[Federal Register Volume 66, Number 196 (Wednesday, October 10, 2001)]
[Notices]
[Pages 51701-51703]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-25382]



[[Page 51701]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-44838; File No. SR-MBSCC-2001-01]


Self-Regulatory Organizations; MBS Clearing Corporation; Notice 
of Filing of Proposed Rule Change Relating to Arrangements To Integrate 
MBS Clearing Corporation and The Depository Trust & Clearing 
Corporation

September 24, 2001.
    Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of 
1934 (``Act''), notice is hereby given that on August 22, 2001, the MBS 
Clearing Corporation (``MBSCC'') filed with the Securities and Exchange 
Commission (``Commission'') a proposed rule change as described in 
Items I, II, and III below, which Items have been prepared primarily by 
MBSCC. The Commission is publishing this notice to solicit comments on 
the proposed rule change 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 involves the initial arrangements for the 
integration of MBSCC with The Depository Trust & Clearing Corporation 
(``DTCC'').\2\
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    \2\ DTCC is a holding company for The Depository Trust Company 
and the National Securities Clearing Corporation, which are 
registered clearing agencies.
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II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, MBSCC 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. MBSCC has prepared summaries, set forth in sections A, 
B, and C below, of the most significant aspects of such statements.\3\
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    \3\ The Commission has modified the text of the summaries 
prepared by MBSCC.
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A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    The proposed rule change is the first formal regulatory step to 
effect the integration of MBSCC with DTCC. Specifically, the rule 
change would implement certain changes in MBSCC's organizational 
documents to facilitate the integration with DTCC and the subsequent 
exchange offer.
1. Background
    At its meeting on July 19, 2001 the Board of Directors of MBSCC 
voted to proceed with a plan for the integration of MBSCC and 
Government Securities Clearing Corporation (``GSCC'') with DTCC 
(``Plan'').\4\ Such integration is expected to take place concurrently 
with the integration of Emerging Markets Clearing Corporation 
(``EMCC'') with DTCC.\5\ MBSCC has been advised that DTCC's Board of 
Directors has also agreed to proceed with the Plan.
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    \4\ Because of the current functional integration of operations 
of MBSCC and GSCC, the integration of MBSCC with DTCC is contingent 
upon the successful integration of GSCC with DTCC and vice versa. 
Securities Exchange Act Release No. 44895 (Oct. 2, 2001) [File No. 
SR-GSCC-2001-11].
    \5\ Pursuant to a separate plan for the integration of EMCC with 
DTCC, it is contemplated that EMCC will become an operating 
subsidiary of DTCC at the same time that MBSCC and GSCC become 
operating subsidiaries of DTCC. However, the integration of MBSCC 
and GSCC with DTCC is not contingent on the integration of EMCC with 
DTCC and vice versa. Securities Exchange Act Release No. 44896 (Oct. 
2, 2001) [File No. SR-EMCC-2001-3].
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    A principal goal of the Plan is to facilitate the development and 
timely execution of a strategy to harmonize the processing streams at 
MBSCC, GSCC, EMCC, The Depository Trust Company (``DTC'') and the 
National Securities Clearing Corporation (``NSCC'') (collectively, 
``Operating Subsidiaries'') for the clearance and settlement of both 
institutional and broker transactions. Harmonized processing should 
help to accommodate shortened settlement cycles, address increasing 
volumes, improve risk management, and lower transaction processing 
costs.
2. The Plan
    Under the Plan, DTCC will form (i) a company that will engage in a 
merger with MBSCC (``Operating Company''), (ii) a company that will own 
all of the capital stock of Operating Company (``Holding Company''), 
and (iii) an acquisition subsidiary (``Acquisition Company'') that will 
make an exchange offer (``Exchange Offer'') for Holding Company shares, 
as described below, and hold shares of Holding Company received 
pursuant to the Exchange Offer.
    After receipt of all necessary regulatory, board, and shareholder 
approvals, Operating Company will merge with MBSCC in a transaction 
(``Merger'') in which (i) the shareholders of MBSCC (``MBSCC 
Shareholders'') will receive an equal number and class of shares of 
Holding Company stock for their shares of MBSCC Class A and Class B 
common stock; (ii) all of the shares of MBSCC will be cancelled; and 
(iii) all the shares of Holding Company stock owned by DTCC will be 
cancelled. MBSCC shareholders will have the opportunity to vote against 
the Merger and to exercise their appraisal rights. MBSCC will be the 
surviving corporation of the Merger.
    Following a successful merger, the MBSCC Shareholders Agreement 
will be terminated. The Acquisition Company will conduct the Exchange 
Offer in which the shareholders of Holding Company (``Holding Company 
Shareholders'') i.e., former MBSCC Shareholders, will have the 
opportunity to exchange their shares of Holding Company common stock 
for shares of DTCC common stock on the basis of the adjusted book value 
of the shares of MBSCC common stock that they exchanged for their 
shares of Holding Company common stock and the adjusted book value of 
the DTCC common shares. Adjusted book value of MBSCC shares will equal 
book value less the retained earnings of MBSCC at the time of (or as of 
the end of the last full calendar month preceding) the integration of 
MBSCC with DTCC. Such retained earnings will thereafter be used only to 
support the business of MBSCC. Adjusted book value of the DTCC common 
shares will equal book value less the smaller of (i) the retained 
earnings of DTCC attributable to the retained earnings of NSCC at the 
time of the integration of NSCC and DTC with DTCC in 1999 or (ii) the 
retained earnings of DTCC attributable to the retained earnings of NSCC 
at the time of (or as of the last full calendar month preceding) the 
integration of MBSCC with DTCC. Such retained earnings are dedicated to 
the business of NSCC.
    Following a successful Exchange Offer, (i) Acquisition Company will 
be the majority or sole (depending on whether all Holding Company 
Shareholders agree to tender their shares) shareholder of Holding 
Company; (ii) Holding Company will be the sole shareholder of MBSCC; 
and (iii) any non-tendering Holding Company Shareholders (former MBSCC 
Shareholders) will be minority shareholders of Holding Company.
    DTCC, through its wholly-owned subsidiary, Acquisition Company, 
will elect as directors of MBSCC the persons elected by the 
shareholders of DTCC to be directors of DTCC. As a subsidiary of the 
Holding Company (and indirect subsidiary of Acquisition Company), MBSCC 
will continue to operate essentially as it does currently, offering its 
own services to its own members pursuant to separate legal arrangements

