Document ID: SEC-2018-1717-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: The Options Clearing Corp.
Posted Date: 2018-11-07T05:00Z

[Federal Register Volume 83, Number 216 (Wednesday, November 7, 2018)]
[Notices]
[Pages 55768-55771]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-24309]

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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-84521; File No. SR-OCC-2018-013]

Self-Regulatory Organizations; The Options Clearing Corporation; 
Notice of Filing of Proposed Rule Change To Extend Term Limits for 
Member Directors Serving on The Options Clearing Corporation's Board of 
Directors

November 1, 2018.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Exchange Act'' or ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice 
is hereby given that on October 26, 2018, The Options Clearing 
Corporation (``OCC'') filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission'') the proposed rule change as described in 
Items I, II, and III below, which Items have been prepared primarily by 
OCC. The Commission is publishing this notice to solicit comments on 
the proposed rule change from interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

I. Clearing Agency's Statement of the Terms of Substance of the 
Proposed Rule Change

    The proposed rule change by OCC would extend the term limits for 
Member Directors serving on the Board of Directors from two consecutive 
three-year terms to three consecutive three-year terms. The proposed 
changes to OCC's By-Laws and Board of Directors Charter and Corporate 
Governance Principles are included as Exhibits 5A and 5B, respectively. 
Material proposed to be added is underlined and material proposed to be 
deleted is marked in strikethrough text. The proposed rule change, 
including Exhibits 5A and 5B, is available on OCC's website at https://www.theocc.com/about/publications/bylaws.jsp. 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.\3\
---------------------------------------------------------------------------

    \3\ OCC's By-Laws and Rules can be found on OCC's public 
website: http://optionsclearing.com/about/publications/bylaws.jsp. 
OCC's Board of Directors Charter and Corporate Governance Principles 
is also available on OCC's public website: https://www.theocc.com/about/corporate-information/board-charter.jsp.
---------------------------------------------------------------------------

II. Clearing Agency's Statement of the Purpose of, and Statutory Basis 
for, the Proposed Rule Change

    In its filing with the Commission, OCC 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. OCC has prepared summaries, set forth in sections (A), 
(B), and (C) below, of the most significant aspects of these 
statements.

(A) Clearing Agency's Statement of the Purpose of, and Statutory Basis 
for, the Proposed Rule Change

(1) Purpose
Background
    OCC is proposing changes to Article III, Section 2 of its By-Laws 
and to its Board of Directors Charter and Corporate Governance 
Principles (``Board Charter'') that would extend the term limits for 
Member Directors from two consecutive three-year terms to three 
consecutive three-year terms. The purpose of the proposed rule change 
is to address issues associated with frequent Member Director turnover 
by providing the potential for longer consecutive service by Member 
Directors who, among other considerations, may have developed 
considerable knowledge about OCC's business and the interests of 
Clearing Members.
Board Composition and Member Director Considerations
    OCC's Certificate of Incorporation and By-Laws establish the 
composition of its Board of Directors (``Board'') and the procedures 
for director selection. When at its full capacity, the Board consists 
of twenty directors: (i) Nine directors representing OCC Clearing 
Members (``Member Directors''); (ii) five directors designated by and 
representing each of OCC's five Equity Exchanges (``Exchange 
Directors''); (iii) five directors who are not affiliated with any 
national securities exchange, national securities association or with 
any broker or dealer in securities (``Public Directors''); and (iv) one 
management director, who serves as the Executive Chairman (``Management 
Director'').\4\
---------------------------------------------------------------------------

    \4\ OCC By-Laws, Article III, Sections 1, 2, 6, 6A and 7 
(addressing the number of directors and required qualifications of 
Member Directors, Exchange Directors, Public Directors and the 
Management Director); see also Board Charter at 4 (Size of Board; 
Composition).

