[Federal Register Volume 66, Number 196 (Wednesday, October 10, 2001)]
[Notices]
[Pages 51698-51700]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-25383]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-44895; File No. SR-GSCC-2001-11]


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

October 2, 2001.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act 
(``Act''),\1\ notice is hereby given that on August 22, 2001, the 
Government Securities Clearing Corporation (``GSCC'') filed with the 
Securities and Exchange Commission (``Commission'') the proposed rule 
change as described in Items I, II, and III below, which Items have 
been prepared by GSCC. 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 GSCC 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, GSCC 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 the statements may be examined at the places specified in Item 
IV below. GSCC 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 GSCC.
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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 GSCC with DTCC. Specifically, the rule change 
would implement certain changes in GSCC's organizational documents to 
facilitate the integration with DTCC and the subsequent exchange offer.
1. Background
    At its meeting on July 24, 2001, GSCC's Board of Directors voted to 
proceed with a plan for the integration of GSCC and MBS Clearing 
Corporation (``MBSCC'') with DTCC (``Plan'').\4\ Such integration is 
expected to take place concurrently with the integration of Emerging 
Markets Clearing Corporation (``EMCC'') with DTCC.\5\ GSCC has been 
advised that the Board of Directors of DTCC has also agreed to proceed 
with the Plan.
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    \4\ Because of the current functional integration of operations 
of GSCC and MBSCC, the integration of GSCC with DTCC is contingent 
upon the successful integration of MBSCC with DTCC and vice versa. 
Securities Exchange Act Release No. 44838 (Sept. 24. 2001) [File No. 
SR-MBSCC-2001-01].
    \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 GSCC and MBSCC become 
operating subsidiaries of DTCC. However, the integration of GSCC and 
MBSCC 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-2001-03].
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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 
GSCC, MBSCC, EMCC, The Depository Trust Company (``DTC'') and the 
National Securities Clearing Corporation (``NSCC'') (collectively, the 
``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
a. Exchange Offer and Valuation
    Under the Plan, DTCC will form a wholly-owned subsidiary 
(``Acquisition Company'') for the purpose of making an exchange offer 
(``Exchange Offer'') for GSCC shares. After receiving all regulatory 
approvals, Acquisition Company will conduct the Exchange Offer where 
GSCC shareholders will have the opportunity to exchange their GSCC 
common stock for DTCC common stock on the basis of the adjusted book 
value of such GSCC and DTCC shares. Adjusted book value of the GSCC 
shares will equal book value less the retained earnings of GSCC at the 
time of (or as of the end of the last full calendar month preceding) 
the integration of GSCC with DTCC.\6\ Adjusted book value of the DTCC 
shares will equal book value less the smaller of (i) the retained 
earnings of DTCC attributable to NSCC's retained earnings 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 GSCC with DTCC.\7\ Following a successful Exchange 
Offer, the GSCC Shareholder Agreement will be terminated. Acquisition 
Company will be the majority or sole (depending on whether all GSCC 
shareholders agree to tender

[[Page 51699]]