[[Page 51702]]

and separate risk management procedures.
    Following the integration, MBSCC will continue to exist as a 
separate registered clearing agency. The retained earnings of MBSCC at 
the time of (or as of the end of the last full calendar month 
preceding) the integration of MBSCC with DTCC will, as a matter of DTCC 
policy, be dedicated to supporting the business of MBSCC. MBSCC will be 
sufficiently capitalized for its activities as a clearing agency.
    Acquisition Company, Holding Company, and DTCC will not engage in 
clearing agency activities. Certain support functions, including human 
resources, finances, audit, general administration and corporate 
communications that are now centralized in DTCC will be provided by 
DTCC to MBSCC pursuant to service contracts.
    After the proposed integration, Acquisition Company, which is 
wholly owned by DTCC, will be the majority or sole (depending on 
whether all Holding Company shareholders, i.e. former MBSCC 
Shareholders, tender their shares during the Exchange Offer) 
shareholder of Holding Company, which, in turn, will be the sole 
shareholder of MBSCC. In or to promote efficiency in the governance of 
Operating Subsidiaries after the Plan is completed, the current By-Laws 
of MBSCC will be replaced with a set of By-Laws that conform, except 
for certain small modifications \6\ and a more broadly drafted 
indemnification provision, to the By-Laws of NSCC.
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    \6\ The modifications include (i) making all references gender-
neutral, (ii) changing the references to the State of New York to 
the State of Delaware (except the reference in Section 5.2), (iii) 
providing in Section 1.2 that a majority, rather than twenty-five 
percent, of all outstanding shares may make a demand to call a 
special meeting, (iv) providing for the ability to notify 
shareholders of shareholder meetings electronically in Section 1.4, 
(v) deleting the provision addressing shareholder action by written 
consent because this is addressed under Delaware law, (vi) setting 
the number of directors in Section 2.1 at a minimum of fifteen and 
maximum of twenty-five, rather than twenty-seven, (vii) providing in 
Section 2.1 that the number of directors at any time shall be 
determined by the Board of Directors of MBSCC, (viii) providing in 
Section 2.9 that directors of MBSCC that are also officers of GSCC 
or DTCC, rather than directors, officers, or employees of any MBSCC 
shareholders, may not serve on the Audit Committee, (ix) providing 
in Section 3.1 that the officers of MBSCC will include those 
required by statute and may include a Chief Executive Officer, (x) 
eliminating the provision in Section 3.3 that the President shall be 
the Chief Executive Officer, (xi) eliminating the provision in 
Section 3.4 that Managing Directors shall upon request advise and 
assist the Chief Operating Officer, and (xii) providing in Article 
VIII that a majority of the holders of all outstanding shares, 
rather than all the holders of all outstanding shares, may amend the 
MBSCC By-Laws.
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    As part of the Plan, a structure will be implemented allowing for 
the fair representation of the members of each of the Operating 
Subsidiaries in the governance of DTCC. Specifically, the DTCC 
shareholders, consisting of the current shareholders of DTCC and the 
shareholders of MBSCC, GSCC, and EMCC, which become shareholders of 
DTCC as a result of the Plan, will elect the persons to serve on the 
Board of Directors of DTCC. These individuals will, in turn, be 
selected by DTCC to serve as the directors of each of the Operating 
Subsidiaries. On a periodic basis to be determined by the DTCC Board, 
rights to purchase DTCC common stock will be reallocated to 
shareholders using the services of any one or more of the Operating 
Subsidiaries based upon their usage. Shareholders may, but will not be 
obligated to, purchase some or all of the DTCC common stock to which 
they are entitled. Holders of DTCC common stock will be entitled to 
