[Federal Register Volume 62, Number 234 (Friday, December 5, 1997)]
[Notices]
[Pages 64415-64417]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-31876]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-39372; File No. SR-GSCC-97-07]
Self-Regulatory Organizations; Government Securities Clearing
Corporation; Order Approving Proposed Rule Change Relating to Election
of Directors
November 28, 1997
On July 23, 1997, the Government Securities Clearing Corporation
(``GSCC'') filed with the Securities and Exchange Commission (the
``Commission'') pursuant to Section 19(b)(1) of the Securities Exchange
Act of 1934 (``Act'') \1\ and on August 18, 1997, amended the proposed
rule change (File No. SR-GSCC-97-07). Notice of the proposal was
published in the Federal Register on September 22, 1997.\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. 39068 (September 12,
1997), 62 FR 49548.
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I. Description
The proposed rule change modifies GSCC's Shareholder. Agreement
(``Agreement''),\3\ By-laws, and Certificate of Incorporation relating
to GSCC's procedures for election of directors and to restrictions
currently placed on transfers of GSCC's securities. As described more
fully below, the proposed rule change amends GSCC's procedures in four
major categories: (a) nomination and election process for board
members, (b) composition of the board, (c) restrictions on issuance and
transfer of shares, and (d) miscellaneous.
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\3\ The Agreement was first executed in 1988 before GSCC had a
set of rules in place. GSCC currently has forty-six shareholders,
each of which is a party to the Agreement. The National Securities
Clearing Corporation (``NSCC'') is the largest shareholder, holding
approximately eighteen percent of GSCC's shares.
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A. Nomination and Election Process for Board Members
Similar to the process in place at NSCC and other clearing
corporations, GSCC has a nominating committee that will be responsible
for nominating candidates for election as participant directors to the
board.\4\ NSCC will continue to nominate and to elect two directors to
the board outside the nominating committee process. The board seat for
a management representative and for the GSCC president also will remain
outside the nominating committee process.
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\4\ The procedures governing the selection of the nominating
committee are contained in Section 2.B of the Agreement, and the
nomination procedures are contained in Section 2.C of the Agreement.
The prior nomination process for participant directors was open to
all members with every member being able to nominate any shareholder
member, including itself. However, a member was restricted to
submitting nominations only for its own correlative participant
category (i.e., broker participants nominated broker participant
directors, clearing agent bank participants nominated clearing agent
bank participant directors, and all other participants nominated
dealer participant directors). The election process involved ballots
being circulated to every member with such voting being similarly
limited to one's own correlative participant category.
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The nominating committee consists of five individuals, a majority
of whom are representatives from active participants. With the
exception of the initial nominating committee, an individual cannot
serve on the nominating committee if he or she has served on the board
or the nominating committee within the past year. The term of a
nominating committee member is two years, and the terms of nominating
committee members are staggered.\5\
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\5\ Initially, one class with two individuals will be designated
for a one year term, and another class with three individuals will
be designated for a two year term. After these initial terms, both
classes will serve two year terms. Therefore, subsequent nominating
committees will have two staggered classes of members.
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With the exception of the first nominating committee, incoming
nominating committee members will be designated by the board after
consideration of the recommendations of current nominating committee
members. The participant category is irrelevant for purposes of the
selection of nominating committee members. However, as a general
guideline, the individuals serving on the nominating committee will
reflect GSCC's overall membership and potential membership base.
Participants will be provided an opportunity early in the
nomination process to suggest one nominee for each open board seat.
After consideration of the participants' suggestions, the nominating
committee will then select its candidates. The nominating committee
will nominate one nominee for each open participant director seat.
Participants will then be notified of the nominating committee's slate
of candidates for open board seats.
[[Page 64416]]
After being notified of the nominating committee's selections,
participants can nominate additional nominees with a petition signed by
the lesser of seven participants or five percent of GSCC's
participants. Each participants may only sign one petition for each
open board seat.
If no nominating petitions have been filed by participants, the
nominating committee will certify to the shareholders the participant
directors selected by the nominating committee. Shareholders will then
be bound to cast their votes supporting the nominating committee
selections at the annual meeting.
However, if participants have filed one or more formal nominating
petitions, GSCC will circulate ballots to all participants and will
permit them to cast their votes to fill each open participant director
seat in the contested participant category or categories. Active
comparison only participants are entitled to one vote per open board
seat. Active clearing agent bank participants are entitled to two votes
per open seat. Active netting participants are entitled to two votes
per open seat. In addition, each netting member will receive another
two votes for approximately every ten million dollars of its clearing
fund deposit up to an additional ten votes. Affiliated members will be
considered one participant for purposes of determining voting
entitlements. Cumulative voting rights have been eliminated.