their shares) shareholder of GSCC and any non-tendering GSCC 
shareholders will remain as minority shareholders of GSCC.
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    \6\ Such retained earnings are dedicated to GSCC's business.
    \7\ Such retained earnings are dedicated to NSCC's business.
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b. Changes to GSCC's Shareholder Agreement
    GSCC's Shareholder Agreement will be amended in connection with the 
Exchange Offer in order to eliminate any restrictions on transferring 
GSCC shares to Acquisition Company.
c. Selection of GSCC's Directors and GSCC Activities
    DTCC, through its wholly-owned subsidiary, Acquisition Company, 
will elect as directors of GSCC the persons elected by the shareholders 
of DTCC to be the directors of DTCC.\8\ GSCC will continue to exist as 
a separate registered clearing agency and will operate essentially as 
it currently does by offering its own services to its own members 
pursuant to separate legal arrangements and separate risk management 
procedures. As a matter of DTCC policy, GSCC's retained earnings at the 
time of (or as of the end of the last full calendar month preceding) 
the integration of GSCC with DTCC will be dedicated to supporting 
GSCC's business. GSCC will be sufficiently capitalized for its 
activities as a clearing agency.
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    \8\ Given that GSCC's initial post-integration board would be 
elected upon the effectiveness of the integration plan, GSCC has 
determined to postpone its 2001 annual election of directors, which 
would normally occur near calendar year-end, with the current Board 
remaining in office until the Plan is effectuated. Should the Plan 
not become effective by March 31, 2002, then GSCC will call an 
annual meeting for the election of directors pursuant to its current 
procedures.
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d. DTCC's Role
    Neither Acquisition Company nor DTCC will engage in clearing agency 
activities. Certain support functions, including human resources, 
finances, audit, general administration, and corporate communications 
will continue to be centralized in DTCC and be provided by DTCC to GSCC 
pursuant to service contracts.
e. Fair Representation
    As a part of the proposed integration, a structure will be 
implemented in order that the Operating Subsidiaries will satisfy the 
fair representation requirement of Section 17A of the Act. 
Specifically, the DTCC shareholders, consisting of the current 
shareholders of DTCC and the shareholders of GSCC, MBSCC, and EMCC, 
which become shareholders of DTCC as a result of the Plan, will elect 
the persons to serve on DTCC's Board of Directors. 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 relocated 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.
f. Committees
    In addition, DTCC will create a Fixed Income Operations and 
Planning Committee that will include representatives of members of GSCC 
and MBSCC. The Fixed Income Operations and Planning Committee will 
advise the DTCC Board and management on its policies and procedures 
with respect to fixed income products and/or services of the Operating 
Subsidiaries and will have certain other responsibilities to be 
assigned to the Committee.
    Furthermore, GSCC and MBSCC will establish a joint GSCC/MBSCC 
Membership and Risk Management Committee that will include 
representatives of participants of GSCC and MBSCC. The joint GSCC/MBSCC 
Membership and Risk Management Committee will advise GSCC's and MBSCC's 
Board of Directors and management with respect to membership, credit, 
and risk matters, and will have certain other responsibilities to be 
assigned to the Committee.
g. Changes to DTCC's and GSCC's Governing Documents
    DTCC's Certificate of Incorporation, By-Laws and Shareholders 
Agreement (``Basic Documents'') will be amended to extend to the 
shareholders of GSCC, MBSCC, and EMCC that become shareholders of DTCC 
as a result of the Exchange Offer the rights that the shareholders of 
DTCC currently have and, in particular, to satisfy the Fair 
Representation Requirement of the Exchange Act. The Basic Documents 
will provide the following:
     The persons elected as directors to the DTCC Board will 
also serve as the directors of each of the Operating Subsidiaries, 
including EMCC.
     Other than, as is currently the case, one director 
appointed to the DTCC Board by the New York Stock Exchange, Inc., as an 
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.
     The rights 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 DTCC's Board and in 
accordance with the DTCC Shareholders Agreement.
     DTCC common stock owners will be able to exercise 
cumulative voting in the election of DTCC's directors.
     Each year the DTCC Board will appoint a nominating 
committee that may include both members and non-members 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 
for 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.
    In addition, GSCC's Certificate of Incorporation and By-Laws will 
be revised to reflect the changes in GSCC's corporate governance 
structure.\9\ GSCC's Certificate of Incorporation shall be amended and 
restated in accordance with Section 807 of the New York Business 
Corporation Law as follows:
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    \9\ The full text of the proposed changes to the Certificate of 
Incorporation and to the By-Laws is set forth in Exhibit A of GSCC's 
rule filing.
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     Current Article 2 of the Certificate of Incorporation will 
be revised to state that the purposes for which GSCC is formed are to 
engage in any lawful act or activity for which corporations may be 
organized under New York Business Corporation Law, provided, however, 
that GSCC is not formed to engage in any act or activity requiring the 
consent or approval of any state official, department, board, agency, 
or other body without first obtaining the consent of such body.
     The supermajority voting provisions previously contained 
in Article 3 will be deleted since they will be unnecessary because 
DTCC through its wholly-owned subsidiary,

[[Page 51700]]