cumulative voting in the election of directors.
    In addition, DTCC will create a Fixed Income Operations and 
Planning Committee that will include representatives of members of each 
of MBSCC and GSCC. The Fixed Income Operations and Planning Committee 
will advise the DTCC Board and management on its policies and 
procedures with respect to the fixed income products and/or services of 
the Operating Subsidiaries and will have certain other responsibilities 
to be assigned to the Committee.
    Furthermore, MBSCC and GSCC will establish a joint GSCC/MBSCC 
Membership and Risk Management Committee, which will be comprised of 
representatives of participants of MBSCC and GSCC. The joint GSCC/MBSCC 
Membership and Risk Management Committee will advise the Boards of 
Directors and management of MBSCC and GSCC with respect to membership, 
credit, and risk matters, and will have certain other responsibilities 
to be assigned to the Committee.
    DTCC's Certificate of Incorporation, By-Laws, and Shareholders 
Agreement (``Basic Documents'') will be amended to extend to the 
shareholders of MBSCC, GSCC, and EMCC, which become shareholders of 
DTCC as a result of the Plan, the rights that the shareholders of DTCC 
currently have and, in particular, to satisfy the Fair Representation 
Requirement of Section 17A of the Exchange Act. In this regard, the 
Basic Documents will provide for the following:
     The persons elected as directors to the DTCC Board will 
also serve as the directors of each of the Operating Subsidiaries, 
including MBSCC.
     Other than, as is currently the case, one director 
appointed to the DTCC Board by the New York Stock Exchange, Inc., as 
the owner of DTCC preferred stock, and one director appointed to the 
DTCC Board by the National Association of Securities Dealers, Inc., as 
the owner of DTCC preferred stock, all directors will be elected 
annually by the owners of DTCC common stock.
     As discussed above, the right to purchase DTCC common 
stock will be reallocated to the users of each of the Operating 
Subsidiaries based upon their usage. Under the Basic Documents, these 
rights will be reallocated on a periodic basis to be determined by the 
DTCC Board.
     The owners of DTCC common stock will be able to exercise 
cumulative voting in the election of directors of DTCC.
     With respect to the nomination process, each year the DTCC 
Board will appoint a nominating committee that may include both members 
and nonmembers of the DTCC Board. After soliciting suggestions from all 
users of each of the Operating Subsidiaries of possible nominees to 
fill vacancies on the DTCC Board, the nominating committee will 
recommend a slate of nominees from the full DTCC Board. The DTCC Board 
may make changes in that slate before submitting nominations to the 
holders of DTCC common stock for election. The election ballot included 
in the proxy materials will provide an opportunity for stockholders to 
cast their votes for a person not listed as a nominee. Because the 
Basic Documents will provide for cumulative voting, certain large 
holders of DTCC common stock may have a sufficient number of shares to 
elect a person not on the slate nominated for election by the DTCC 
Board.
    The Certificate of Incorporation and By-Laws of MBSCC will be 
revised to reflect the changes in MBSCC's corporate governance 
structure.\7\ MBSCC's Certificate of Incorporation shall be amended and 
restated in accordance with Section 245 of the Delaware General 
Corporation Law (``Section 245'') as follows:
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    \7\ The full text of the proposed changes to the Certificate of 
Incorporation and to the By-Laws is set forth in Exhibit A of 
MBSCC's rule filing.
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     The amended and restated Certificate of Incorporation 
shall contain a preamble and recitals pursuant to Section 245.
     The fourth article of the Certificate of Incorporation 
shall be amended to eliminate all references to Class A and