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

[[Page 55769]]

    In connection with OCC's status as a registered clearing agency, 
Section 17A(b)(3)(C) of the Act \5\ requires, among other things, that 
OCC's rules \6\ must assure a fair representation of its participants 
in the selection of its directors and administration of its affairs.\7\ 
The term ``participant'' when used with respect to a clearing agency 
under the Act means any person, such as a Clearing Member, who directly 
uses the clearing agency to clear or settle securities transactions.\8\ 
Accordingly, OCC's By-Laws set forth the qualifications for Member 
Directors, providing that a Member Director must be either a (i) 
Clearing Member or (ii) representative (e.g., a director, senior 
officer, principal or general partner) of a Clearing Member 
Organization or an affiliate of such organization.\9\
---------------------------------------------------------------------------

    \5\ 15 U.S.C. 78q-1(b)(3)(C).
    \6\ 15 U.S.C. 78c(a)(27) (defining the term ``rules of a 
clearing agency'').
    \7\ The Commission has noted that the Act ``does not define fair 
representation or set up particular standards of representation. 
Instead, it provides that the Commission must determine whether the 
rules of the clearing agency regarding the manner in which decisions 
are made give fair voice to participants as well as to shareholders 
in the selection of directors and the administration of its affairs. 
The Commission has stated that `at a minimum, fair representation 
requires that the entity responsible for nominating individuals for 
membership on the board of directors should be obligated by by-law 
or rule to make nominations with a view toward assuring fair 
representation of the interests of shareholders and a cross-section 
of the community of participants.''' Securities Exchange Act Release 
No. 72564 (July 8, 2014), 79 FR 40824, 40828 (July 14, 2014) 
(internal citations omitted).
    \8\ See 15 U.S.C. 78c(a)(24) (defining the term ``participant'' 
when used with respect to a clearing agency) and 15 U.S.C. 78c(a)(9) 
(defining the term ``person'').
    \9\ OCC By-Laws, Article I, Section 1.R.(6) and Article III, 
Section 2.
---------------------------------------------------------------------------

    At the annual meeting of stockholders, OCC's stockholders elect 
Member Directors from a list of nominees prepared by the Board's 
Governance and Nominating Committee (``GNC'') and approved by the 
Board.\10\ In furtherance of the Act's fair representation requirement 
described above, Article III, Section 5 of OCC's By-Laws requires the 
GNC in selecting Member Director nominees to ``endeavor to achieve 
balanced representation among Clearing Members on the Board of 
Directors to assure that (i) not all Member Directors are 
representatives of the largest Clearing Member Organizations based on 
the prior year's volume, and (ii) the mix of Member Directors includes 
representatives of Clearing Member Organizations that are primarily 
engaged in agency trading on behalf of retail customers or individual 
investors.'' \11\ All director nominees, including Member Director 
nominees, must also be considered under standards for directors in 
OCC's Fitness Standards for Directors, Clearing Members and Others 
(``Fitness Standards'') \12\ regarding their skills, experience, 
expertise, attributes and professional backgrounds.\13\ OCC's Fitness 
Standards also promote the fair representation considerations noted 
above under Section 17A(b)(3)(C) of the Act \14\ and Article III, 
Section 5 of the By-Laws in that they require that the GNC in 
nominating directors seek to achieve a balanced representation of 
directors among all Clearing Members and among the business activities 
of Clearing Members.\15\
---------------------------------------------------------------------------

    \10\ OCC By-Laws, Article III, Section 5. In advance of the 
election, OCC shares the list of nominees with Clearing Members who 
are provided an opportunity to submit additional nominees. Id.
    \11\ OCC By-Laws, Article III, Section 5.
    \12\ The Fitness Standards are available on OCC's public 
website: https://www.theocc.com/about/corporate-information/board-charter.jsp.
    \13\ See OCC's Fitness Standards at 1-2; see also OCC Governance 
and Nominating Committee Charter (``GNC Charter'') at 3 (providing 
that the GNC shall identify, screen and review individuals qualified 
to be elected or appointed to serve as Member Directors consistent 
with the Fitness Standards), available on OCC's public website at 
https://www.theocc.com/about/corporate-information/board-committee-charters.jsp; OCC By-Laws Article III, Section 2, Interpretation and 
Policy .01 (providing that the GNC shall use the Fitness Standards 
for Directors, Clearing Members and Others in considering Member 
Director nominees).
    \14\ 15 U.S.C. 78q-1(b)(3)(C).
    \15\ Fitness Standards at 2.
---------------------------------------------------------------------------

Member Director Term Limits
    Member Directors are the only OCC directors currently subject to 
term limits.\16\ Specifically, Member Directors are limited to serving 
two consecutive three-year terms for a total for a total of six 
consecutive years of Board service (excluding any time that may be 
served filling a vacancy).\17\ These term limits are one of several 
mechanisms that help ensure that the composition of Member Directors 
serving on OCC's Board is rotated on a periodic basis to promote fair 
representation of Clearing Members. Other mechanisms include the GNC's 
administration of the fair representation considerations that are set 
out in Article III, Section 5 of the By-Laws,\18\ a review by the GNC 
at least every three years of the composition of the Board as a whole 
for consistency with public interest and regulatory requirements \19\ 
and evaluation of the potential nominees under the Fitness 
Standards.\20\
---------------------------------------------------------------------------

