Self-Regulatory Organizations; The Options Clearing Corporation; Order Approving Proposed Rule Change Concerning the Consolidation of the Governance Committee and Nominating Committee Into a Single Committee, Changes to the Nominating Process for Directors, and Increasing the Number of Public Directors on the Options Clearing Corporation's Board of Directors, 40824-40828 [2014-16370]

Download as PDF 40824 Federal Register / Vol. 79, No. 134 / Monday, July 14, 2014 / Notices unfair discrimination, as it applies to all TPHs that submit an application to change a CTPH. B. Self-Regulatory Organization’s Statement on Burden on Competition CBOE does not believe that the proposed rule change will impose any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Act. The Exchange does not believe that the proposed rule change imposes any burden on intramarket competition because it applies to all Trading Permit Holders. The Exchange does not believe that the proposed rule change will impose any burden on intermarket competition as it is merely attempting to make changes to its rules to eliminate practices that are no longer necessary or relevant. The Exchange notes that, to the extent that the proposed changes make CBOE more attractive for trading, market participants trading on other exchanges are welcome to become TPHs and trade at CBOE if they determine that this proposed rule change has made CBOE more attractive or favorable. C. Self-Regulatory Organization’s Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others The Exchange neither solicited nor received comments on the proposed rule change. mstockstill on DSK4VPTVN1PROD with NOTICES III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action Because the foregoing proposed rule change does not: A. Sgnificantly affect the protection of investors or the public interest; B. impose any significant burden on competition; and C. become operative for 30 days from the date on which it was filed, or such shorter time as the Commission may designate, it has become effective pursuant to Section 19(b)(3)(A) of the Act 8 and Rule 19b–4(f)(6) 9 thereunder. At any time within 60 days of the filing of the proposed rule change, the Commission summarily may temporarily suspend such rule change if it appears to the Commission that such action is necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of the Act. If the Commission takes such action, the Commission will institute proceedings to determine whether the proposed rule 8 15 9 17 U.S.C. 78s(b)(3)(A). CFR 240.19b–4(f)(6). VerDate Mar<15>2010 19:25 Jul 11, 2014 Jkt 232001 change should be approved or 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 (https://www.sec.gov/ rules/sro.shtml); or • Send an email to rule-comments@ sec.gov. Please include File Number SR– CBOE–2014–056 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–CBOE–2014–056. 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 Web site (https://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 Web site 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 the filing also will be available for inspection and copying at the principal office of the Exchange. 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–CBOE– 2014–056 and should be submitted on or before August 4, 2014. PO 00000 Frm 00120 Fmt 4703 Sfmt 4703 For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.10 Kevin M. O’Neill, Deputy Secretary. [FR Doc. 2014–16364 Filed 7–11–14; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–72564; File No. SR–OCC– 2014–09] Self-Regulatory Organizations; The Options Clearing Corporation; Order Approving Proposed Rule Change Concerning the Consolidation of the Governance Committee and Nominating Committee Into a Single Committee, Changes to the Nominating Process for Directors, and Increasing the Number of Public Directors on the Options Clearing Corporation’s Board of Directors July 8, 2014. I. Introduction On May 13, 2014, The Options Clearing Corporation (‘‘OCC’’) filed with the Securities and Exchange Commission (‘‘Commission’’) the proposed rule change SR–OCC–2014–09 pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’) 1 and Rule 19b–4 thereunder.2 The proposed rule change was published for comment in the Federal Register on May 30, 2014.3 The Commission received no comment letters. For the reasons discussed below, the Commission is granting approval of the proposed rule change. II. Description OCC is proposing to: (i) Amend its ByLaws and Governance Committee Charter to combine the Nominating Committee (‘‘NC’’) and the Governance Committee (‘‘GC’’) to establish a single Governance and Nominating Committee (‘‘GNC’’), (ii) make changes concerning OCC’s nomination process for Directors, and (iii) increase the number of Public Directors on OCC’s Board of Directors (‘‘Board’’) from three to five. The proposed modifications are based on recommendations from the GC in the course of carrying out its mandate of reviewing the overall corporate governance of OCC and recommending improvements to the structure of OCC’s Board. In part, the GC’s 10 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 3 Securities Exchange Act Release No. 72242 (May 23, 2014), 79 FR 31166 (May 30, 2014). 