Acquisition Company, will be the controlling shareholder of GSCC.
     Current Article 4 of the Certificate of Incorporation, 
which provides for removal of directors by shareholders, will be 
deleted as redundant because the By-Laws contain a substantially 
similar provision.
     Because there are no Class B common shares currently 
outstanding and because there are no plans to issue any such shares 
prior to or subsequent to the proposed integration, Article 5 (as 
revised, Article 3) of the Certificate of Incorporation will be 
modified to eliminate Class B shares. Because GSCC will no longer have 
any Class B shares, Article 6, which addressed the conversion of Class 
B shares to Class A shares, will be deleted. Article 7 (as revised, 
Article 5) will be amended to eliminate the references to classes of 
shares.
     A new Article 4 will be inserted to provide that GSCC 
shareholders may take action by written consent without a meeting as 
long as such consent is signed by the holders of outstanding shares 
having no less than the minimum number of votes that would be necessary 
to authorize or take such action at a meeting at which all shares 
entitled to vote thereon were present and voted.
     A new Article 6 will be inserted to limit liability of the 
directors to GSCC and its shareholders for any breach of duty provided 
that such limitation is consistent with the provisions of the New York 
Business Corporation Law.
     Articles 8A, 8B, and 9 will be eliminated because most of 
the content of those articles is no longer relevant or will not be 
relevant after the proposed integration since GSCC will have a 
controlling shareholder, DTCC through its wholly-owned subsidiary 
Acquisition Company. GSCC's Rules currently address the subject of 
allocation of liability of failed participants.\10\
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    \10\ GSCC will make a separate rule filing under Section 19(b) 
of the Act concerning amendments to its Rules to appropriately 
reflect the integration.
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     Article 10, which refers to the election of the Vice 
Chairman of the Board pursuant to a shareholder agreement, will be 
deleted because the GSCC Shareholder Agreement will be terminated as 
part of the proposed integration.
     After the proposed integration, Acquisition Company, which 
is wholly-owned by DTCC, will be the majority or sole (depending on 
whether all current GSCC shareholders tender their shares under the 
Exchange Offer) shareholder of GSCC. In order to promote efficiency in 
the governance of the Operation Subsidiaries after the Plan is 
completed, GSCC's current By-Laws will be replaced with a set of By-
Laws that generally conform to NSCC's By-Laws.\11\
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    \11\ GSCC's By-Laws will differ from NSCC's By-Laws in that (i) 
all references will be gender-neutral, (ii) Section 1.2 will provide 
that a majority, rather than twenty-five percent, of all outstanding 
shares may make a demand to call a special meeting, (iii) Section 
1.4 will provide for the ability to notify shareholders of 
shareholder meetings electronically, (iv) Section 1.2 will set the 
number of directors at a minimum of fifteen and maximum of twenty-
five, rather than twenty-seven, (v) Section 2.1 will provide that 
the number of directors at any time shall be determined by GSCC's 
Board of Directors, (vi) Section 2.9 will provide that GSCC's 
directors that are also GSCC or DTCC officers may not serve on the 
Audit Committee, (vii) Section 3.1 will state that the GSCC officers 
will include those required by statute and may include a Chief 
Executive Officer, (viii) the provision in Section 3.3 that the 
President shall be the Chief Executive Officer will be eliminated, 
(ix) the provision in Section 3.4 that Managing Directors shall, 
upon request, advise and assist the Chief Operating Officer will be 
eliminated, and (x) Article VIII will provide that a majority of the 
holders of all outstanding shares, rather than all the holders of 
all outstanding shares, may amend GSCC's By-Laws.
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    GSCC 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 GSCC 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. The proposed 
rule change will not effect and is therefore consistent with GSCC's 
duty to safeguard funds and securities in GSCC's custody or control or 
for which it is responsible.

B. Self-Regulatory Organization's Statement on Burden on Competition

    GSCC 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. GSCC, 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, NW., Washington, DC 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 GSCC's principal office. All 
submissions should refer to File Number SR-GSCC-2001-11 and should be 
submitted by October 31, 2001.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\12\

    \12\ 17 CFR 200.30-3(a)(12).

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-25383 Filed 10-9-01; 8:45 am]
BILLING CODE 8010-01-M