[Federal Register Volume 84, Number 34 (Wednesday, February 20, 2019)]
[Notices]
[Pages 5129-5132]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-02735]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-85129; File No. SR-OCC-2018-015]


Self-Regulatory Organizations; The Options Clearing Corporation; 
Order Approving Proposed Rule Change, as Modified by Partial Amendment 
No. 1, Concerning Changes to The Options Clearing Corporation's 
Management Structure

February 13, 2019.
    On December 20, 2018, The Options Clearing Corporation (``OCC'') 
filed with the Securities and Exchange Commission (``Commission'') the 
proposed rule change SR-OCC-2018-015 (``Proposed Rule Change'') 
pursuant to Section 19(b) of the Securities Exchange Act of 1934 
(``Exchange Act'') \1\ and Rule 19b-4 \2\ thereunder. The Proposed Rule 
Change was published for comment in the Federal Register on December 
31, 2018,\3\ and the Commission has received no comments in response. 
On February 1, 2019, OCC filed a partial amendment (``Partial Amendment 
No. 1'') to the Proposed Rule Change.\4\ This order approves the 
Proposed Rule Change, as modified by Partial Amendment No. 1.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Securities Exchange Act Release No. 84939 (Dec. 21, 2018), 
83 FR 67762 (Dec. 31, 2018) (SR-OCC-2018-015) (``Notice'').
    \4\ In Partial Amendment No. 1, OCC corrected an error in 
Exhibit 5 without changing the substance of the Proposed Rule 
Change. Partial Amendment No. 1 is not subject to notice and comment 
because it does not materially alter the substance of the Proposed 
Rule Change or raise any novel regulatory issues. References to the 
Proposed Rule Change from this point forward refer to the Proposed 
Rule Change, as amended by Partial Amendment No. 1.
---------------------------------------------------------------------------

I. Description of the Proposed Rule Change 5
---------------------------------------------------------------------------

    \5\ All terms with initial capitalization that are not otherwise 
defined herein have the same meaning as set forth in the OCC By-Laws 
and Rules. OCC's By-Laws and Rules can be found on OCC's public 
website: http://optionsclearing.com/about/publications/bylaws.jsp.
---------------------------------------------------------------------------

    OCC proposes to change its By-Laws, Rules, Board Charter, and 
certain Board-committee charters to (1) separate the roles of Executive 
Chairman and Chief Executive Officer (``CEO'') and reallocate authority 
and responsibilities between the two roles; (2) remove the requirement 
from OCC's By-Laws that the Board of Directors (``Board'') elect a 
Chief Administrative Officer (``CAO'') and delete the references to a 
CAO throughout OCC's By-Laws, Rules, and charters; and (3) provide 
additional flexibility regarding the Management Director seat on the 
Board, including providing that such a director is not required. 
According to OCC, the purpose of the Proposed Rule Change would be to 
re-establish the separation of the Executive Chairman and CEO roles and 
to implement additional organizational changes to OCC's governance 
structure, including providing additional flexibility to the Management 
Director on the Board and removing the requirement that the Board elect 
a CAO, that the Board has concluded would benefit OCC's operation and, 
consequently, OCC's ability to serve Clearing Members and the markets 
for which it clears and settles transactions.\6\
---------------------------------------------------------------------------

    \6\ See Notice, 83 FR at 67763.
---------------------------------------------------------------------------

A. Separation of Roles of Executive Chairman and CEO

    Currently, the Executive Chairman of OCC's Board also serves as 
OCC's CEO.\7\ OCC stated that, at the time that it adopted this 
structure in 2017,

[[Page 5130]]

combining the roles of Executive Chairman and CEO was part of a package 
of governance changes that OCC's Board concluded represented 
enhancements to OCC's leadership structure that would promote more 
efficient management and operations.\8\ Since the adoption of the 
current structure, OCC has new members of its senior management team, 
including its current Chief Security Officer and Chief Information 
Officer.\9\ As a result, OCC believes it is now well positioned to 
again separate the roles of Executive Chairman and CEO in its 
management structure.\10\
---------------------------------------------------------------------------

    \7\ See OCC By-Laws, Art. IV, Sec. 6(a).
    \8\ See Notice, 83 FR at 67763. See also Exchange Act Release 
No. 80168 (Mar. 7, 2017), 82 FR 13522 (Mar. 13, 2017) (Notice of 
Filing of a Proposed Rule Change concerning changes to OCC's 
management structure); Securities Exchange Act Release No. 80531 
(Apr. 26, 2017), 82 FR 20502 (May 2, 2017) (SR-OCC-2017-002).
    \9\ OCC also installed a number of other senior executives in 
the period leading up to the adoption of its current management 
structure, including its current Chief Administrative Officer, head 
of government relations, Chief Compliance Officer (``CCO''), Chief 
Financial Officer, and President and Chief Operating Officer.
    \10\ See Notice, 83 FR at 67764.
---------------------------------------------------------------------------