    \16\ Exchange Directors, Public Directors and the Management 
Director are not subject to any term limits.
    \17\ OCC By-Laws, Article III, Section 2(a). For example, a 
Member Director who is appointed in 2018 to fill a vacancy and then 
is elected to serve a three-year term beginning in 2020 would 
currently be eligible to serve out two consecutive three-year terms 
ending in 2026.
    \18\ See supra note 11 and accompanying text.
    \19\ See GNC Charter at 3-4.
    \20\ See Fitness Standards at 2 (requiring consideration of 
additional criteria for Member Directors such as balanced 
representation among all Clearing Members and the development of a 
mix of Member Directors).
---------------------------------------------------------------------------

    In a recent review by OCC of the tenure of its Member Directors 
from 1999 to 2018, OCC found that a majority of Member Directors during 
the period served for less than their full period of eligible 
service.\21\ This high level of Member Director turnover indicates that 
factors other than Member Director term limits are already providing 
opportunities for OCC to rotate Board representation among the body of 
OCC Clearing Members. It is also the case that a high rate of early 
departures by Member Directors can risk impairing the Board's 
effectiveness due to the related disruptions in its composition as a 
decision-making body and the loss of institutional knowledge held by 
the departing Member Directors. Early departures of Member Directors 
also raise administrative efficiency concerns for OCC because it must 
devote substantial time and resources to the identification of 
appropriate new Member Director candidates and to their orientation 
upon election.
---------------------------------------------------------------------------

    \21\ A Member Director may leave before the end of his or her 
term for a variety of reasons such as retirement, moving to a new 
firm, changing jobs within a firm, or because the GNC declines to 
nominate the individual for an additional term.
---------------------------------------------------------------------------

Proposed Changes
    As an available tool to help address the concerns described above 
regarding Member Director turnover, OCC proposes to amend its By-Laws 
and its Board Charter to provide that a Member Director may serve for a 
limit of three consecutive three-year terms rather than two consecutive 
three-year terms.\22\ OCC believes that this change would enhance the 
tools at its disposal to promote administrative efficiency of the Board 
without compromising fair representation among Clearing Members. In 
OCC's experience, Member Directors who reach the current two-term limit 
often have developed considerable knowledge of OCC's business and 
provide valuable judgment about the intersection of OCC's interests and 
the interests of Clearing Members. If the continued service of such a 
Member Director would be appropriate

[[Page 55770]]

but for the current term limit as decided through the Board's approval 
of the nominee, OCC believes that it should not have to forgo the 
benefits of that Member Director's service for an additional 
consecutive three-year term for reasons unrelated to the quality of the 
Member Director's service. Currently, a high performing Member Director 
in this situation would be denied the ability to serve a third 
consecutive three-year term, to the detriment of OCC and its 
stakeholders. By contrast, a similarly situated Public Director or 
Exchange Director would not be limited in this way since they are not 
subject to term limits.
---------------------------------------------------------------------------

    \22\ Specifically, OCC would replace the reference to ``two'' 
consecutive term limits with ``three'' consecutive term limits in 
Article III, Section 2 of the By-Laws and in Item 8 of the 
Membership subsection under the Board Issues section of the Board 
Charter.
---------------------------------------------------------------------------

    In connection with the proposed rule change, Member Directors would 
still be required to be nominated by the Board and elected by OCC's 
stockholders to each three-year term. Therefore, the proposed rule 
change would not guarantee that any Member Director would serve for the 
proposed limit of three consecutive three-year terms. Rather, a Member 
Director would merely be eligible to serve a third consecutive term if 
such continued service was also appropriate under all other relevant 
considerations (e.g., the GNC's administration of the fair 
representation considerations in Article III, Section 5 of the By-Laws, 
a review by the GNC at least every three years of the composition of 
the Board as a whole for consistency with public interest and 
regulatory requirements, and the evaluation of the potential nominees 
under the Fitness Standards). In the case of any Member Director who 
has served two consecutive terms, the GNC would be free to determine 
that such Member Director would not be appropriate as a nominee for a 
third consecutive term, including in light of the fair representation 
considerations described above. However, where a high performing Member 
Director is not otherwise disqualified, OCC would not be forced to lose 
the benefits of his or her continued service for a third consecutive 
three-year term.