1 15 E:\FR\FM\14JYN1.SGM 14JYN1 Federal Register / Vol. 79, No. 134 / Monday, July 14, 2014 / Notices mstockstill on DSK4VPTVN1PROD with NOTICES recommendations stem from suggestions of an outside consultant that was retained to review and report on OCC’s governance structure in relationship to industry governance practices. To conform to these proposed changes, OCC is also proposing to make certain edits to its Stockholders Agreement, Board of Directors Charter, and Fitness Standards for Directors. Currently, the GC operates pursuant to its own Charter.4 The NC is not a Board level Committee and does not operate pursuant to a charter; however, provisions in Article III of OCC’s ByLaws prescribe certain aspects of the NC’s structure and operation. OCC is proposing to apply to the GNC many of the existing provisions of the relevant By-Laws that apply to the NC and GC Charter. Amendments to the existing By-Laws and GC Charter are discussed below. Certain provisions of Article III of OCC’s By-Laws govern the role the NC plays in nominating persons as Member Directors 5 on OCC’s Board as well as the composition and structure of the NC itself. The NC is required to endeavor to achieve balanced representation in its Member Director and Non-Director Member nominees, giving due consideration to business activities and geographic distribution. The NC is composed of seven total members: one Public Director and six Non-Director Members.6 The Public Director member, who is nominated by the Executive Chairman with the approval of a majority of the Board, generally serves a three year term, unless she ceases to qualify as a Public Director.7 The six Non-Director Members nominated by the NC and selected by OCC’s stockholders are divided into two equal classes of three members, and the classes serve staggered two year terms.8 By 4 Securities Exchange Act Release Nos. 71030 (Dec. 11, 2013), 78 FR 7612 (Dec. 16, 2013) (SR– OCC–2013–18); 71083 (Dec. 16, 2013), 78 FR 77182 (Dec. 20, 2013) (SR–OCC–2013–807). 5 Under Article III, Section 2 every Member Director must be either a Clearing Member or a representative of a Clearing Member Organization. 6 Under Sections 4 and 5 of Article III, a NonDirector Member of the NC must be a representative of a Clearing Member and no person associated with the same Clearing Member Organization as a member of the NC may be nominated by the NC for a position as a Member Director on the Board of Directors or a Non-Director Member of the NC for the ensuing year. 7 Public Directors may not be affiliated with any national securities exchange or national securities association or any broker or dealer in securities, and OCC’s Executive Chairman and President, who are Management Directors. See OCC By-Laws Article III, Section 6A. 8 This tiered structure eliminated the complete turnover of the members of the NC each year and fostered greater continuity among its elected VerDate Mar<15>2010 19:25 Jul 11, 2014 Jkt 232001 comparison, the GC Charter requires the current GC to have no fewer than five directors and to include at least one Public Director, at least one Exchange Director, and at least one Member Director. It also provides that no Management Directors may serve on the GC. OCC’s Board currently has 19 members consisting of nine Member Directors, five Exchange Directors, three Public Directors, and two Management Directors. Based on recommendations from the GC in the course of review of OCC’s overall corporate governance, OCC is proposing certain amendments detailed below to merge OCC’s NC and GC into a single GNC, change the nominating process for directions, and increase the number of Public Directors from three to five. A. Proposed Amendments Common to the By-Laws and Other OCC Governance Documents Certain of the proposed changes would amend the existing By-Laws as well as other governance documents of OCC. For example, conforming edits would be made throughout the By-Laws and GC Charter to delete NC and GC references and replace them with references to the GNC. 40825 each of the Member Director, Exchange Director, and Public Director categories. The prohibition on Management Directors serving on the GC would continue to apply to the GNC. 2. GNC Member Appointment Process and Term Limits The members of the GNC would be appointed annually by the Board from among certain Board members recommended by the GNC after consultation with OCC’s Executive Chairman. GNC Members would serve at the pleasure of the Board. The GNC’s Chairman (‘‘GNC Chair’’) would be designated from among the GNC’s Public Directors. Provisions implementing these changes would be added to Section 4 of Article III of the By-Laws to entirely supplant the class and term limit structure and nominations process that currently applies to the NC and its Non-Director Members and Public Director, and references to Non-Director Members would be removed from the By-Laws. The GC Charter would also be amended to reflect this structure for GNC nominations and appointments. The new GNC would be composed of a minimum of three total members: at least one Public Director, at least one Exchange Director, and at least one Member Director. To reflect this change, OCC would: (i) Eliminate in Section 4 of Article III of the By-Laws the requirement for six Non-Director Members, (ii) add requirements for at