Document ID: SEC-2018-1969-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: The Options Clearing Corp.
Posted Date: 2018-12-21T05:00Z

[Federal Register Volume 83, Number 245 (Friday, December 21, 2018)]
[Notices]
[Pages 65775-65777]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-27612]

[[Page 65775]]

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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-84836; File No. SR-OCC-2018-013]

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

December 17, 2018.

I. Introduction

    On October 26, 2018, The Options Clearing Corporation (``OCC'') 
filed with the Securities and Exchange Commission (``Commission'') the 
proposed rule change SR-OCC-2018-013 (``Proposed Rule Change'') 
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Exchange Act'') \1\ and Rule 19b-4 thereunder,\2\ to extend the term 
limits for Member Directors serving on OCC's Board of Directors 
(``Board'') from two consecutive three-year terms to three consecutive 
three-year terms. The Proposed Rule Change was published for comment in 
the Federal Register on November 7, 2018,\3\ and the Commission has 
received no comments in response.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Exchange Act Release No. 34-84521 (Nov. 1, 2018), 83 FR 
55768 (Nov. 7, 2018) (``Notice'').
---------------------------------------------------------------------------

II. Background 4
---------------------------------------------------------------------------

    \4\ 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 a change to Article III, Section 2 of its By-Laws and 
to the 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. According to OCC, the purpose of the 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 
Board's composition and the procedures for director selection. Pursuant 
to these documents, when at 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'').\5\
---------------------------------------------------------------------------

    \5\ 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).
---------------------------------------------------------------------------

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

    \6\ 15 U.S.C. 78q-1(b)(3)(C).
    \7\ See 15 U.S.C. 78c(a)(24) (defining the term ``participant'' 
when used with respect to a clearing agency); 15 U.S.C. 78c(a)(9) 
(defining the term ``person'').
    \8\ OCC By-Laws, Article I, Section 1.R.(6) and Article III, 
Section 2.
---------------------------------------------------------------------------

    At its 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.\9\ In furtherance of the Exchange 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.'' \10\ All director nominees, including Member Director 
nominees, must also be considered under the standards for directors in 
OCC's Fitness Standards for Directors, Clearing Members, and Others 
(``Fitness Standards'') \11\ regarding their skills, experience, 
expertise, attributes, and professional backgrounds.\12\ The Fitness 
Standards include criteria that apply specifically to Member 
Directors.\13\ In addition, at least every three years, the GNC is 
required to review the composition of the Board as a whole for 
consistency with public interest and regulatory requirements, including 
whether the Board reflects the appropriate balance across the 
categories of directors such as Member Directors.\14\
---------------------------------------------------------------------------

    \9\ 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.
    \10\ OCC By-Laws, Article III, Section 5.
    \11\ The Fitness Standards are available on OCC's public 
website: https://www.theocc.com/about/corporate-information/board-charter.jsp.
    \12\ 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).
    \13\ Additional criteria for Member Directors include: (i) 
Balanced representation among all Clearing Members; (ii) balanced 
representation of all business activities of Clearing Members; (iii) 
nature of the firm with which each prospective director is 
associated; (iv) industry affiliations; (v) assure that not all 
Member Directors are representatives of the largest Clearing Member 
Organizations based on the prior year's volume; and (vi) develop a 
mix of Member Directors that includes representatives of Clearing 
Member Organizations that are primarily engaged in agency trading on 
behalf of retail customers or individual investors. Fitness 
Standards at 2.
    \14\ GNC Charter at 3-4.
---------------------------------------------------------------------------

Member Director Term Limits

    Member Directors are the only type of OCC directors currently 
subject to term limits. Specifically, Member Directors are limited to 
serving two consecutive three-year terms for a total of six consecutive 
years of Board service (excluding any time that may be served filling a 
vacancy).\15\ All other

[[Page 65776]]

directors--Exchange Directors, Public Directors, and the Management 
Director--are not subject to any term limits.\16\
---------------------------------------------------------------------------

    \15\ 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.
    \16\ The Commission previously approved the removal of term 
limits for Public Directors in 2016. Exchange Act Release No. 34-
78862 (Sept. 16, 2016), 81 FR 65415, 65427 (Sept. 22, 2016) (SR-OCC-
2016-002).
---------------------------------------------------------------------------

III. 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.\17\ 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)(C) of the Exchange Act \18\ and Rules 17Ad-22(e)(2)(i), 
(e)(2)(iii), and (e)(2)(iv) thereunder.\19\
---------------------------------------------------------------------------

    \17\ 15 U.S.C. 78s(b)(2)(C).
    \18\ 15 U.S.C. 78q-1(b)(3)(C).
    \19\ 17 CFR 240.17Ad-22(e)(i), (iii), and (iv).
---------------------------------------------------------------------------

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

    Section 17A(b)(3)(C) of the Exchange Act \20\ 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.\21\ The Exchange Act does not define 
fair representation or set up particular standards of representation. 
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.'' \22\ The Commission believes that the 
Proposed Rule Change is consistent with the fair representation 
requirement.
---------------------------------------------------------------------------