(2) Statutory Basis

    Section 17A(b)(3)(F) of the Act \23\ requires, among other things, 
that the rules of a clearing agency be designed to promote the prompt 
and accurate clearance and settlement of securities transactions, and, 
in general, protect investors and the public interest. OCC believes 
that the proposed rule change is consistent with these requirements 
because OCC would be afforded flexibility to continue to benefit from 
the institutional knowledge and experience of a Member Director for a 
third consecutive three-year term where appropriate. The benefits that 
flow from informed and experienced Member Directors in turn help OCC 
carry out its clearing agency functions to promote the prompt and 
accurate clearance and settlement of securities transactions, 
consistent with the protection of investors and the public interest. 
Allowing for this flexibility would increase the tools available to OCC 
to mitigate the effects of high Member Director turnover on Board 
performance, which in turn promotes OCC's ability to carry out its 
clearing agency functions consistent with Section 17A(b)(3)(F) of the 
Act. \24\
---------------------------------------------------------------------------

    \23\ 15 U.S.C. 78q-1(b)(3)(F).
    \24\ Id.
---------------------------------------------------------------------------

    As described above, Section 17A(b)(3)(C) of the Act \25\ requires, 
among other things, that the rules of a clearing agency assure a fair 
representation of its participants in the selection of its directors 
and administration of its affairs.\26\ OCC believes that the proposed 
rule change is consistent with the fair representation requirements of 
Section 17A(b)(3)(C) of the Act \27\ because it would provide OCC with 
greater flexibility to select Member Directors who optimize Board 
performance while keeping in place the mechanisms described above that 
would continue to promote fair representation among Clearing Members on 
the Board, including: the GNC's administration of the fair 
representation considerations in Article III, Section 5 of the By-Laws, 
a review by the GNC at least every three years of the composition of 
the Board as a whole for consistency with public interest and 
regulatory requirements, and evaluation of the potential nominees under 
the Fitness Standards.\28\ The proposed rule change would cause Member 
Directors to be eligible to serve a third consecutive three-year term 
but would not guarantee that any Member Director would be nominated or 
elected to a third consecutive term. Moreover, in certain circumstances 
the disqualification of Member Directors who have reached the current 
term limit could actually inhibit OCC's ability to assure fair 
representation where the disqualified Member Director is a superior 
candidate to others in terms of assuring fair representation among 
Clearing Members. In this regard, the greater flexibility OCC would 
enjoy under the proposed rule change offers greater opportunity to 
assure consistency with Section 17A(b)(3)(C) of the Act \29\ by not 
precluding Member Director nominees who could further fair 
representation objectives through continued service.
---------------------------------------------------------------------------

    \25\ 15 U.S.C. 78q-1(b)(3)(C).
    \26\ See supra note 7.
    \27\ 15 U.S.C. 78q-1(b)(3)(C).
    \28\ See supra notes 18-20 and accompanying text.
    \29\ 15 U.S.C. 78q-1(b)(3)(C).
---------------------------------------------------------------------------

    Rules 17Ad-22(e)(2)(i)-(iv) under the Act \30\ require that a 
covered clearing agency, such as OCC, establish, implement, maintain 
and enforce written policies and procedures reasonably designed to 
``provide for governance arrangements that, among other things: (i) Are 
clear and transparent; (ii) clearly prioritize the safety and 
efficiency of the covered clearing agency; (iii) support the public 
interest requirements in Section 17A of the Act (15 U.S.C. 78q-1) 
applicable to clearing agencies, and the objectives of owners and 
participants; and (iv) establish that the board of directors and senior 
management have appropriate experience and skills to discharge their 
duties and responsibilities[.]'' OCC believes that the proposed rule 
change would be consistent with these requirements for the reasons 
described below.
---------------------------------------------------------------------------

    \30\ 17 CFR 240.17Ad-22(e)(2)(i)--(iv).
---------------------------------------------------------------------------