[[Page 51703]]

Class B Common Stock, including the right of holders of Class B Common 
Stock to elect one MBSCC director. References to Class B Common Stock, 
including the right of holders of Class B Common Stock to elect a 
director, will no longer be necessary as MBSCC will be wholly-owned by 
Holding Company. All of MBSCC's directors will be elected by DTCC 
through its wholly-owned subsidiary, Acquisition Company, which will be 
the majority or sole (depending on how many Holding Company 
shareholders, i.e., former MBSCC shareholders, tender their Holding 
Company shares in the Exchange Offer) shareholder of Holding Company. 
The former holders of MBSCC Class B Common Stock, as well as the former 
holders of Class A Common Stock, that participate in the Exchange Offer 
will have the opportunity to participate in the governance of DTCC 
through the election of DTCC's directors.
     The fifth article of the Certificate of Incorporation 
shall be stricken as permitted by Section 245 of the Delaware General 
Corporation Law and the sixth, seventh, ninth and tenth articles of the 
Certificate of Incorporation shall be deleted as unnecessary. The 
remaining articles shall be renumbered accordingly.
     The eighth article (as revised, the fifth article) of the 
Certificate of Incorporation shall be modified to include a reference 
to a testator or intestate of a person that is being indemnified.
    MBSCC believes that the proposed rule change is consistent with the 
requirements of Section 17A of the Exchange Act and the rules and 
regulations thereunder applicable to MBSCC because it is designed to 
coordinate further the activities of each of the Operating Subsidiaries 
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. Specifically, 
the proposed integration structure satisfies the fair representation 
requirement of Section 17A of the Act, by (1) giving participants, 
including those participants of MBSCC, of each of the Operating 
Subsidiaries who are also shareholders of DTCC the right to purchase 
shares of DTCC common stock on a basis that reflects their use of the 
services and facilities of each of the Operating Subsidiaries. This 
system for reallocating entitlements to purchase shares of DTCC common 
stock among participants will be the same as that now employed by DTCC 
for reallocating entitlements to purchase shares of DTCC common stock 
among participants of DTCC and NSCC and (2) selecting individuals to be 
directors of DTCC (who will also be directors of each of the Operating 
Subsidiaries) on a basis that will ensure that all major constituencies 
in the securities industry will have a voice in the business and 
affairs of each of the Operating Subsidiaries. Finally, the proposed 
rule change will not affect, and is therefore consistent with, the 
safeguarding of securities and funds in MBSCC's custody or control or 
for which it is responsible.

B. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    MBSCC does not believe that the proposed rule change will result in 
any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Exchange Act. MBSCC, as well as each 
of the other Operating Subsidiaries, is a utility created to serve 
members of the securities industry by providing certain complementary 
services that are ancillary to the businesses in which industry members 
compete with one another.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    No written comments relating to the proposed rule change have been 
solicited or received.

III. Date of Effectiveness of the Proposed Rule 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 the self-regulatory organization 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, N.W., Washington, D.C. 20549-
0609. 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 Room. Copies of such 
filing will also be available for inspection and copying at MBSCC's 
principal office. All submissions should refer to File No. SR-MBSCC-
2001-01 and should be submitted by October 31, 2001.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\8\
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    \8\ 7 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-25382 Filed 10-9-01; 8:45 am]
BILLING CODE 8010-01-M