[Federal Register Volume 66, Number 212 (Thursday, November 1, 2001)]
[Notices]
[Pages 55218-55220]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-27419]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-44987; File No. SR-EMCC-2001-03]


Self-Regulatory Organizations; Emerging Markets Clearing 
Corporation; Order Granting Accelerated Approval of a Proposed Rule 
Change Relating to Arrangements To Integrate Emerging Markets Clearing 
Corporation and the Depository Trust & Clearing Corporation

October 25, 2001.
    On August 22, 2001, the Emerging Markets Clearing Corporation 
(``EMCC'') filed with the Securities and Exchange Commission 
(``Commission'') pursuant to section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \1\ a proposed rule change (File No. 
EMCC-2001-03) and on October 24, 2001, amended the proposed rule 
change.\2\ Notice of the proposal was published in the Federal Register 
on October 10, 2001.\3\ 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\ The amendment merely clarified that Class B shareholders 
would be given post integration voting rights for the election of 
EMCC directors at a rate of one-quarter vote per share. This 
clarification was made only to ensure the tax-free nature of the 
integration transaction and the proposal that Class B shareholders 
would be given limited voting rights was discussed and comment 
requested on in the notice. Accordingly, republication of the notice 
of filing is not required.
    \3\ Securities Exchange Act Release No. 44896 (Oct. 2, 2001), 66 
FR 51695.
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I. Description

    The proposed rule change will modify EMCC's organizational 
documents to facilitate its integration with the Depository Trust and 
Clearing Corporation (``DTCC'') (``Plan''). The primary purpose of the 
Plan, which was approved by EMCC's Board of Directors on July 25, 2001, 
is to ultimate harmonized the processing streams at EMCC, the 
Government Securities Clearing Corporation (``GSCC''), the MBS Clearing 
Corporation (``MBSCC''),\4\ The Depository Trust Company, and the 
National Securities Clearing Corporation (``NSCC'') \5\ (collectively, 
the ``Operating Subsidiaries'') for the clearance and settlement of 
institutional and broker transactions by integrating all of the 
Operating Subsidiaries with DTCC. Under the Plan, EMCC and DTCC will 
take the following initial actions:
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    \4\ Pursuant to separate plans for the integration of GSCC and 
MBSCC and DTCC, it is contemplated that GSCC and MBCC will become 
operating subsidiaries of DTCC at the same time that EMCC becomes an 
operating subsidiary of DTCC. However, the integration of EMCC and 
DTCC is not contingent on the integration of GSCC and MBSCC with 
DTCC and vice versa. Securities Exchange Act Release Nos. 44895 
(Oct. 2, 2001), 66 FR 51698 (Oct. 10, 2001); 44989 (Oct. 25, 2001) 
[File No. SR-GSCC-2001-11]; 44838 (Sept. 24, 2001), 66 FR 51701 
(Oct. 10, 2001); 44988 (Oct. 25, 2001) [File No. SR-MBSCC-2001-01].
    \5\ DTC and NSCC are already wholly owned subsidiaries of DTCC.
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    (1) Conduct an Exchange Offer. DTCC will form a wholly owned 
subsidiary (``Acquisition Company'') that will make an exchange offer 
(``Exchange Offer'') for EMCC shares. Under the terms of the Exchange 
Offer, eligible Class A EMCC shareholders \6\ will have the opportunity 
to exchange their EMCC shares for DTCC common stock.\7\ Concurrent with 
and subject to the effectiveness of the Exchange Offer, EMCC will 
repurchase the Class A and Class B common sharer held by its trade 
association shareholders. Subject to the effectiveness of the Exchange 
Offer, EMCC's trade association shareholders will receive from EMCC in 
exchange for their Class A and Class B common shares cash in an amount 
equal to the lesser of (a) Their acquisition cost or (b) the adjusted 
book value of their shares. EMCC's Class B shareholders will retain 
their Class B shares (other than the trade association shareholders who 
will be paid out as provided above) with the same rights to have their 
shares repurchased for cash as currently provided in EMCC's Amended and 
Restated Shareholder Agreement (``EMCC Shareholder Agreement'').\8\
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    \6\ EMCC Class A shareholders eligible to participate in the 
Exchange Offer include EMCC Class A shareholders that are members or 
affiliates of members of EMCC, GSCC, MBSCC, DTC, or NSCC.
    \7\ The share exchange rate will be based on the adjusted book 
values of EMCC and DTCC. The adjusted book value of EMCC will equal 
book value less the retained earnings of EMCC at the time of (or as 
of the end of the last full preceding calendar month) the 
integration of EMCC with DTCC. The adjusted book value of DTCC 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 preceding calendar month) the 
integration of EMCC with DTCC.
    \8\ In addition and subject to the effectiveness of the Exchange 
Offer, holders of Class B shares will be provided with the limited 
right to vote for the election of EMCC Directors.
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    Following a successful Exchange Offer, Acquisition Company will be 
the majority shareholder of EMCC and the Class B and any non-eligible 
and/or non-tendering Class A EMCC shareholders will remain as minority 
shareholders in EMCC.
    As a matter of DTCC policy, EMCC's retained earnings at the time of 
(or as of the end of the last full preceding calendar month) the 
integration of EMCC with DTCC will be dedicated to supporting EMCC's 
business. Acquisition Company and DTCC will not 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 EMCC pursuant to service contracts.
    (2) Change EMCC's Shareholder Agreement. EMCC's Shareholder 
Agreement will be amended in connection with the Exchange Offer in 
order to eliminate any restrictions on transferring EMCC shares to 
Acquisition Company. Following a successful Exchange Offer, the EMCC 
Shareholder Agreement will be terminated.
    (3) Select New EMCC's Directors. DTCC, through its wholly-owned 
subsidiary, Acquisition Company, will

