[Federal Register: October 31, 2005 (Volume 70, Number 209)]
[Notices]
[Page 62359-62361]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr31oc05-81]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-52663; File No. SR-FICC-2005-19]
Self-Regulatory Organizations; Fixed Income Clearing Corporation;
Notice of Filing of Proposed Rule Change To Require Members To Purchase
Shares of the Common Stock of The Depository Trust & Clearing
Corporation
October 25, 2005.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ notice is hereby given that on October 4, 2005, the Fixed
Income Clearing Corporation (``FICC'') filed with the Securities and
Exchange Commission (``Commission'') the proposed rule change described
in Items I, II, and III below, which items have been prepared primarily
by FICC. The Commission is publishing this notice to solicit comments
on the proposed rule change from interested parties.
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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 purpose of this proposed rule change is to amend the rules of
FICC to require that certain members of FICC purchase shares of common
stock of The Depository Trust & Clearing Corporation (``DTCC'').
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, FICC 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 these statements may be examined at the places specified in
Item IV below. FICC has prepared summaries, set forth in sections (A),
(B), and (C) below, of the most significant aspects of these
statements.\2\
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\2\ The Commission has modified the text of the summaries
prepared by FICC.
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[[Page 62360]]
(A) Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
(a) DTCC is a holding company for three registered clearing
agencies: FICC, The Depository Trust Company (``DTC''), and the
National Securities Clearing Corporation (``NSCC''). Pursuant to DTCC's
current Shareholders Agreement (``Current Shareholders Agreement''),
substantially all members and participants of DTC, NSCC, and FICC
(``Participants'') are entitled but are not required to purchase DTCC
common shares. Participants are allocated an entitlement to purchase
DTCC common shares on the basis of their relative use of the services
of DTC, NSCC, and FICC. As of the last periodic allocation of share
entitlements in 2003, approximately 1,100 Participants had a right to
purchase DTCC common shares; however, only 190 Participants currently
own any DTCC common shares and of these only 86 own DTCC common shares
up to the full amounts of their share entitlements.
DTCC is currently soliciting the consent of its common shareholders
to amend the Current Shareholders Agreement pursuant to which
Participants of DTC, NSCC, and FICC that make full use of the services
of one or more of these clearing agency subsidiaries of DTCC would be
required to purchase DTCC common shares (``Mandatory Purchaser
Participants'') \3\ in accordance with the terms of the Current
Shareholders Agreement while preserving the right but not the
obligation of other Participants that make only limited use of their
services to purchase DTCC common shares (``Voluntary Purchaser
Participants'').\4\
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\3\ Under the Proposed Shareholders Agreement, a Mandatory
Purchaser Participant that is a Participant in more than one
clearing agency will be required to purchase DTCC common shares
based upon its relative use of the services of all clearing agencies
of which it is a Participant.
\4\ The proposed DTCC Shareholders Agreement (``Proposed
Shareholders Agreement'') marked to show the proposed amendments is
attached to the proposed rule change as Exhibit 3 and is available
on FICC's Web site at http://www.ficc.com. The effective date of the
Proposed Shareholders Agreement would be the later of (i) approval
by DTCC common shareholders owning two-thirds of the outstanding
DTCC common shares and (ii) approval by the Commission of the
proposed rule change and similar proposed rule changes being
submitted by DTC and NSCC.
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Holders of DTCC common shares are entitled to elect all of the
directors of DTCC other than two directors that DTCC preferred
shareholders are entitled to elect.\5\ DTCC common shareholders are
entitled to vote on all other matters submitted to a vote of DTCC
shareholders, and each DTCC common shareholder is entitled to one vote
per DTCC common share. DTCC common shareholders are entitled to
cumulate their votes for the election of directors. In addition, DTCC
common shareholders are entitled to receive, when and if declared by
the Board of Directors of DTCC, out of assets of DTCC dividends payable
in cash or stock or otherwise. However, since DTC, NSCC, and FICC
provide their services to their Participants on a cost-basis with
revenues in excess of expenses and necessary reserves rebated or on a
discounted basis, as a matter of policy and practice DTCC does not pay
any dividends on DTCC common shares. The proposed amendments to the
Current Shareholders Agreement will have no effect on these rights of
DTCC common shareholders and preferred shareholders.
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\5\ In connection with the 1999 integration of DTC and NSCC and
formation of DTCC, the New York Stock Exchange (``NYSE'') and the
National Association of Securities Dealers (``NASD''), the then
coowners of NSCC, each received 10,000 DTCC preferred shares in
exchange for their NSCC common stock. DTCC preferred shareholders
have no right to vote on any matters submitted to a vote of DTCC
shareholders except that each of the two DTCC preferred shareholders
are entitled to elect one director. DTCC preferred shareholders have
no right to receive any dividends. In the event of any liquidation,
dissolution or winding up of the affairs of DTCC, DTCC preferred
shareholders are entitled to a liquidation preference of $300 per
share of DTCC preferred stock.