    The revised term limits for Member Directors would be set forth 
explicitly in OCC's By-Laws and its Board Charter that are available on 
its website, consistent with clear and transparent governance 
arrangements.\31\ The proposed rule change would also promote a 
governance structure that prioritizes the safety and efficiency of OCC 
by providing it with greater flexibility, where appropriate, to retain 
the institutional knowledge and skills of high performing Member 
Directors for a third consecutive three-year term.\32\ For the same 
reasons described above regarding how the proposed rule change is 
consistent with the fair representation requirements under Section 
17A(b)(3)(C) of the Act, the proposed rule change would also be 
consistent with the requirement in Rule 17Ad-22(e)(2)(iii) \33\ to 
support the public interest requirements in Section 17A of the Act 
(which includes the fair representation requirement) applicable to 
clearing agencies and the objectives of owners and participants. 
Finally, consistent with Rule 17Ad-22(e)(2)(iv) \34\ the proposed rule 
change would promote a Board structure in which OCC's directors have 
appropriate experience and skills to discharge their duties and 
responsibilities by making available an additional pool of qualified 
Member Director candidates who have

[[Page 55771]]

already served two consecutive three-year terms and therefore may 
possess institutional knowledge and judgment that is valuable to the 
Board and difficult to replace.
---------------------------------------------------------------------------

    \31\ 17 CFR 240.17Ad-22(e)(2)(i).
    \32\ 17 CFR 240.17Ad-22(e)(2)(ii).
    \33\ 17 CFR 240.17Ad-22(e)(2)(iii).
    \34\ 17 CFR 240.17Ad-22(e)(2)(iv).
---------------------------------------------------------------------------

    The proposed rule change is not inconsistent with the existing 
rules of OCC, including any other rules proposed to be amended.

(B) Clearing Agency's Statement on Burden on Competition

    Section 17A(b)(3)(I) of the Act \35\ requires that the rules of a 
clearing agency not impose any burden on competition not necessary or 
appropriate in furtherance of the purposes of the Act. OCC does not 
believe that the proposed rule change would impact or impose any burden 
on competition.
---------------------------------------------------------------------------

    \35\ 15 U.S.C. 78q-1(b)(3)(I).
---------------------------------------------------------------------------

    Clearing Members would not be placed at a competitive disadvantage 
to other Clearing Members as a result of Member Directors becoming 
eligible to serve for a third consecutive three-year term. Member 
Directors would still be required to be nominated by the GNC and 
elected by OCC's stockholders, and in the case of any Member Director 
who has served two consecutive terms the GNC would remain free to 
determine that such Member Director is not appropriate as a nominee for 
a third consecutive term, including in light of fair representation 
considerations. In this way, the proposed rule change applies equally 
to all Clearing Members. The proposed term limit increase is intended 
to provide OCC with greater flexibility to select Member Directors who 
optimize Board performance while keeping in place existing requirements 
that promote fair representation among Clearing Members on the Board, 
such as the GNC's administration of the fair representation 
considerations in Article III, Section 5 of the By-Laws, a review by 
the GNC at least every three years of the composition of the Board as a 
whole for consistency with public interest and regulatory requirements, 
and evaluation of the potential nominees under the Fitness 
Standards.\36\
---------------------------------------------------------------------------

    \36\ See supra notes 18-20 and accompanying text.
---------------------------------------------------------------------------

    For the foregoing reasons, OCC believes that the proposed rule 
change is in the public interest, would be consistent with the 
requirements of the Act applicable to clearing agencies, and would not 
impact or impose a burden on competition.

(C) Clearing Agency's Statement on Comments on the Proposed Rule Change 
Received from Members, Participants or Others

    Written comments on the proposed rule change were not and are not 
intended to be solicited with respect to the proposed rule change and 
none have been received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period up to 90 days (i) as the 
Commission may designate 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 or disapprove the 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 email to [email protected]. Please include 
File Number SR-OCC-2018-013 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.

All submissions should refer to File Number SR-OCC-2018-013. This file 
number should be included on the subject line if email 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 website (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 website viewing and printing in 
the Commission's Public Reference Room, 100 F Street NE, Washington, DC 
20549, on official business days between the hours of 10:00 a.m. and 
3:00 p.m. Copies of such filing also will be available for inspection 
and copying at the principal office of OCC and on OCC's website at 
https://www.theocc.com/about/publications/bylaws.jsp.
    All comments received will be posted without change. Persons 
submitting comments are cautioned that we do not redact or edit 
personal identifying information from comment submissions. You should 
submit only information that you wish to make available publicly.
    All submissions should refer to File Number SR-OCC-2018-013 and 
should be submitted on or before November 28, 2018.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\37\
---------------------------------------------------------------------------

    \37\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-24309 Filed 11-6-18; 8:45 am]
BILLING CODE 8011-01-P