Based upon the recommendation of the outgoing executive committee,
the incoming board will designate the chairman of the board.\6\ The
chairman will be elected for a one year term with no overall term limit
other than the six year term limit applicable to all participant
directors.
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\6\ Prior to the amendment, there was no provision in the
Agreement for selecting the chairman of the board.
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B. Composition of the Board
The proposal removes the specific board composition requirements
from the Agreement so that the Agreement outlines only board parameters
such as a maximum number of board seats and a minimum required number
of categories of directors that will be represented.\7\ Pursuant to the
By-laws, the board is empowered to make changes within the Agreement's
broad parameters, including changing the size or composition
requirements of the board in order to reflect membership demographics
and other criteria.\8\
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\7\ Section 2.A of the Agreement.
\8\ Before changing the number of directors, GSCC must file a
proposed rule change with the Commission.
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The current board composition has been recategorized as one
management director, one at-large director, two NSCC directors, six
general user participant directors, three broker participant directors,
and two clearing agent bank directors.\9\ Many of the related
definitions of the participant categories have been expanded. The
Agreement's definition of ``broker'' is broadened to include any entity
regulatory engaged in the business of effecting transactions in any
securities eligible for processing by GSCC on behalf of
participants.\10\ ``Clearing agent bank'' is more broadly defined
essentially to mean any commercial bank member of the Federal Reserve
System that provides clearing services with respect to GSCC eligible
securities on behalf of others for at least ten percent of GSCC's
participants and that provides those services using its own Federal
Reserve account.\11\ The terms ``general user participant'' and
``general user participant director'' are used instead of ``dealer
participant'' and ``dealer participant director.\12\ The definition of
``general user participant'' is essentially any participant that is not
a broker or clearing agent bank, including futures commission merchants
and registered investment companies.
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\9\ Prior to the amendment, the Agreement provided for twelve
participant directors consisting of six dealer participant
directors, three broker participant directors, and three clearing
agent bank participant directors.
\10\ ``Broker'' was previously defined as an entity regularly
engaged in the business of effecting transactions specifically in
treasury securities and specifically for the account of primary
dealers and aspiring primary dealers.
\11\ ``Clearing agent bank'' was defined as any clearing bank
regularly used by brokers, primary dealers, and aspiring primary
dealers for the clearance and settlement of transactions in treasury
securities.
\12\ ``Dealer participant'' was defined as a primary dealer or
an aspiring primary dealer that is a participant. All references to
primary and aspiring dealers have been removed from the Agreement.
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Finally, GSCC directors are currently limited to serving two
consecutive three year terms on the board. Under the revisions, the
current term limits are retained for all but the vice chairman and
management director, who will not have term limits. Furthermore, the
Agreement specifies that there must be a one year absence from the
board before a former director is eligible for a new overall six year
term limit. The three staggered classes of directors are retained. The
By-laws specify the categories of directors that compose each of the
three classes.
C. Restrictions on Issuance and Transfer of GSCC Shares
GSCC is removing the price restrictions on its shares, which
currently require that both Class A and Class B shares generally must
be issued, sold, or transferred at a price of $500 per share. However,
under the revisions GSCC generally will not be able to sell shares at
less than current book value.
Pursuant to the revisions, GSCC may issue Class A shares to an
existing Class A shareholder, participant, or affiliate of a
participant rather than only to participants not already holding Class
A shares.\13\ GSCC's authority to issue new Class B shares is removed
from the Agreement.\14\
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\13\ If GSCC issues additional Class A shares, NSCC has the
right to request that enough additional Class A shares be issued to
it in order for NSCC to retain its twenty percent holdings in GSCC.
\14\ The board recently stated its intention to repurchase the
existing Class B shares when GSCC is determined to be adequately
capitalized, which is expected to occur by year end 1997.
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Class A shareholders may now sell Class A shares to any existing
Class A shareholder, participant, or affiliate of a participant in lots
of 300 shares.\15\ However, no shareholder other than NSCC may own more
than five percent of Class A shares unless such shares are held as a
result of acquisition, merger, or a comparable event. Similarly,
shareholders may sell Class B shares to any existing shareholder,
participant, or affiliate of a participant in lots of 200 shares.
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\15\ Previously, the Agreement contained restrictions on
transfers of Class A shares by participant shareholders including a
requirement that the Class A shareholder must transfer all of its
Class A shares and that the transfer must be to a single participant
not already holding Class A shares.
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The proposed rule change extends GSCC's right of first refusal to
any sale or transfer of shares by any shareholder.\16\ GSCC may
purchase such shares at the lesser of the agreed price or the current
book value. GSCC may resell such securities for a price at least equal
to the book value unless the board approves a lower price.
