[Federal Register Volume 66, Number 212 (Thursday, November 1, 2001)]
[Notices]
[Pages 55222-55224]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-27420]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-44988; File No. SR-MBSCC-2001-01]


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

October 25, 2001.
    On August 22, 2001, the MBS Clearing Corporation (``MBSCC'') 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. MBSCC-2001-01). Notice of the 
proposal was published in the Federal Register on October 10, 2001.\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. 44838 (Sept. 24, 2001), 
66 FR 51701.
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I. Description

    The proposed rule change will modify MBSCC'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 MBSCC's Board of Directors on July 19, 
2001, is to ultimately harmonize the processing streams at MBSCC, the 
Government Securities Clearing Corporation (``GSCC''),\3\ the Emerging 
Markets Clearing Corporation (``EMCC''),\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.

[[Page 55223]]

Under the Plan, MBSCC and DTCC will take the following initial actions.
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    \3\ 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 Nos. 44985 (Oct. 2, 2001), 66 FR 
51698 (Oct. 10, 2001); 44989 (Oct. 25, 2001) [File No. SR-GSCC-2001-
01].
    \4\ 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 Nos. 44896 
(Oct. 2, 2001), 66 FR 51695 (Oct. 10, 2001); 44987 (Oct. 25, 2001) 
[File No. SR-EMCC-2001-03].
    \5\ DTC and NSCC are already wholly owned subsidiaries of DTCC.
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    (1) Conduct an Exchange Offer. 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 all 
shares of Holding Company received pursuant to the Exchange Offer. 
Under the terms of the Exchange Offer, Operating Company will merge 
with MBSCC in a transaction (``Merger'') in which (i) the MSBCC 
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 canceled; and 
(iii) all the shares of Holding Company stock owned by DTCC will be 
canceled. 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.
    The Acquisition Company will conduct the Exchange Offer whereby 
Holding Company's 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.\6\ 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.
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    \6\ 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 preceding calendar month) 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 
preceding calendar month) the integration of MBSCC with DTCC.
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    As a matter of DTCC policy, MBSCC's retained earnings at the time 
of (or as of the end of the last full preceding calendar month) the 
integration of MBSCC with DTCC will be dedicated to supporting MBSCC'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 MBSCC pursuant to service contracts.
    (2) Change MBSCC's Shareholder Agreement. MBSCC's Shareholder 
Agreement will be terminated.
    (3) Select New MBSCC's Directors. DTCC, through its wholly-owned 
subsidiary, Acquisition Company, will elect as directors of MBSCC the 
persons elected by the shareholders of DTCC to be the directors of 
DTCC.\7\ 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 and separate risk 
management procedures.
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    \7\ Given the MBSCC's initial post-integration board would be 
elected upon the effectiveness of the integration plan, MBSCC 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, MBSCC 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 
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.
    (4) Form New Committees. 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 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 
assigned to it.
    (5) Change DTCC's and MBSCC's Governing Documents. 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.\8\ In this regard, the Basic Documents 
will provide for the following:
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    \8\ 15 U.S.C. 78q-1(b)(3)(C).
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     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 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 the 
DTCC Board.
     The owners of DTCC common stock will be able to exercise 
cumulative voting in the election of directors of DTCC.

[[Page 55224]]

     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 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.
    MBSCC's Certificate of Incorporation and By-Laws will be revised to 
reflect the changes in MBSCC's corporate governance structure. MBSCC's 
Certificate of Incorporation will be amended and restated in accordance 
with section 245 of the Delaware General Corporation Law (``section 
245'') as follows:
     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 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 
be 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 Hold Company shares in 
the Exchange Offer) shareholders, 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 
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.
    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 order 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 generally 
conform to NSCC's By-Laws.\9\
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    \9\ 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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II. Discussion

    The Commission finds that MBSCC's proposed rule change is 
consistent with the requirements of the Act and the rules and 
regulations thereunder and particularly with the requirements of 
section 17A(b)(3)(C) \10\ 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 affair. The Commission finds that 
MBSCC's proposal is consistent with this requirement because the 
integration plan should provide MBSCC members with a reasonable 
opportunity to acquire common stock in DTCC based on their use of MBSCC 
and should provide MBSCC members through their holding of DTCC stock 
with adequate and fair representation in the selection of MBSCC's 
directors and in the administration of MBSCC's affairs. Furthermore, 
MBSCC members will have an opportunity to advise DTCC through the new 
Fixed Income Operations and Planning Committee and Membership and 
through the Risk Management Committee that will be composed, in part, 
of MBSCC members.
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    \10\ 15 U.S.C. 78q-1(b)(3)(C).
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    MBSCC 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 MBSCC to begin its integration in accordance with the 
schedule for the integration of MBSCC, GSCC, and EMCC with DTCC. The 
Commission is approving the proposed rule change prior to the end of 
the comment period in order that MBSCC may begin its integration in 
accordance with the schedule for the integration of MBSCC, GSCC, and 
EMCC 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-MBSCC-2001-01) be, and 
hereby is, approved.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\11\
Margaret H. McFarland,
Deputy Secretary.
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    \11\ 17 CFR 200.30-3(a)(12).
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[FR Doc. 01-27420 Filed 10-31-01; 8:45 am]
BILLING CODE 8010-01-M