    \20\ 15 U.S.C. 78q-1(b)(3)(C).
    \21\ See supra note 7.
    \22\ Exchange Act Release No. 34-20221 (Sept. 23, 1983), 48 FR 
45167, 45172 (Oct. 3, 1983) (Depository Trust Co., et al.; Order).
---------------------------------------------------------------------------

    First, the Commission agrees that increasing the number of three-
year terms that Member Directors may serve from two to three could 
provide OCC with the ability to retain the experience of Member 
Directors who, among other considerations, may have developed 
considerable knowledge about OCC's business and the interests of 
Clearing Members and therefore could bring significant value to OCC's 
governance process. Moreover, the mechanisms described above in the 
applicable By-Laws and board committee charters would continue to 
require the GNC to endeavor to achieve balanced representation among 
Clearing Members on the Board when nominating Member Directors and in 
conducting reviews of the Board's composition.\23\ The Commission 
believes that these mechanisms should be sufficient to continue to 
promote the fair representation of Clearing Members, while still 
permitting OCC to potentially retain the services of experienced Member 
Directors. Further, the Commission notes that the Proposed Rule Change 
would not guarantee the nomination or election of a Member Director to 
a third consecutive term. For these reasons, the Commission believes 
that the Proposed Rule Change is consistent with Section 17A(b)(3)(C) 
of the Exchange Act.\24\
---------------------------------------------------------------------------

    \23\ See supra notes 10-13.
    \24\ 15 U.S.C. 78q-1(b)(3)(C).
---------------------------------------------------------------------------

B. Consistency With Rules 17Ad-22(e)(2)(i), (e)(2)(iii), and (e)(2)(iv) 
Under the Exchange Act

    Rules 17Ad-22(e)(2)(i), (e)(2)(iii), and (e)(2)(iv) under the 
Exchange Act 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: Are clear and transparent; support the public 
interest requirements in Section 17A of the Exchange Act applicable to 
clearing agencies, and the objectives of owners and participants; and 
establish that the board of directors and senior management have 
appropriate experience and skills to discharge their duties and 
responsibilities.\25\ The Commission believes that the Proposed Rule 
Change is consistent with these provisions of Rule 17Ad-22(e)(2) for 
the following reasons.
---------------------------------------------------------------------------

    \25\ 17 CFR 240.17Ad-22(e)(i), (iii), and (iv).
---------------------------------------------------------------------------

    First, the revised term limits for Member Directors would be set 
forth explicitly in OCC's By-Laws and Board Charter, both of which are 
available on the OCC website. We believe that, by making these 
documents publicly available and easily accessible, OCC would be 
providing clear and transparent governance arrangements consistent with 
the requirements of Rule 17Ad-22(e)(2)(i).\26\
---------------------------------------------------------------------------

    \26\ 17 CFR 240.17Ad-22(e)(i).
---------------------------------------------------------------------------

    Second, for the same reasons we believe the Proposed Rule Change is 
consistent with the fair representation requirements under Section 
17A(b)(3)(C) of the Exchange Act,\27\ as discussed above in Section 
III.A, the Commission believes that the Proposed Rule Change is 
consistent with Rule 17Ad-22(e)(2)(iii)'s \28\ requirement that OCC 
establish, implement, maintain, and enforce written policies and 
procedures reasonably designed to provide for governance arrangements 
that support the public interest requirements in Section 17A of the 
Exchange Act applicable to clearing agencies and the objectives of 
owners and participants.
---------------------------------------------------------------------------

    \27\ 15 U.S.C. 78q-1(b)(3)(C).
    \28\ 17 CFR 240.17Ad-22(e)(iii).
---------------------------------------------------------------------------

    Finally, by providing OCC with the potential ability to retain the 
experience of Member Directors who, among other considerations, may 
have developed considerable knowledge about OCC's business and the 
interests of Clearing Members that may be difficult to replace and that 
could bring significant value to OCC's governance process, we believe 
that the Proposed Rule Change would promote a Board composition in 
which OCC's directors have appropriate experience and skills to 
discharge their duties and responsibilities. Accordingly, the 
Commission believes that ensuring that OCC has the flexibility to have 
Member Directors serve a third consecutive three-year term should help 
to ensure that OCC's Board has the appropriate experience and skills to 
discharge their responsibilities, consistent with the requirements of 
Rule 17Ad-22(e)(iv).\29\
---------------------------------------------------------------------------

    \29\ 17 CFR 240.17Ad-22(e)(iv).
---------------------------------------------------------------------------

IV. Conclusion

    On the basis of the foregoing, the Commission finds that the 
Proposed Rule Change is consistent with the requirements of the 
Exchange Act, and in particular, the requirements of Section 17A of the 
Exchange Act \30\ and the rules and regulations thereunder.
---------------------------------------------------------------------------

    \30\ 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,\31\ that the Proposed Rule Change (SR-OCC-2018-013) be, 
and hereby is, approved.
---------------------------------------------------------------------------

    \31\ 15 U.S.C. 78s(b)(2).

[[Page 65777]]

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

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\32\
---------------------------------------------------------------------------

    \32\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2018-27612 Filed 12-20-18; 8:45 am]
BILLING CODE 8011-01-P