least one Member Director and one Exchange Director, and (iii) modify the current requirement for one Public Director to instead require that there must be at least one Public Director. The proposed composition for the GNC mirrors the existing composition specified in the GC Charter. Therefore, no changes are proposed to the current GC Charter other than the elimination of the requirements that the GNC have no fewer than five directors. In its filing with the Commission, OCC stated that that limitation would be eliminated with the goal of providing the Board with greater flexibility to determine the optimal size and composition of the GNC, so long as the composition also facilitates diverse representation by satisfying the proposed requirement for at least one GNC representative from 3. Number of Public Directors and Member Directors OCC is proposing to amend its ByLaws to increase the minimum number of Public Directors on its Board from three to five. It is also making certain other changes related to the overall composition of the Board and the classification and term of office of Public Directors. The proposed change in the number of Public Directors from three to five would reconstitute OCC’s Board with a total of 21 directors. OCC believes that, as indicated in its initial proposal to add Public Directors to its Board,9 Public Directors broaden the mix of viewpoints and business expertise that is represented on the Board. Accordingly, OCC believes that the input and expertise of two more Public Directors will further benefit OCC in the administration of its affairs in respect of the markets that it serves, and in the performance of its duties as a systemically important financial market utility. The proposed changes would remove a provision that, under certain conditions, automatically adjusts the number of Member Directors serving on the Board. OCC’s By-Laws currently require that if the aggregate number of Exchange Directors and Public Directors equals at least nine, the total number of members. Securities Exchange Act Release No. 29437 (July 12, 1991), 56 FR 33319 (July 19, 1991) (SR–OCC–91–11). 9 Securities Exchange Act Release No. 30328 (January 31, 1992), 57 FR 4784 (February 7, 1992) (SR–OCC–1992–02). 1. GNC Composition PO 00000 Frm 00121 Fmt 4703 Sfmt 4703 E:\FR\FM\14JYN1.SGM 14JYN1 40826 Federal Register / Vol. 79, No. 134 / Monday, July 14, 2014 / Notices mstockstill on DSK4VPTVN1PROD with NOTICES Member Directors must be automatically adjusted to exceed that number by one.10 OCC believes that the removal of this provision would provide the Board with greater flexibility to determine its optimal composition. The proposed changes also remove a provision that reduces the number of Member Directors if the number is above nine and exceeds the sum of the number of Exchange Directors and the number of Public Directors by more than one, because the number of Member Directors would be fixed at nine. OCC is also proposing certain amendments to its Stockholders Agreement, Board of Directors Charter, and Fitness Standards for Directors, Clearing Members, and Others. In each case, conforming changes would be made to recognize the merger of the NC and GC into the GNC as a standing Committee of the Board and reflect the role it would play in OCC’s director nomination process. The proposed modifications to the Board Charter and Fitness Standards would reflect the increase in the number of Public Directors serving on the Board from three to five and the removal of the provision that automatically adjusts the number of Member Directors serving on the Board when certain conditions are met. The criteria specified in the Fitness Standards for Directors, Clearing Members, and Others for use in considering individuals nominated to be Member Directors would also be revised for consistency with the criteria proposed to be added to Article III, Section 5 of the By-Laws, discussed below, designed to achieve balanced Board representation. The Stockholders Agreement also contains proposed amendments to replace the term Chairman with Executive Chairman. This parallels a separate proposed amendment by OCC to implement this change in its By-Laws and Rules, but a consolidated amendment to the Stockholders Agreement is proposed for ease of administration. B. Proposed Amendments to By-Laws As explained in more detail below, certain of the proposed changes would require amendments only to OCC’s existing By-Laws. One such example is that Sections 2 and 5 of Article III of the By-Laws would be amended to remove prohibitions against representation of the same Clearing Member Organization on the Board and the NC.11 This 10 OCC By-Laws Article III, Section 1. 11 A Clearing Member Organization is a Clearing Member that is a legal entity rather than a natural person. VerDate Mar<15>2010 19:25 Jul 11, 2014 Jkt 232001 prohibition would be eliminated since GNC members will be selected from among the members of the Board under the new approach. 1. Balanced Representation The NC’s responsibility to endeavor to achieve balanced representation among Clearing Members on the Board would be carried over to the GNC. Specifically, the GNC would be required to ensure that (1) not all of the Member Directors are from the members having the largest volume of business with OCC during the prior year and (2) the mix of Member Directors includes members primarily engaged in agency trading on behalf of retail investors. 