[[Page 55219]]

elect as directors of EMCC the persons elected by the shareholders of 
DTCC to be the directors of DTCC.\9\ EMCC 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.
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    \9\ Given that EMCC's initial post-integration board would be 
elected upon the effectiveness of the integration plan, EMCC 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, EMCC will call an annual 
meeting for the election of directors pursuant to its current 
procedures.
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    As a part of the integration, a structure will be implemented that 
is designed to ensure that the Operating Subsidiaries satisfy the fair 
representation requirement of section 17A(b)(3)(C) of the Act.\10\ 
Specifically, the DTCC shareholders, consisting of the current DTCC 
shareholders and EMCC's, MBSCC's, and GSCC's shareholders that 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 reallocated to 
shareholders based upon their usage of one or more of the Operating 
Subsidiaries. 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.
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    \10\ 15 U.S.C. 78-q(b)(3)(C).
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    (4) Form New Committees. DTCC's existing International Operations 
and Planning Committee will include representatives of EMCC members. 
The International Operations and Planning Committee will advise the 
DTCC Board and management on its policies and procedures with respect 
to the international products and/or services of the Operating 
Subsidiaries, including EMCC, and will have certain other 
responsibilities to be assigned to the Committee. In addition, EMCC 
will continue to have a Membership and Risk Committee that will include 
representatives of EMCC's members. The EMCC membership and Risk 
Committee will advise EMCC's Board of Directors and management with 
respect to membership, credit matters, and risk matters and will have 
certain other responsibilities assigned to it.
    (5) Change DTCC's and EMCC's Governing Documents. DTCC's 
Certificate of Incorporation, By-Laws and Shareholders Agreement 
(``Basic Documents'') will be amended to extend to the shareholders of 
EMCC, MBSCC, and GSCC that become shareholders of DTCC as a result of 
the Exchange Offer the rights to 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 
the owner of DTCC preferred stock, and one director appointed to the 
DTCC Board by the National Association of Securities Sealers, Inc., as 
an 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 determine by DTCC's Board and in 
accordance with the DTCC Shareholders Agreement. DTCC common stock.
     DTCC's directors.
     Each year 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, EMCC's Certificate of Incorporation and By-Laws will 
be revised to reflect the changes in EMCC's corporate governance 
structure and to include certain other changes so that these documents 
conform to the Certificates of Incorporation and By-Laws of GSCC and 
MBSCC, so as to promote efficiency in the governance of the Operating 
Subsidiaries upon completion of the Plan. EMCC's Certificate of 
Incorporation shall be amended as follows:
     Its operative provisions, which currently are contained in 
the original Certificate and several amendments, will be restated into 
a single composite Amended and Restated Certificate of Incorporation 
and reordered and renumbered as appropriate.
     In Article 3 (as renumbered), the provisions relating to 
the Class B common shares will be modified to provide such shares with 
limited voting rights. These shares will have the right to vote, with 
the Class A common shares voting together as a single Class, for the 
election of directors.
     A new Article 4 will be inserted to provide that, in 
accordance with New York Business Corporation Law, EMCC shareholders 
may take action by written consent without a meeting and without 
unanimity as long as such consent is signed by the holders of 
outstanding shares having not 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.
     The supermajority voting provisions currently contained in 
Article 6 will be deleted since they will be unnecessary because DTCC, 
through its wholly-owned subsidiary, Acquisition Company, will be the 
controlling shareholder of EMCC.
     A new Article 6 will be added to limit the liability of 
the directors to EMCC and its shareholders for any breach of duty 
provided such limitation is consistent with the provisions of the New 
York Business Corporation Law.
    Since after the proposed integration, DTCC through its wholly-owned 
subsidiary, Acquisition Company, will be the majority shareholder of 
EMCC, the current By-Laws of EMCC will be replaced with a set of By-
Laws that generally conform to NSCC's By-Laws.\11\
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    \11\ EMCC's By-Laws will differ from NSCC's By-Laws in that (i) 
all references will be gender-neutral, (ii) the requirement in 
Section 3.3 that the President shall be the Chief Executive Officer 
will be deleted, (iii) the number of directors shall be between 
fifteen and twenty-five as determined by the Board, and (iv) 
Sections 1.2 and Article VIII will provide that a majority of the 
outstanding shares may call a special shareholders meeting and may 
amend EMCC's By-Laws.
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II. Discussion