    According to OCC, providing for separate Executive Chairman and CEO 
roles would add a counterbalance in the management and oversight of 
OCC.\11\ Currently, OCC's Executive Chairman and CEO is responsible for 
the control functions of OCC, including enterprise risk management, 
internal audit and compliance, and external affairs, and has 
supervision over the officers and agents he appoints.\12\ The Executive 
Chairman, as CEO, is also ``an officer responsible for all aspects of 
[OCC's] business and . . . its day to day affairs.'' \13\ Under the 
Proposed Rule Change, the Executive Chairman would be less involved in 
day-to-day management decisions of the type more typically made by an 
executive but would retain his or her role vis-[agrave]-vis the 
Board.\14\ In addition, the Executive Chairman would retain 
responsibility over internal audit, public affairs, and government 
relations. The CEO would be responsible for all aspects of OCC's 
business and of its day-to-day affairs, including enterprise risk 
management and compliance, and would be responsible for all aspects of 
the business of the Corporation that do not report directly to the 
Executive Chairman. The Chief Operations Officer (``COO'') would 
administer the day-to-day affairs and business of the Corporation in 
accordance with the directions of the CEO.
---------------------------------------------------------------------------

    \11\ See id. OCC further represented that the separation of 
these roles would enable the Executive Chairman to serve an advisory 
role in assisting the CEO with strategic plan development as well as 
management succession planning by assisting in developing, coaching 
and mentoring members of the senior management team in a separate 
capacity than that of the CEO. See id.
    \12\ See OCC By-Laws, Art. IV, Sec. 6(a).
    \13\ Id.
    \14\ Because the Executive Chairman would be less involved in 
day-to-day operational issues, the Proposed Rule Change would remove 
the requirement that the Executive Chairman must be selected from 
``among the full-time employees of OCC'' to require only that the 
Executive Chairman be selected from ``among the employees of OCC.'' 
This amendment would allow the Executive Chairman to be a part-time 
employee.
---------------------------------------------------------------------------

    There are numerous provisions throughout OCC's By-Laws and Rules 
that the Proposed Rule Change would amend to change the list of 
officers authorized to act under the relevant provision. In some 
instances, the Executive Chairman will continue to be listed as an 
authorized individual; in other instances, the reference to the 
Executive Chairman would be replaced by the CEO. The Proposed Rule 
Change would replace references to the Executive Chairman with 
references to the CEO in those provisions that generally involve 
routine day-to-day business decisions or are, by their terms, 
temporary.\15\ The Proposed Rule Change would add references to the 
CEO, but not remove references to the Executive Chairman, in those 
provisions that primarily involve emergency or other exigent 
circumstances, determinations around OCC's management structure, and 
other activities generally outside of OCC's day-to-day activities 
(e.g., signing OCC share certificates).\16\ OCC stated that the purpose 
of referencing both the Executive Chairman and CEO in such provisions 
would be to provide management the capacity to carry out OCC's affairs 
in such circumstances even if a particular officer is absent or is 
otherwise unable to perform his or her duties.\17\ Because, as 
described below, OCC has proposed removing the role of CAO, the 
Proposed Rule Change would remove the CAO from the list of officers 
authorized to act under each relevant provision.
---------------------------------------------------------------------------

    \15\ See Notice, 83 FR at 67765 (providing the full list of 
provisions that would no longer reference the Executive Chairman).
    \16\ See id. (providing the full list of provisions that would 
include a reference to the CEO).
    \17\ See id.
---------------------------------------------------------------------------

B. Removal of the Role of CAO

    OCC's rules currently require the Board to elect a CAO.\18\ This 
requirement was created in 2017 at the same time as the combining of 
the Executive Chairman and CEO roles and the removal of the role of the 
President.\19\ At that time, OCC stated that the CAO role was created 
for the purpose of distributing the responsibilities of the President 
and to provide flexibility to help ensure that responsibility is not 
concentrated in any one officer.\20\ OCC believes that, with the 
separation of the Executive Chairman and CEO roles, the role of CAO is 
no longer necessary to ensure flexibility.\21\ The Proposed Rule Change 
would eliminate the requirement for the Board to elect a CAO and would 
remove related references to the CAO.\22\ Where the removal of 
reference to the CAO reduces the number of individuals authorized to 
take some action under OCC's rules to two, the Proposed Rule Change 
would provide for the delegation of authority by the CEO and COO to a 
Designated Officer \23\ in the event that the CEO and COO are both 
unavailable. OCC believes delegation in these instances to senior 
officers of the Corporation is appropriate to ensure that the authority 
can be exercised if necessary in the event the CEO and COO are both 
unavailable.\24\
---------------------------------------------------------------------------

