Federal Register / Vol. 62, No. 234 / Friday, December 5, 1997 / Notices 64415

4 17 CFR 200,30-3(a)(27)

1 15 U.S.C. 78s(b)(1).

2Securities Exchange Act Release No. 39068

(September 12, 1997), 62 FR 49548.

3The Agreement was first executed in 1988

before GSCC had a set of rules in place. GSCC

currently has forty-six shareholders, each of which

is a party to the Agreement. The National Securities

Clearing Corporation (‘‘NSCC’’) is the largest

shareholder, holding approximately eighteen

percent of GSCC’s shares.

4The procedures governing the selection of the

nominating committee are contained in Section 2.B

of the Agreement, and the nomination procedures

are contained in Section 2.C of the Agreement. The

prior nomination process for participant directors

was open to all members with every member being

able to nominate any shareholder member,

including itself. However, a member was restricted

to submitting nominations only for its own

correlative participant category (i.e., broker

participants nominated broker participant directors,

clearing agent bank participants nominated clearing

agent bank participant directors, and all other

participants nominated dealer participant

directors). The election process involved ballots

being circulated to every member with such voting

being similarly limited to one’s own correlative

participant category.

5 Initially, one class with two individuals will be

designated for a one year term, and another class

with three individuals will be designated for a two

year term. After these initial terms, both classes will

serve two year terms. Therefore, subsequent

nominating committees will have two staggered

classes of members.

D. Standards and Methods Ensuring

Promptness, Accuracy and

Completeness of Transaction Reports

Not applicable.

E. Rules and Procedures Addressed to

Fraudulent or Manipulative

Dissemination

Not applicable.

F. Terms of Access to Transaction

Reports

See Item I(A).

G. Identification of Marketplace of

Execution

Not applicable.

III. Solicitation of Comments

The CTA has designated this proposal

as establishing or changing fees and

other charges collected on behalf of all

of the sponsors and participants which

under Section 11Aa3–2(c)(3)(i) of the

Act renders the proposal effective upon

receipt of this filing by the Commission.

The Commission may summarily

abrogate the amendments within sixty

days of its filing and require refiling and

approval of the amendments by

Commission order pursuant to 11Aa3–

2(c)(3)(iii), if it appears to the

Commission that such action is

necessary or appropriate in the public

interest, for the protection of investors

and maintenance of fair and orderly

markets, to remove impediments to and

perfect the mechanisms of a National

Market System, or otherwise in

furtherance of the purposes of the Act.

Interested persons are invited to

submit written data, views, and

arguments concerning the foregoing.

Persons making written submissions

should file six copies thereof with the

Secretary, Securities and Exchange

Commission, 450 Fifth Street, N.W.,

Washington, D.C. 20549. 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

Room. Copies of such filing will also be

available for inspection and copying at

the principal office of the CTA. All

submissions should refer to the file

number in the caption above and should

be submitted by December 29, 1997.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.4

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 97–31878 Filed 12–4–97; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–39372; File No. SR–GSCC–

97–07]

Self-Regulatory Organizations;

Government Securities Clearing

Corporation; Order Approving

Proposed Rule Change Relating to

Election of Directors

November 28, 1997

On July 23, 1997, the Government

Securities Clearing Corporation

(‘‘GSCC’’) filed with the Securities and

Exchange Commission (the

‘‘Commission’’) pursuant to Section

19(b)(1) of the Securities Exchange Act

of 1934 (‘‘Act’’) 1 and on August 18,

1997, amended the proposed rule

change (File No. SR–GSCC–97–07).

Notice of the proposal was published in

the Federal Register on September 22,

1997.2 No comment letters were

received. For the reasons discussed

below, the Commission is approving the

proposed rule change.

I. Description

The proposed rule change modifies

GSCC’s Shareholder. Agreement

(‘‘Agreement’’),3 By-laws, and

Certificate of Incorporation relating to

GSCC’s procedures for election of

directors and to restrictions currently

placed on transfers of GSCC’s securities.

As described more fully below, the

proposed rule change amends GSCC’s

procedures in four major categories: (a)

nomination and election process for

board members, (b) composition of the

board, (c) restrictions on issuance and

transfer of shares, and (d)

miscellaneous.

A. Nomination and Election Process for

Board Members

Similar to the process in place at

NSCC and other clearing corporations,

GSCC has a nominating committee that

will be responsible for nominating

candidates for election as participant

directors to the board.4 NSCC will

continue to nominate and to elect two

directors to the board outside the

nominating committee process. The

board seat for a management

representative and for the GSCC

president also will remain outside the

nominating committee process.

