[Federal Register Volume 64, Number 154 (Wednesday, August 11, 1999)]
[Notices]
[Pages 43795-43797]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-20701]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-41657; File No. SR-DTC-99-17]


Self-Regulatory Organizations; The Depository Trust Company; 
Notice of Filing of Proposed Rule Change Relating to Arrangements To 
Integrate The Depository Trust Company and the National Securities 
Clearing Corporation

July 27, 1999.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on July 6, 1999, The 
Depository Trust Company (``DTC'') filed with the Securities and 
Exchange Commission (``Commission'') the proposed rule change (File No. 
SR-DTC-99-17) as described in Items I, II, and III below, which items 
have been prepared primarily by DTC. The Commission is publishing this 
notice to solicit comments 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

    The proposed rule change filed by DTC involves proposed 
arrangements to integrate DTC and National Securities Clearing 
Corporation (``NSCC''). The proposal provides for the following:
     DTC and NSCC will form a New York corporation (``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 DC 
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 will be offered shares of Holding 
Company preferred stock on a one-for-one basis in exchange for their 
NSCC shares (``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, and each will offer 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, 
and the Holding Company will provide those services to each of the two 
subsidiary clearing agencies pursuant to service contracts.

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

    In its filing with the Commission, DTC 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. DTC has prepared summaries, set forth in sections (A), 
(B), and (C) below, of the most significant aspects of such 
statements.\2\
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    \2\ The Commission has modified the text of the summaries 
prepared by DTC.
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(A) Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    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. 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. This strategy is intended 
to accommodate shortened settlement cycles and increased volumes, to 
improve risk management, and to lower 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 individual to 
serve as the Board of Directors for each of the two companies. Since 
simply adding the membership of DTC's Board of NSCC's Board would have 
resulted in certain user and marketplace organizations having more than 
one representative, each of these organizations was asked to select 
only one representative. 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 Board of Directors by 
NSCC's stockholders. Since federal banking law applicable to DTC limits 
the maximum size of DTC's Board to twenty-five members, two of the 
persons to NSCC's Board will participate in DTC Board meetings as non-
voting advisors. The remaining twenty-five persons have been elected as 
DTC's Board of Directors by DTC stockholders.\3\ The next steps in the 
integration 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.
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    \3\ See Securities Exchange Act Release No. 41529 (June 15, 
1999), 64 FR 33333 [File No. SR-DTC-99-08] (order approving proposed 
rule change).
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    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 (``NYSE'') and the National Association of 
Securities Dealers, Inc. (``NASD''), the current stockholders of NSCC. 
As explained in more detail below, DTC believes that DTC and NSCC will 
satisfy the fair representation requirement of Section

[[Page 43796]]

17A(b)(3)(C) of the Act \4\ in the Holding Company structure by (1) 
giving participants and members of DTC and NSCC the right to purchase 
shares or Holding Company common stock on a basis that reflects their 
use of the services and facilities of DTC and NSCC (based on 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 (based on a process analogous to 
the process now employed by the two clearing agencies for selecting 
their directors).
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    \4\ 15 U.S.C. 78q-1(b)(3)(C).
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    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 supermajority of DTC stockholders tender their shares of DTC 
stock for shares of Holding Company common stock: (1) Any DTC 
stockholders that 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 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.\5\
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    \5\ DTC has informed the Commission that the procedures to be 
used by NSCC to sell or transfer Holding Company common stock are in 
all material respects the same as the procedures set forth in DTC's 
Stockholders Agreement applicable to the sale by a stockholder of 
DTC shares.
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    The Holding Company's Articles of Incorporation, By-Laws, and 
Shareholders Agreement (``Basic Documents'') \6\ 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 Section 17A of the Act. In this regard, the Basic 
Documents provide for the following.
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    \6\ DTC included the Basic Documents as exhibits to its filing, 
which is available for inspection and copying in the Commission's 
public reference room and through DTC.
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     As owners of Holding Company preferred stock, the NYSE and 
the NASD each will have the right to put one person on the Board of 
Director of the Holding Company, and that person will also serve 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 the users' usage. Under the Basic Documents, these rights 
will be reallocated initially in 2000 and again in 2001. Thereafter, 
depending upon whether there are significant changes in entitlements 
and stock purchases, the Board of the Holding Company will be permitted 
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 nonmembers of the Board. After soliciting 
suggestions from all users of the clearing agencies 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 
vote 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.
    DTC believes that the proposed rule change is consistent with the 
requirements of Section 17A of the Act because 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 of burden on Competition

    DTC does not believe that the proposed rule change will impose any 
burden on competition not necessary or appropriate in 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 
complete 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 DTC participants have not been solicited or 
received on the proposed rule change.

III. Date of Effectiveness of the Proposed Rules 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 DTC 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.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. 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 DTC. All submission 
should refer to File No. SR-DTC-99-17 and should be submitted by 
September 1, 1999.


[[Page 43797]]


    For the Commission by Division of Market Regulation, pursuant to 
delegated authority.\7\
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    \7\ 17 CFR 200.30-3(a)(12)
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-20701 Filed 8-10-99; 8:45 am]
BILLING CODE 8010-01-M