

[Federal Register: December 14, 2005 (Volume 70, Number 239)]
[Notices]               
[Page 74070-74071]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr14de05-111]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-52922; File Nos. SR-DTC-2005-16, SR-FICC-2005-19, and 
SR-NSCC-2005-14]

 
Self-Regulatory Organizations; The Depository Trust Company, 
Fixed Income Clearing Corporation, and National Securities Clearing 
Corporation; Order Approving Proposed Rule Changes to Require Members 
to Purchase Shares of the Common Stock of The Depository Trust & 
Clearing Corporation

December 7, 2005.

I. Introduction

    On October 4, 2005, The Depository Trust Company (``DTC''), the 
Fixed Income Clearing Corporation (``FICC''), and the National 
Securities Clearing Corporation filed with the Securities and Exchange 
Commission (``Commission'') proposed rule changes SR-DTC-2005-16, SR-
FICC-2005-19, and SR-NSCC-2005-14 pursuant to section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act'').\1\ Notices of the proposals 
were published in the Federal Register on October 31, 2005.\2\ The 
Commission received one comment letter in response to the proposed rule 
change filed by DTC \3\ and one comment letter in response to the 
proposed rule change filed by FICC.\4\ For the reasons discussed below, 
the Commission is approving the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ Securities Exchange Act Release Nos. 52665 (October 25, 
2005), 70 FR 62357 [SR-DTC-2005-16]; 52663 (October 25, 2005), 70 FR 
62359 [SR-FICC-2005-19]; and 52664 (October 25, 2005), 70 FR 62364 
[SR-NSCC-2005-14].
    \3\ Letter from Stewart A. Levin, Ph.D., Geophysics Research 
Fellow, Landmark Graphics Corp. (Oct. 29, 2005).
    \4\ Letter from Kelly S. McEntire, Retired State of Utah 
Administrator, (Dec. 6, 2005).
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II. Description

    The Depository Trust & Clearing Corporation (``DTCC'') is a holding 
company parent of DTC, FICC, and NSCC. Pursuant to DTCC's current 
Shareholders Agreement (``Shareholders Agreement''), substantially all 
members and participants of DTC, FICC, and NSCC (collectively 
``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, FICC, and NSCC. 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 has obtained the consent of its common shareholders to amend 
the Shareholders Agreement pursuant to which Participants of DTC, FICC, 
and NSCC 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'') \5\ in accordance 
with the terms of the amended Shareholders Agreement while preserving 
the right but not the obligation of other Participants that make only 
limited use of the services of one or more of the clearing agencies to 
purchase DTCC common shares (``Voluntary Purchaser Participants'').\6\
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    \5\ Pursuant to the amendments to the 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. For DTC, a Mandatory Purchaser 
Participant includes all participants of DTC other than Limited 
Participants. For FICC, this term includes Netting Members of FICC's 
Government Securities Division. For NSCC, this term includes all 
Members other than Mutual Fund/Insurance Services Members.
    \6\ The DTCC Shareholders Agreement marked to show the proposed 
amendments is attached to the proposed rule change as Exhibit 3 and 
is available on DTC's Web site at http://www.dtc.org/impNtc/mor/index.html, FICC's Web site at http://www.ficc.com/gov/

gov.docs.jsp?NS-query=, and NSCC's Web site at http://www.nscc.com/legal.

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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.\7\ 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 
cumulative voting in the election of directors. In addition, DTCC 
common shareholders are entitled to receive out of the assets of DTCC, 
when and if declared by the Board of Directors of DTCC, dividends 
payable in cash or stock or otherwise. However, since DTC, FICC, and 
NSCC provide their services to their Participants on a cost-basis with 
revenues in excess of expenses and necessary reserves rebated or 
provide their services on a discounted basis, as a matter of policy and 
practice DTCC does not pay any dividends on DTCC common shares. The 
amendments to the Shareholders Agreement will have no effect on these 
rights of DTCC common shareholders and preferred shareholders.
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    \7\ 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 Shareholders Agreement, a 
person elected as a director of DTCC also serves as a director of DTC, 
FICC, and NSCC. The amendments to the Shareholders Agreement will have 
no effect on these covenants.
    The system for allocating entitlements to purchase shares in the 
Shareholders Agreement was first implemented by DTC with respect to DTC 
common shares in 1973. At that time, the bank users of DTC's services 
purchased their DTC common shares, but for logistical and other reasons 
the NYSE, the NASD, and the American Stock Exchange (``AMEX'') 
(collectively ``Self-Regulatory