The nominating committee consists of

five individuals, a majority of whom are

representatives from active participants.

With the exception of the initial

nominating committee, an individual

cannot serve on the nominating

committee if he or she has served on the

board or the nominating committee

within the past year. The term of a

nominating committee member is two

years, and the terms of nominating

committee members are staggered.5

With the exception of the first

nominating committee, incoming

nominating committee members will be

designated by the board after

consideration of the recommendations

of current nominating committee

members. The participant category is

irrelevant for purposes of the selection

of nominating committee members.

However, as a general guideline, the

individuals serving on the nominating

committee will reflect GSCC’s overall

membership and potential membership

base.

Participants will be provided an

opportunity early in the nomination

process to suggest one nominee for each

open board seat. After consideration of

the participants’ suggestions, the

nominating committee will then select

its candidates. The nominating

committee will nominate one nominee

for each open participant director seat.

Participants will then be notified of the

nominating committee’s slate of

candidates for open board seats.
64416 Federal Register / Vol. 62, No. 234 / Friday, December 5, 1997 / Notices

6Prior to the amendment, there was no provision

in the Agreement for selecting the chairman of the

board.

7Section 2.A of the Agreement.

8Before changing the number of directors, GSCC

must file a proposed rule change with the

Commission.

9Prior to the amendment, the Agreement

provided for twelve participant directors consisting

of six dealer participant directors, three broker

participant directors, and three clearing agent bank

participant directors.

10 ‘‘Broker’’ was previously defined as an entity

regularly engaged in the business of effecting

transactions specifically in treasury securities and

specifically for the account of primary dealers and

aspiring primary dealers.

11 ‘‘Clearing agent bank’’ was defined as any

clearing bank regularly used by brokers, primary

dealers, and aspiring primary dealers for the

clearance and settlement of transactions in treasury

securities.

12 ‘‘Dealer participant’’ was defined as a primary

dealer or an aspiring primary dealer that is a

participant. All references to primary and aspiring

dealers have been removed from the Agreement.

13 If GSCC issues additional Class A shares, NSCC

has the right to request that enough additional Class

A shares be issued to it in order for NSCC to retain

its twenty percent holdings in GSCC.

14The board recently stated its intention to

repurchase the existing Class B shares when GSCC

is determined to be adequately capitalized, which

is expected to occur by year end 1997.

15Previously, the Agreement contained

restrictions on transfers of Class A shares by

participant shareholders including a requirement

that the Class A shareholder must transfer all of its

Class A shares and that the transfer must be to a

single participant not already holding Class A

shares.

16Prior to this proposed rule change, GSCC had

a right of first refusal only with respect to NSCC’s

sale of its Class A shares.

After being notified of the nominating

committee’s selections, participants can

nominate additional nominees with a

petition signed by the lesser of seven

participants or five percent of GSCC’s

participants. Each participants may only

sign one petition for each open board

seat.

If no nominating petitions have been

filed by participants, the nominating

committee will certify to the

shareholders the participant directors

selected by the nominating committee.

Shareholders will then be bound to cast

their votes supporting the nominating

committee selections at the annual

meeting.

However, if participants have filed

one or more formal nominating

petitions, GSCC will circulate ballots to

all participants and will permit them to

cast their votes to fill each open

participant director seat in the contested

participant category or categories.

Active comparison only participants are

entitled to one vote per open board seat.

Active clearing agent bank participants

are entitled to two votes per open seat.

Active netting participants are entitled

to two votes per open seat. In addition,

each netting member will receive

another two votes for approximately

every ten million dollars of its clearing

fund deposit up to an additional ten

votes. Affiliated members will be

considered one participant for purposes

of determining voting entitlements.

Cumulative voting rights have been

eliminated.

Based upon the recommendation of

the outgoing executive committee, the

incoming board will designate the

chairman of the board.6 The chairman

will be elected for a one year term with

no overall term limit other than the six

year term limit applicable to all

participant directors.

