[Federal Register Volume 64, Number 169 (Wednesday, September 1, 1999)]
[Notices]
[Pages 47882-47883]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-22692]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-41786; File No. SR-DTC-99-17]


Self-Regulatory Organizations; The Depository Trust Company; 
Order Granting Accelerated Approval of a Proposed Rule Change Relating 
to Arrangements To integrate The Depository Trust Company and the 
National Securities Clearing Corporation

August 24, 1999.
    On July 6, 1999, The Depository Trust Company (``DTC'') filed with 
the Securities and Exchange Commission (``Commission'') a proposed rule 
change (File No. SR-DTC-99-17) pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act'').\1\ Notice of the proposal 
was published in the Federal Register on August 11, 1999.\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. 41657 (July 27, 1999), 
64 FR 43795.
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I. Description

    The rule change involves arrangements to integrate DTC and the 
National Securities Clearing Corporation (``NSCC''). Under the rule 
change, DTC and NSCC will form a New York corporation (``Holding 
Company'') that will own directly all of the outstanding stock of NSCC 
and will own indirectly through a Delaware subsidiary of the Holding 
Company all of the outstanding stock of DTC.
    The Holding Company will issue two classes of stock: common and 
preferred. The Holding Company will conduct two exchange offers in 
which (1) current DTC stockholders will have the opportunity to 
exchange their DTC shares for Holding Company common stock on a one-
for-one basis and (2) the New York Stock Exchange (``NYSE'') and the 
National Association of Securities Dealers, Inc. (``NASD''), 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.
    In connection with the exchange offer for shares of DTC stock, the 
current DTC Stockholders Agreement has been 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 and 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.\3\
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    \3\ 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'') \4\ 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(b)(3)(C) of the Act.\5\ Specifically, the 
Basic Documents provide for the following:
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    \4\ 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.
    \5\ 15 U.S.C. 78q-1(b)(3)(C).
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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 
Directors of the Holding Company. All other directors will be elected 
annually by the owners of holding Company common stock. The Holding 
Company will elect as the Directors of DTC and NSCC the

[[Page 47883]]

persons that the stockholders of the Holding Company elect as the 
directors of the Holding Company.
     The rights to purchase Holding Company common stock will 
be reallocated to the users of DTC and NSCC based upon the users' usage 
of the clearing agencies' services and facilities. 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.
    Each year the holding Company's Board of Directors will appoint a 
nominating committee that may include both members and non-members 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. Because the Basic Documents provide for cumulative 
voting, it will be possible one or more owners of Holding Company 
common stock to arrange to elect a person not on the slate nominated 
for election by the Board.
    DTC and NSCC will continue to operate as they do currently, and 
each will offer its own services to its own participants and members 
pursuant to separate legal arrangements and separate risk management 
procedures. DTC has informed the Commission that the Holding Company 
will not engage in any clearing agency activities but that it will 
provide certain support functions, including human resources, finance, 
audit, general administration, corporate communications, and legal, 
which support functions will be centralized in the Holding Company, to 
DTC and NSCC pursuant to service contracts.

II. Discussion

    Section 17A(b)(3)(C) of the Act \6\ requires that the rules of a 
clearing agency assure a fair representation of its shareholders (or 
members) and participants in the selection of its directors and 
administration of its affairs. The Commission believes that the 
proposed rule change is consistent with DTC's obligations under Section 
17A(b)(3)(C) because it should provide DTC's participants with a 
reasonable opportunity to acquire common stock in the Holding Company 
in proportion to their use of DTC and should provide DTC's participants 
through their holding of Holding Company stock with adequate and fair 
representation in the selection of DTC's directors and in the 
administration of DTC's affairs.
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    \6\ 15 U.S.C. 78q-1(b)(3)(C).
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    The Commission finds good cause for approving the proposed rule 
change prior to the thirtieth day after the publication of notice of 
the filing. Approving prior to the thirtieth day after publication of 
notice will allow DTC to proceed with the exchange offer to its 
shareholders in which the shareholders may exchange their shares in DTC 
for common stock in the Holding Company.

III. Conclusion

    On the basis of the foregoing, the Commission finds that DTC's 
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-DTC-99-17) be and hereby is 
approved.

    For the Commission by the 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. 99-22692 Filed 8-31-99; 8:45 am]
BILLING CODE 8010-01-M