    \18\ See OCC By-Laws, Art. IV, Sec. 8.
    \19\ See Securities Exchange Act Release No. 80531 (Apr. 26, 
2017), 82 FR 20502, 20503 (May 2, 2017) (SR-OCC-2017-002).
    \20\ See id.
    \21\ See Notice, 83 FR at 67765-66.
    \22\ OCC's Board would retain authority under the existing By-
Laws to ``elect one or more Vice Presidents or such other officers 
as it may from time to time determine are required for the efficient 
management and operation of the Corporation.'' See OCC By-Laws, Art. 
IV, Sec. 1.
    \23\ See OCC By-Laws, Art. I, Sec. D(8). A Designated Officer 
must be of the rank of Senior Vice President or higher. See id.
    \24\ See Notice, 83 FR at 67766.
---------------------------------------------------------------------------

C. Changes to the Role of Management Director

    OCC's rules currently require that the Board include a Management 
Director, and that the Executive Chairman be elected to fill that 
position.\25\ The Proposed Rule Change would remove the following 
requirements: (1) That the Board include a Management Director; and (2) 
that the Executive Chairman serve as Management Director. OCC believes 
that these changes would create more flexibility for filling the role 
of Management Director and could more easily accommodate potential 
future scenarios, for example, if the Management Director seat shifts 
from the Executive Chairman to the CEO.\26\
---------------------------------------------------------------------------

    \25\ See OCC By-Laws, Art. III, Sec. 1.
    \26\ See Notice, 83 FR at 67766.
---------------------------------------------------------------------------

D. Conforming Changes

    The positions of Executive Chairman, CEO, CAO, and Management 
Director are referenced throughout OCC's governing documents. 
Consistent with

[[Page 5131]]

the changes described above that would impact OCC's By-Laws and Rules, 
the Proposed Rule Change would make certain conforming amendments to 
the following charters: (1) Board Charter; (2) Audit Committee Charter 
(``AC Charter''); (3) Compensation and Performance Committee Charter 
(``CPC Charter''); (4) Governance and Nominating Committee Charter 
(``GNC Charter''); and (5) Risk Committee Charter (``RC Charter'').\27\
---------------------------------------------------------------------------

    \27\ In its proposal, OCC noted that the Technology Committee 
Charter required no amendment. See Notice, 83 FR at 67766, n. 31.
---------------------------------------------------------------------------

    The Proposed Rule Change would generally make amendments to reflect 
the separation of those roles and the revised duties of each role 
pursuant to the amendments described above in the Board Charter, AC 
Charter, CPC Charter, GNC Charter, and RC Charter. Additionally, the 
Proposed Rule Change would amend the Board Charter to remove the CEO's 
role in certain Board matters due to the CEO position no longer being 
linked to the position of Executive Chairman. The Proposed Rule Change 
would amend the AC Charter as follows: (1) The CCO would report 
administratively to the CEO and functionally to the Audit Committee; 
(2) the Chief Audit Executive (``CAE'') would report administratively 
to the Executive Chairman and functionally to the Audit Committee; (3) 
the Audit Committee would consult the CEO in reviewing the performance 
of the Compliance function and the CCO; (4) the Audit Committee would 
consult the Executive Chairman in reviewing the performance of the 
Internal Audit function and the CAE. The Proposed Rule Change would 
amend the RC Charter to reflect that OCC's Chief Risk Officer would 
report administratively to the CEO and functionally to the Risk 
Committee.
    The Proposed Rule Change would remove the references to the CAO 
from the Board Charter and CPC Charter. The Proposed Rule Change would 
also conform the description of the Management Director in the Board 
Charter to the changes described above.

II. Discussion and Commission Findings

    Section 19(b)(2)(C) of the Exchange Act directs the Commission to 
approve a proposed rule change of a self-regulatory organization if it 
finds that such proposed rule change is consistent with the 
requirements of the Exchange Act and the rules and regulations 
thereunder applicable to such organization.\28\ After carefully 
considering the Proposed Rule Change, the Commission finds the proposal 
is consistent with the requirements of the Exchange Act and the rules 
and regulations thereunder applicable to OCC. More specifically, the 
Commission finds that the proposal is consistent with Section 
17A(b)(3)(A) of the Exchange Act \29\ and Rule 17Ad-22(e)(2) 
thereunder.\30\
---------------------------------------------------------------------------

    \28\ 15 U.S.C. 78s(b)(2)(C).
    \29\ 15 U.S.C. 78q-1(b)(3)(A).
    \30\ 17 CFR 240.17Ad-22(e)(2).
---------------------------------------------------------------------------