B. Composition of the Board

The proposal removes the specific

board composition requirements from

the Agreement so that the Agreement

outlines only board parameters such as

a maximum number of board seats and

a minimum required number of

categories of directors that will be

represented.7 Pursuant to the By-laws,

the board is empowered to make

changes within the Agreement’s broad

parameters, including changing the size

or composition requirements of the

board in order to reflect membership

demographics and other criteria.8

The current board composition has

been recategorized as one management

director, one at-large director, two NSCC

directors, six general user participant

directors, three broker participant

directors, and two clearing agent bank

directors.9 Many of the related

definitions of the participant categories

have been expanded. The Agreement’s

definition of ‘‘broker’’ is broadened to

include any entity regulatory engaged in

the business of effecting transactions in

any securities eligible for processing by

GSCC on behalf of participants.10

‘‘Clearing agent bank’’ is more broadly

defined essentially to mean any

commercial bank member of the Federal

Reserve System that provides clearing

services with respect to GSCC eligible

securities on behalf of others for at least

ten percent of GSCC’s participants and

that provides those services using its

own Federal Reserve account.11 The

terms ‘‘general user participant’’ and

‘‘general user participant director’’ are

used instead of ‘‘dealer participant’’ and

‘‘dealer participant director.12 The

definition of ‘‘general user participant’’

is essentially any participant that is not

a broker or clearing agent bank,

including futures commission

merchants and registered investment

companies.

Finally, GSCC directors are currently

limited to serving two consecutive three

year terms on the board. Under the

revisions, the current term limits are

retained for all but the vice chairman

and management director, who will not

have term limits. Furthermore, the

Agreement specifies that there must be

a one year absence from the board

before a former director is eligible for a

new overall six year term limit. The

three staggered classes of directors are

retained. The By-laws specify the

categories of directors that compose

each of the three classes.

C. Restrictions on Issuance and Transfer

of GSCC Shares

GSCC is removing the price

restrictions on its shares, which

currently require that both Class A and

Class B shares generally must be issued,

sold, or transferred at a price of $500 per

share. However, under the revisions

GSCC generally will not be able to sell

shares at less than current book value.

Pursuant to the revisions, GSCC may

issue Class A shares to an existing Class

A shareholder, participant, or affiliate of

a participant rather than only to

participants not already holding Class A

shares.13 GSCC’s authority to issue new

Class B shares is removed from the

Agreement.14

Class A shareholders may now sell

Class A shares to any existing Class A

shareholder, participant, or affiliate of a

participant in lots of 300 shares.15

However, no shareholder other than

NSCC may own more than five percent

of Class A shares unless such shares are

held as a result of acquisition, merger,

or a comparable event. Similarly,

shareholders may sell Class B shares to

any existing shareholder, participant, or

affiliate of a participant in lots of 200

shares.

The proposed rule change extends

GSCC’s right of first refusal to any sale

or transfer of shares by any

shareholder.16 GSCC may purchase such

shares at the lesser of the agreed price

or the current book value. GSCC may

resell such securities for a price at least

equal to the book value unless the board

approves a lower price.

GSCC has the right to repurchase

Class A shares from participant

shareholders provided that each

participant shareholder is required to

sell to GSCC the same percentage of

Class A shares and NSCC continues to

hold twenty percent of GSCC’s Class A

shares unless NSCC agrees otherwise.

Pursuant to the proposal, GSCC may

offer to repurchase shares at any price

determined by the board or may require

that the shares be sold to it at current

book value.
Federal Register / Vol. 62, No. 234 / Friday, December 5, 1997 / Notices 64417

17Previously, GSCC had the discretionary right to

repurchase its shares provided that GSCC

repurchases all of the shares for $500 per share.

18Prior to the proposed rule change, the

Agreement set forth a number of supermajority

board voting requirements that had to be met in

order to make certain changes to the Agreement,

including classification of directors, procedures for

electing and replacing directors, provisions related

to loss allocation, and procedures and requirements

for amending the Agreement.

19 15 U.S.C. 78q–1(b)(3)(C).

20Securities Exchange Act Release No. 16900

(June 17, 1980), 45 FR 30086.

21 17 CFR 200.30–3(a)(12).

1 15 U.S.C. 78s(b)(1).

2 17 CFR 240.19b–4.

The revisions authorize GSCC to issue

shares in response to an extraordinary

corporate action (e.g., a joint business

venture). Pursuant to such an issuance,

GSCC may exchange or transfer such

shares for cash in any amount or for any

noncash consideration.

If a shareholder ceases to be a GSCC

participant, GSCC may mandate the sale

to itself of shares of such a shareholder

at book value.17 However, the proposal

also authorizes GSCC to offer to

repurchase shares for any price

determined by the board under such

circumstances.

