[Federal Register Volume 64, Number 172 (Tuesday, September 7, 1999)]
[Notices]
[Pages 48694-48695]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-23112]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-41800; File No. SR-NSCC-99-10]


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

August 27, 1999.
    On August 5, 1999, the National Securities Clearing Corporation 
filed with the Securities and Exchange Commission (``Commission'') a 
proposed rule change (File No. SR-NSCC-99-10) 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 16, 
1999.\2\ No comment letters were received. For the reasons discussed 
below, the Commission is approving the proposed rule change on an 
accelerated basis.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ Securities Exchange Act Release No. 41719 (August 9, 1999), 
64 FR 44569.
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I. Description

    The rule change involves arrangements to integrate NSCC and The 
Depository Trust Company (``DTC''). Under the rule change, NSCC and DTC 
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 for shares of DTC stock, the 
current DTC Stockholders Agreement has been amended to provide that if 
a specified super majority 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 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 participant or members 
of DTC and NSCC.\3\
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    \3\ NSCC 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 NSCC and DTC 
currently have 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\ NSCC 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 NSCC.
    \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 NSCC and DTC the 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 NSCC and DTC 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

[[Page 48695]]

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 for 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.
    NSCC and DTC 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. NSCC 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 
NSCC and DTC 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 NSCC's obligations under 
Section 17A(b)(3)(C) because it should provide NSCC's members with a 
reasonable opportunity to acquire common stock in the Holding Company 
in proportion to their use of NSCC and DTC and should provide NSCC's 
members through their holding of Holding Company stock with adequate 
and fair representation in the selection of NSCC's directors and in the 
administration of NSCC'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 NSCC to proceed with the exchange offer to its 
shareholders in which the shareholders may exchange their shares in 
NSCC for preferred stock in the Holding Company.

III. Conclusion

    On the basis of the foregoing, the Commission finds that NSCC'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-NSCC-99-10) 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. 99-23112 Filed 9-3-99; 8:45 am]
BILLING CODE 8010-01-M