    The Commission finds that EMCC's proposed rule change is consistent 
with

[[Page 55220]]

the requirements of the Act and the rules and regulations thereunder 
and particularly with the requirements of section 17A(b)(3)(C) \12\ of 
the Act. Section 17A(b)(3)(C) requires that a clearing agency's rules 
assure the fair representation of its shareholders (or members) and 
participants in the selection of its direction and administration of 
its affairs. The Commission finds that EMCC's proposal is consistent 
with this requirement because the integration plan should provide EMCC 
members with a reasonable opportunity to acquire common stock in DTCC 
based on their use of EMCC and should provide EMCC members through 
their holding of DTCC stock with adequate and fair representation in 
the selection of EMCC's directors and in the administration of EMCC's 
affairs. Furthermore, EMCC members will have an opportunity to advise 
DTCC through the International Operations and Planning Committee and 
Membership and Risk Committee that will include EMCC members.
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    \12\ 15 U.S.C. 78q-1(b)(3)(C).
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    EMCC has requested that the Commission find good cause for 
approving the proposed rule change prior to the thirtieth day after the 
date of publication of notice of filing. The Commission finds good 
cause for approving the proposed rule change prior to the thirtieth day 
after the date of publication of notice of filing because such approval 
will allow EMCC to begin its integration in accordance with the 
schedule for the integration of EMCC, MBSCC, and GSCC with DTCC. The 
Commission is approving the proposed rule change prior to the end of 
the comment period in order that EMCC may begin its integration in 
accordance with the schedule for the integration of EMCC, MBSCC, and 
GSCC with DTCC.

III. Conclusion

    On the basis of the foregoing, the Commission finds that the 
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-EMCC-2001-03) be, and hereby 
is approved.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\13\
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    \13\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-27419 Filed 10-31-01; 8:45 am]
BILLING CODE 8010-01-M