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Pursuant to certain covenants in the Current Shareholders
Agreement, a person elected a director of DTCC also serves as a
director of each of DTC, NSCC, and FICC. The proposed changes in the
Current Shareholders Agreement will have no effect on these covenants.
The system for allocating entitlements to purchase shares, which
was incorporated into the Current Shareholders Agreement, was first
implemented by DTC with respect to DTC common shares in 1973. At that
time, the banks that were users of DTC's services purchased their DTC
common shares directly but for logistical and other reasons the NYSE,
the NASD and the American Stock Exchange (``AMEX'') (collectively, the
``Self-Regulatory Organizations'') purchased the DTC common shares
allocated to the broker-dealers that were members of the Self-
Regulatory Organizations and users of the services of DTC. It was
anticipated that over time as broker-dealers exercised their right to
purchase DTC common shares, the number of DTC common shares held by
broker-dealers directly would increase and the number of DTC common
shares held by the Self-Regulatory Organizations would correspondingly
decrease, potentially to zero, since the share entitlements of the
Self-Regulatory Organizations were a function of the unexercised share
entitlements of their members.
The Self-Regulatory Organizations, notwithstanding the passage of
time and the opportunity afforded their members to purchase DTCC common
shares, continue to hold a significant block of DTCC common shares.
NYSE holds approximately 29% of the outstanding DTCC common shares, and
the NASD and the AMEX each holds approximately 3.7%. Accordingly, a
total of approximately 36.4% of the outstanding DTCC common shares are
not held by Participants but rather are held in a representative
capacity by the Self-Regulatory Organizations for broker-dealer
Participants which have not purchased any DTCC common shares or have
not purchased DTCC common shares commensurate with their share
entitlements. It is also the case that a significant number of
Participants other than broker-dealers have not purchased any DTCC
common shares or have not purchased DTCC common shares commensurate
with their share entitlements. Ownership of DTCC common shares (and
previously ownership of DTC common shares) is not a financial
investment but instead is a vehicle for supporting each registered
clearing agency and influencing its policies and operations through the
election of directors.
By providing that all DTCC common shares are owned by Participants,
FICC believes that these proposed rule changes and the proposed
amendments to the Current Shareholders Agreement will guarantee that
Participants continue to govern and control the activities of DTC,
NSCC, and FICC, including the kinds and quality of services provided
and the service fees charged. In particular, Participants will be in a
position to assure that DTC, NSCC, and FICC continue the practices of
establishing fees that are cost-based and use-based and of returning to
Participants in the form of cash rebates or discounts revenues in
excess of expenses and necessary reserves. Finally, because they
introduce the greatest risks to the clearing agencies and obtain the
greatest benefits from clearing agency services, it is appropriate to
require those Participants making full use of the services of DTC,
NSCC, or FICC to contribute to DTCC's capital through the purchase of
its common shares.
FICC believes that the proposed rule change is consistent with the
requirements of Section 17A of the Act \6\
[[Page 62361]]
and the rules and regulations thereunder applicable to FICC because
FICC believes the proposed changes to the Current Shareholders
Agreement will assure fair representation of FICC's members in the
selection of FICC's directors and the administration of its affairs.
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\6\ 15 U.S.C. 78q-1.
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(B) Self-Regulatory Organization's Statement on Burden on Competition
FICC does not believe that the proposed rule change will have any
impact or impose any burden on competition.
(C) Self-Regulatory Organization's Statement on Comments on the
Proposed Rule Change Received From Members, Participants, or Others
Written comments relating to the proposed rule change have not yet
been solicited or received. FICC will notify the Commission of any
written comments received by FICC.
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. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml.
) or Send an e-mail to rule-comments@sec.gov. Please include
File Number SR-FICC-2005-19 in the subject line.
Paper Comments
Send paper comments in triplicate to Jonathan G. Katz,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-9303.
All submissions should refer to File Number SR-FICC-2005-19. This file
number should be included on the subject line if e-mail is used. To
help the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml
). 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 Section, 100 F Street,
NE., Washington, DC 20549. Copies of such filings also will be
available for inspection and copying at the principal office of FICC
and on FICC's Web site, http://www.ficc.com. All comments received will
be posted without change; the Commission does not edit personal
identifying information from submissions. You should submit only
information that you wish to make available publicly. All submissions
should refer to File Number SR-FICC-2005-19 and should be submitted on
or before November 21, 2005.
For the Commission by the Division of Market Regulation,
pursuant to delegated authority.\7\
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\7\ 17 CFR 200.30-3(a)(12).
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Jonathan G. Katz,
Secretary.
[FR Doc. E5-5998 Filed 10-28-05; 8:45 am]
BILLING CODE 8010-01-P