A. Consistency With Section 17A(b)(3)(A) of the Exchange Act

    Section 17A(b)(3)(A) of the Act requires, among other things, that 
a clearing agency is so organized and has the capacity to be able to 
facilitate the prompt and accurate clearance and settlement of 
securities transactions and derivatives agreements, contracts, and 
transactions for which it is responsible, safeguard securities and 
funds in its custody or control or for which it is responsible, and to 
comply with the provisions of Section 17A of the Exchange Act and the 
rules and regulations thereunder.\31\
---------------------------------------------------------------------------

    \31\ 15 U.S.C. 78q-1(b)(3)(A).
---------------------------------------------------------------------------

    As described above, the Proposed Rule Change would amend OCC's 
senior leadership structure. The Proposed Rule Change would provide a 
balance between the groups involved in the management and oversight of 
OCC by separating the roles of Executive Chairman and CEO. The 
Commission believes that such a balance would support the Board's 
ability to engage with and challenge decisions by management.
    The Proposed Rule Change would remove the requirement for OCC's 
Board to elect a CAO, which would also reduce the number of individuals 
authorized to act in certain situations. The separation of the roles of 
Executive Chairman and CEO would, however, account for the removal of 
the role of CAO in some instances, and the authority to delegate 
authority to Designated Officers, as described above, would account for 
the removal in other instances. The Commission believes that these 
structure changes, taken together with the removal of the role of CAO, 
would maintain OCC's current capacity to address both day-to-day and 
exigent circumstances as they arise.
    As described above, the Proposed Rule Change would continue to 
allow for a Management Director, but would remove the requirements that 
there be a Management Director and that such a Management Director be 
the same person as the Executive Chairman. These changes would provide 
flexibility for filling the role of Management Director under potential 
future scenarios. The Commission believes that providing additional 
flexibility for filling the role of Management Director would support 
the functioning of OCC's Board in the future. Accordingly, based on the 
foregoing, the Commission believes that the Proposed Rule Change is 
consistent with the organizational and capacity requirements of Section 
17A(b)(3)(A) of the Exchange Act.\32\
---------------------------------------------------------------------------

    \32\ Id.
---------------------------------------------------------------------------

B. Consistency With Rule 17Ad-22(e)(2) Under the Exchange Act

    Rule 17Ad-22(e)(2) under the Exchange Act requires, among other 
things, that a covered clearing agency establish, implement, maintain, 
and enforce written policies and procedures reasonably designed to 
provide for governance arrangements that meet certain criteria.\33\ 
Rule 17Ad-22(e)(2)(i) under the Exchange Act requires that such 
governance arrangements are clear and transparent.\34\ Further, Rule 
17Ad-22(e)(2)(v) under the Exchange Act requires that such governance 
arrangements specify clear and direct lines of responsibility.\35\
---------------------------------------------------------------------------

    \33\ 17 CFR 240.17Ad-22(e)(2).
    \34\ 17 CFR 240.17Ad-22(e)(2)(i).
    \35\ 17 CFR 240.17Ad-22(e)(2)(v).
---------------------------------------------------------------------------

    As described above, the Proposed Rule Change would separate the 
roles of Executive Chairman and CEO and remove the role of CAO. The 
Commission believes that separating the roles of Executive Chairman and 
CEO would promote clarity in each of the separate roles by removing any 
potential overlap. The Proposed Rule Change would also clarify the 
reporting lines of the function and members of senior management as 
described above (e.g., the CAE would report to the Executive Chairman 
and the CCO would report to the CEO). Further, the Proposed Rule Change 
would not alter the direct reporting of members of senior management, 
such as the CAE, CCO, and CRO, to the Board and its committees. The 
Commission believes that these changes provide increased clarity around 
the reporting lines of these members of senior management. Accordingly, 
based on the foregoing, the Commission believes that the proposed 
changes pertaining to the assignment of responsibilities and reporting 
are consistent with Exchange Act Rule 17Ad-22(e)(2).\36\
---------------------------------------------------------------------------

    \36\ 17 CFR 240.17Ad-22(e)(2).
---------------------------------------------------------------------------

III. Conclusion

    On the basis of the foregoing, the Commission finds that the 
Proposed

[[Page 5132]]

Rule Change is consistent with the requirements of the Exchange Act, 
and in particular, the requirements of Section 17A of the Exchange Act 
\37\ and the rules and regulations thereunder.
---------------------------------------------------------------------------

    \37\ In approving this Proposed Rule Change, the Commission has 
considered the proposed rules' impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
---------------------------------------------------------------------------

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Exchange Act,\38\ that the Proposed Rule Change (SR-OCC-2018-015), as 
modified by Partial Amendment No. 1, be, and hereby is, approved.
---------------------------------------------------------------------------

    \38\ 15 U.S.C. 78s(b)(2).
---------------------------------------------------------------------------



    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\39\
Eduardo A. Aleman,
Deputy Secretary.
---------------------------------------------------------------------------

    \39\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

[FR Doc. 2019-02735 Filed 2-19-19; 8:45 am]
 BILLING CODE 8011-01-P