[[Page 74071]]

Organizations'') purchased the DTC common shares allocated to the 
broker-dealer users of DTC services that were their members. 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.
    Notwithstanding the passage of time and the opportunity afforded 
broker-dealer Participants to purchase DTCC common shares, the Self-
Regulatory Organizations 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%. 
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. Accordingly, a total of approximately 36.4% of the 
outstanding DTCC common shares are not held by Participants but rather 
are held by the Self-Regulatory Organizations. 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, 
DTC, FICC, and NSCC believe that the proposed rule changes \8\ and the 
proposed amendments to the Shareholders Agreement will guarantee that 
Participants continue to govern and to control the activities of DTC, 
FICC, and NSCC, including the services provided and the service fees 
charged. In particular, Participants will be in a position to assure 
that DTC, FICC, and NSCC 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, FICC, and NSCC to 
contribute to DTCC's capital through the purchase of its common shares.
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    \8\ The proposals add a new provision to each of DTC, FICC, and 
NSCC's rules that requires Mandatory Purchaser Participants to 
purchase and own DTCC common shares in accordance with the terms of 
the Shareholders Agreement. The new provisions are DTC Rule 31, NSCC 
Rule 64, FICC's Government Securities Division Rule 49, and FICC's 
Mortgage-Backed Securities Division Article V, Rule 18.
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III. Comment Letters

    The Commission received two comment letters.\9\ Both commenters 
opposed the proposed rule change. One commenter stated that if DTC 
needed to raise capital it should offer the shares to the general 
public or participants in DTC's Direct Registration System. The 
commenter also suggested that share ownership by DTC participants 
provides a financial disincentive for such participants to share 
information with the Commission and other regulators regarding criminal 
or unethical practices. The other commentator suggested that requiring 
participants to purchase common shares in DTCC could be used as a means 
to separate small investors from large investors based on their net 
assets and subject smaller investors to potential abuse.
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    \9\ Supra notes 3 and 4.
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IV. Discussion

    Section 17A(b)(3)(C) of the Act requires that the rules of a 
clearing agency be designed to assure fair representation in the 
selection of its directors and the administration of its affairs.\10\ 
The Commission finds that DTC, FICC, and NSCC's proposed rule changes 
are consistent with this requirement because the proposed changes serve 
to increase the number of Participants that have input in the selection 
of DTCC's board of directors and thus the boards of directors of DTC, 
FICC, and NSCC. This increased participation of Participants should 
help DTC, FICC, and NSCC assure that their Participants have fair 
representation in the selection of its directors and the administration 
of their affairs.
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    \10\ 15 U.S.C. 78q-1(b)(3)(C).
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    The purpose of the proposed rule changes are not to raise capital 
for DTC, FICC, and NSCC as suggested by one of the commenters, but 
rather to redistribute common share ownership from having a significant 
portion held by the Self-Regulatory Organizations to having all shares 
held by the Participants in order to increase Participants' role in the 
selection of directors and the administration of DTC, FICC, and NSCC's 
affairs. With respect to the other commenter's fear that some 
``investors'' would not be able to purchase DTCC common shares, neither 
DTC, FICC, nor NSCC have been informed by any of their Participants 
that they would have difficulty or be unable to pay for the allocation 
of shares.

V. Conclusion

    On the basis of the foregoing, the Commission finds that the 
proposed rule changes are consistent with the requirements of the Act 
and in particular section 17A of the Act and the rules and regulations 
thereunder.
    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\11\ that the proposed rule changes (File Nos. SR-DTC-2005-16, SR-
FICC-2005-19, and SR-NSCC-2005-14) be and hereby is approved.
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    \11\ 15 U.S.C. 78s(b)(2).

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\12\
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    \12\ 17 CFR 200.30-3(a)(12).
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Jonathan G. Katz,
Secretary.
[FR Doc. E5-7305 Filed 12-13-05; 8:45 am]

BILLING CODE 8010-01-P
