Document ID: SEC-2005-0167-0001
Agency: sec
Document Type: Notice
Title: (A) Self-Regulatory Organizations Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change
Posted Date: 2005-10-31T05:00Z

[Federal Register: October 31, 2005 (Volume 70, Number 209)]
[Notices]               
[Page 62364-62366]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr31oc05-84]                         

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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-52664; File No. SR-NSCC-2005-14]

 
Self-Regulatory Organizations; National Securities 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

[[Page 62365]]

(``Act''),\1\ notice is hereby given that on October 4, 2005, the 
National Securities Clearing Corporation (``NSCC'') 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 NSCC. The Commission is publishing this notice to 
solicit comments on the proposed rule change from interested parties.
---------------------------------------------------------------------------

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

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 
NSCC to require that members of NSCC other than Mutual Fund/Insurance 
Services Members 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, NSCC 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. NSCC has prepared summaries, set forth in sections (A), 
(B), and (C) below, of the most significant aspects of these 
statements.\2\
---------------------------------------------------------------------------

    \2\ The Commission has modified the text of the summaries 
prepared by NSCC.
---------------------------------------------------------------------------

(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: NSCC, The Depository Trust Company (``DTC''), and the Fixed 
Income Clearing Corporation (``FICC''). 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\
---------------------------------------------------------------------------

    \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 
attchaed to the propose rule change as Exhibit 3 and is available on 
NSCC's Web site at http://www.nscc.com/legal. 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 FICC.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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 
owners 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 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.
---------------------------------------------------------------------------

    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

[[Page 62366]]

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, 
NSCC 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.
    NSCC believes that the proposed rule change is consistent with the 
requirements of Section 17A of the Act \6\ and the rules and 
regulations thereunder applicable to NSCC because NSCC believes the 
proposed changes to the Current Shareholders Agreement will assure fair 
representation of NSCC's members in the selection of NSCC's directors 
and the administration of its affairs.
---------------------------------------------------------------------------

    \6\ 15 U.S.C. 78q-1.
---------------------------------------------------------------------------

(B) Self-Regulatory Organization's Statement on Burden on Competition

    NSCC 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. NSCC will notify the Commission of any 
written comments received by NSCC.

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-NSCC-2005-14 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-NSCC-2005-14. 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 NSCC 
and on NSCC's Web site, http://www.nscc.com\legal. 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-NSCC-2005-14 and should be 
submitted on or before November 21, 2005.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\7\
---------------------------------------------------------------------------

    \7\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Jonathan G. Katz,
Secretary.
 [FR Doc. E5-5990 Filed 10-28-05; 8:45 am]

BILLING CODE 8010-01-P