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\16\ Prior to this proposed rule change, GSCC had a right of
first refusal only with respect to NSCC's sale of its Class A
shares.
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GSCC has the right to repurchase Class A shares from participant
shareholders provided that each participant shareholder is required to
sell to GSCC the same percentage of Class A shares and NSCC continues
to hold twenty percent of GSCC's Class A shares unless NSCC agrees
otherwise. Pursuant to the proposal, GSCC may offer to repurchase
shares at any price determined by the board or may require that the
shares be sold to it at current book value.
[[Page 64417]]
The revisions authorize GSCC to issue shares in response to an
extraordinary corporate action (e.g., a joint business venture).
Pursuant to such an issuance, GSCC may exchange or transfer such shares
for cash in any amount or for any noncash consideration.
If a shareholder ceases to be a GSCC participant, GSCC may mandate
the sale to itself of shares of such a shareholder at book value.\17\
However, the proposal also authorizes GSCC to offer to repurchase
shares for any price determined by the board under such circumstances.
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\17\ Previously, GSCC had the discretionary right to repurchase
its shares provided that GSCC repurchases all of the shares for $500
per share.
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D. Miscellaneous Amendments
The proposal deletes loss allocation provisions in the Agreement
that are redundant with the loss allocation provisions set forth in
GSCC's rules. All timing references and procedures specific to the
period between 1988 and 1991 contained in the Agreement are removed. In
addition, provisions naming a specific individual to hold one NSCC
director seat and another specific individual to act as the management
director for purposes of the 1988 annual meeting are removed.
The supermajority voting requirements \18\ with respect to future
amendments of the Agreement are removed. However, GSCC retains the
requirement that an affirmative vote of at least eighty percent of the
entire board is required to change its business from that of a
registered clearing agency including any change that would put GSCC in
the business of being a broker or of performing brokered transactions.
Moreover, for the protection of its shareholders and members, any
change of business that puts GSCC in competition with clearing agent
banks is subject to a veto by a unanimous vote of all the clearing
agent bank directors and one other participant director.
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\18\ Prior to the proposed rule change, the Agreement set forth
a number of supermajority board voting requirements that had to be
met in order to make certain changes to the Agreement, including
classification of directors, procedures for electing and replacing
directors, provisions related to loss allocation, and procedures and
requirements for amending the Agreement.
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II. Discussion
Section 17A(b)(3)(C)\19\ of the Act requires that the rules of a
clearing agency assure the fair representation of its shareholders or
members 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
(``Division'') 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.\20\ 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.
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\19\ 15 U.S.C. 78q-1(b)(3)(C).
\20\ Securities Exchange Act Release No. 16900 (June 17, 1980),
45 FR 30086.
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The Commission believes that GSCC's proposal is consistent with its
obligations under the Act because it provides participants with a
meaningful opportunity to participate in GSCC's election process. The
board, which should be responsive to participant concerns, will
designate the members of the nominating committee. GSCC participants
will have the opportunity both informally and formally to nominate
candidates for board seats. If there is a contested election, GSCC
participants will have the opportunity to vote for participant
directors. Therefore, the Commission believes that GSCC's procedures
should provide fair representation to its members.
The Commission also believes that the changes to the composition of
the board will provide enhanced fair representation. Several classes of
participants that did not fit within the eligible categories of
participant directors are now represented by the general user
participant category. Thus, the Commission believes that GSCC's
proposal is consistent with its obligations to assure the fair
representation of participants.
The Commission finds that the removal of certain restrictions on
the issuance and transfer of GSCC shares may assist GSCC in operating
efficiently as a clearing agency. By exercising its right of first
refusal, GSCC will be able to ensure that ownership of GSCC is limited
to industry participants. Thus, GSCC's primary focus will continue to
be on the clearance and settlement of securities. Also, GSCC may be
better able to respond quickly to new business ventures by having the
ability to issue shares in connection with new operations.
Finally, the Commission finds that the remaining miscellaneous
amendments to the Agreement, such as the deletion of the loss
allocation provision, the removal of obsolete references, and the
removal of the supermajority voting requirements, provide for a more
flexible and efficient operation of GSCC and, therefore, are consistent
with the requirements of the Act. For example, by eliminating
supermajority voting requirements, GSCC will be able to make necessary
changes in its operations on an expedited basis.
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-GSCC-97-07) be and hereby is
approved.
For the Commission by the Division of Market Regulation,
pursuant to delegated authority.\21\
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\21\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-31876 Filed 12-4-97; 8:45 am]
BILLING CODE 8010-01-M