D. Miscellaneous Amendments

The proposal deletes loss allocation

provisions in the Agreement that are

redundant with the loss allocation

provisions set forth in GSCC’s rules. All

timing references and procedures

specific to the period between 1988 and

1991 contained in the Agreement are

removed. In addition, provisions

naming a specific individual to hold one

NSCC director seat and another specific

individual to act as the management

director for purposes of the 1988 annual

meeting are removed.

The supermajority voting

requirements 18 with respect to future

amendments of the Agreement are

removed. However, GSCC retains the

requirement that an affirmative vote of

at least eighty percent of the entire

board is required to change its business

from that of a registered clearing agency

including any change that would put

GSCC in the business of being a broker

or of performing brokered transactions.

Moreover, for the protection of its

shareholders and members, any change

of business that puts GSCC in

competition with clearing agent banks is

subject to a veto by a unanimous vote

of all the clearing agent bank directors

and one other participant director.

II. Discussion

Section 17A(b)(3)(C)19 of the Act

requires that the rules of a clearing

agency assure the fair representation of

its shareholders or members and

participants in the selection of its

directors. In the release announcing

standards for the registration of clearing

agencies (‘‘Standards Release’’), the

Division of Market Regulation

(‘‘Division’’) stated that rather than

prescribing a single method for

providing fair representation, the

Division would evaluate each clearing

agency’s procedures on a case-by-case

basis.20 The Standards Release provided

several examples of procedures that

could be used to satisfy the fair

representation requirement, including

solicitation of board of directors

nominations from all participants and

selection of director candidates by a

nominating committee selected by the

participants.

The Commission believes that GSCC’s

proposal is consistent with its

obligations under the Act because it

provides participants with a meaningful

opportunity to participate in GSCC’s

election process. The board, which

should be responsive to participant

concerns, will designate the members of

the nominating committee. GSCC

participants will have the opportunity

both informally and formally to

nominate candidates for board seats. If

there is a contested election, GSCC

participants will have the opportunity

to vote for participant directors.

Therefore, the Commission believes that

GSCC’s procedures should provide fair

representation to its members.

The Commission also believes that the

changes to the composition of the board

will provide enhanced fair

representation. Several classes of

participants that did not fit within the

eligible categories of participant

directors are now represented by the

general user participant category. Thus,

the Commission believes that GSCC’s

proposal is consistent with its

obligations to assure the fair

representation of participants.

The Commission finds that the

removal of certain restrictions on the

issuance and transfer of GSCC shares

may assist GSCC in operating efficiently

as a clearing agency. By exercising its

right of first refusal, GSCC will be able

to ensure that ownership of GSCC is

limited to industry participants. Thus,

GSCC’s primary focus will continue to

be on the clearance and settlement of

securities. Also, GSCC may be better

able to respond quickly to new business

ventures by having the ability to issue

shares in connection with new

operations.

Finally, the Commission finds that the

remaining miscellaneous amendments

to the Agreement, such as the deletion

of the loss allocation provision, the

removal of obsolete references, and the

removal of the supermajority voting

requirements, provide for a more

flexible and efficient operation of GSCC

and, therefore, are consistent with the

requirements of the Act. For example,

by eliminating supermajority voting

requirements, GSCC will be able to

make necessary changes in its

operations on an expedited basis.

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–97–07) be and hereby is

approved.

For the Commission by the Division of

Market Regulation, pursuant to delegated

authority.21

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 97–31876 Filed 12–4–97; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–39378; File No. SR–MSRB–

97–04]

Self-Regulatory Organizations;

Municipal Securities Rulemaking

Board, Inc.; Order Granting Approval

to Proposed Rule Change and Notice

of Filing and Order Granting

Accelerated Approval to Amendment

No. 2 to Proposed Rule Change

Relating to Its Arbitration Code

December 1, 1997.

I. Introduction

On May 22, 1997, the Municipal

Securities Rulemaking Board, Inc.

(‘‘MSRB’’ or ‘‘Board’’) submitted to the

Securities and Exchange Commission

(‘‘Commission’’), pursuant to Section

19(b)(1) of the Securities Exchange Act

of 1934 (‘‘Act’’)1 and Rule 19b–4

thereunder,2 a proposed rule change to

amend Rule G–35, the Board’s

Arbitration Code. The proposed rule

change would create two new sections:

Section 37 would state that the Board

will not accept any new arbitration

claims filed on or after January 1, 1998;

and Section 38 would provide that, as

of January 1, 1998, every bank dealer (as

defined in Rule D–8) shall be subject to