[Federal Register Volume 66, Number 212 (Thursday, November 1, 2001)]
[Notices]
[Pages 55220-55222]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-27421]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-44989; File No. SR-GSCC-2001-11]


Self-Regulatory Organizations; Government Securities Clearing 
Corporation; Order Granting Accelerated Approval of A Proposed Rule 
Change Relating to Arrangements to Integrate Government Securities 
Clearing Corporation and The Depository Trust & Clearing Corporation

October 25, 2001.
    On August 22, 2001, the Government Securities Clearing Corporation 
(``GSCC'') 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. 
GSCC-2001-11), 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. 44895 (Oct. 2, 2001), 66 
FR 51698.
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I. Description

    The proposed rule change will modify GSCC'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 GSCC's Board of Directors on July 24, 2001, 
is to ultimately harmonize the processing streams at GSCC, the MBS 
Clearing Corporation (``MBSCC''),\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. Under the Plan, GSCC and DTCC will 
take the following initial actions:
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    \3\ 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 Nos. 44838 (Sept. 24, 2001), 66 FR 
51695; 44988 (Oct. 25, 2001) [File No. SR-MBSCC-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 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 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 a wholly-owned 
subsidiary (``Acquisition Company'') that will make an exchange offer 
(``Exchange Offer'') for GSCC shares. Under the terms of the Exchange 
Offer, GSCC shareholders will have the opportunity to exchange their 
GSCC common stock for DTCC common stock.\6\ 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 tender their shares) shareholder of GSCC, and any 
non-tendering GSCC shareholders will remain as minority shareholders of 
GSCC.
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    \6\ The share exchange rate will be based on the adjusted book 
values of GSCC and DTCC. The adjusted book value of GSCC will equal 
book value less the retained earnings of GSCC at the time of (or as 
of the end of the last full preceding calendar month) the 
integration of GSCC 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 calendar month preceding) the 
integration of GSCC with DTCC.
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    As a matter of DTCC policy, GSCC's retained earnings at the time of 
(or as of the end of the last preceding calendar month) the integration 
of GSCC with DTCC will be dedicated to supporting GSCC'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 GSCC 
pursuant to service contracts.
    (2) Change 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.
    (3) Select New GSCC's Directors. DTCC, through its wholly-owned 
subsidiary, Acquisition Company, will elect as directors of GSCC the 
persons

[[Page 55221]]

elected by the shareholders of DTCC to be the directors of DTCC.\7\ 
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.
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    \7\ 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, GSCC 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.\8\ 
Specifically, the DTCC shareholders, consisting of the current DTCC 
shareholders and GSCC's, MBSCC's, and EMCC's shareholders that become 
shareholders of DTCC as a result of the Plan, will elect the persons to 
serve on DTCC's Boards 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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    \8\ 15 U.S.C. 78q-1(b)(3)(C).
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    (4) Form New Committees. 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 services of the Operating 
Subsidiaries and will have certain other responsibilities to be 
assigned to the Committee. GSCC and MBSCC will also 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 assigned 
to it.
    (5) Change 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 DTCC shareholders as a result of the 
Exchange Offer the rights that DTCC's shareholders currently have and, 
in particular, to satisfy the fair representation requirement. The 
Basic Document will provide the following:
     The persons elected as directors to the DTCC Board will 
also serve as the directors of each of the Opening Subsidiaries, 
including GSCC.
     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 Opening 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.
    GSCC's Certificate of Incorporation and By-Laws will be revised to 
reflect the changes in GSCC's corporate governance structure. GSCC's 
Certificate of Incorporation shall be amended and restated in 
accordance with Section 807 of the New York Business Corporation Law as 
follows:
     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, 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 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.
     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

[[Page 55222]]

allocation of liability of failed participants.\9\
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    \9\ 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 of 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 placed with a set of By-Laws 
that generally conform to NSCC's By-Laws.\10\
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    \10\ 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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II. Discussion

    The Commission finds that GSCC'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) \11\ 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 
GSCC's proposal is consistent with this requirement because the 
integration plan should provide GSCC members with a reasonable 
opportunity to acquire common stock in DTCC based on their use of GSCC 
and should provide GSCC members through their holding of DTCC stock 
with adequate and fair representation in the selection of GSCC's 
directors and in the administration of GSCC's affairs. Furthermore, 
GSCC 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 GSCC members.
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    \11\ 15 U.S.C. 78q-1(b)(3)(C).
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    GSCC 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 GSCC to amend its rules to begin its integration in 
accordance with the schedule for the integration of GSCC, MBSCC, and 
EMCC with DTCC. The Commission is approving the proposed rule change 
prior to the end of the comment period in order that GSCC may begin its 
integration in accordance with the schedule for the integration of 
GSCC, MBSCC, 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-GSCC-2001-11) be, and hereby 
is approved.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\12\
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    \12\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-27421 Filed 10-31-01; 8:45 am]
BILLING CODE 8010-01-M