2. Nomination and Election Process The Board would appoint members to the GNC from among the Board’s members who are recommended by the GNC. This change requires certain proposed modifications to the nomination and election process currently reflected in Article III, Section 5 of the By-Laws. Changes are also proposed that would change the deadlines for nominations of Member Directors by both the GNC and Clearing Members, and OCC would preserve the petition process by which Clearing Members may nominate additional candidates to be Member Directors on the Board. In recognition of the elimination of the concept of NonDirector Members, several provisions in Section 5 of Article III of the By-Laws addressing the ability of stockholders to elect or nominate Non-Director Members of the NC would be deleted. In relevant part, however, these provisions would be retained to the extent they apply to the ability of stockholders under certain conditions to nominate and elect Member Directors of the Board. 3. Public Directors Proposed changes to Section 6A of Article III of the By-Laws would require the GNC to nominate Public Directors for election by OCC’s stockholders and to use OCC’s fitness standards in making such nominations. Currently, OCC’s Executive Chairman nominates Public Directors with Board approval. Changes are also proposed to help clarify the class structure and term limits of Public Directors that are independent of changes proposed to facilitate the formation of the GNC.12 12 These changes would specify that, aside from the Class II Public Director who was elected to the Board at the 2011 annual meeting, two other Public Directors were appointed to the Board prior to its 2013 annual meeting, one designated as a Class I Public Director and the other designated as a Class PO 00000 Frm 00122 Fmt 4703 Sfmt 4703 The proposed changes to Article III, Section 6A of the By-Laws would also provide for the classification of the two new Public Directors. One of the new Public Directors will be designated as a Class I Public Director, and the other will be designated as a Class III Public Director. The proposed changes also establish the times at which the successors of the two new Public Directors will be elected. The successor of the new Public Director that is a Class III Public Director will be elected at the 2015 annual meeting of stockholders, and the successor of the new Public Director that is a Class I Public Director will be elected at the 2016 annual meeting. 4. Disqualifications and Filling Vacancies and Newly Created Directorships The disqualification provisions in Article III, Section 11 of the By-Laws would be revised to reflect that any determination to disqualify a director would be effective and result in a vacancy only if the GNC makes a recommendation for disqualification in addition to an affirmative vote for disqualification by a majority of the whole Board. The By-Laws currently provide that if a Member Director vacancy is filled by the Board, the person filling the vacancy will serve until the next scheduled election for the relevant class of Member Director and a successor is elected. However, if the term for that class of Member Director extends beyond the Board’s next annual meeting the vacancy must be filled by a person who is recommended by the Nominating Committee. Proposed changes to these terms in respect of the GNC would require the Board in all cases to appoint a person who is recommended by the GNC. Similarly, Public Director vacancies would be required to be filled by the Board as generally provided for in Section 6A of Article III of the By-Laws, including with regard to candidates being nominated by the GNC using OCC’s fitness standards for directors. Provisions concerning filling vacancies with respect to the NC would be deleted, consistent with its elimination in favor of the GNC. 5. Ministerial Changes The proposed changes to Article III of the By-Laws also include certain ministerial changes. A reference to stockholder exchanges in the III Public Director. Generally, the three year terms for Public Directors with staggered expiration for each class would be preserved; however, an exception would be added for the initial Class I and III Public Directors. E:\FR\FM\14JYN1.SGM 14JYN1 Federal Register / Vol. 79, No. 134 / Monday, July 14, 2014 / Notices interpretation and policy to Section 6 would be replaced by the defined term Equity Exchanges, and a reference in Section 14 to notice by telegram would be changed to facsimile to reflect current means of communication. C. Proposed Amendments to the GC Charter Certain of the proposed amendments relating to the creation of the GNC would apply only to OCC’s existing GC Charter. These amendments are discussed below. 1. GNC Purpose The statement of purpose in the GC Charter would be revised to reflect the GNC’s larger scope of responsibilities. The existing GC purpose of reviewing the overall corporate governance of OCC would be maintained, along with language clarifying that this review would be performed on a regular basis and that recommendations concerning Board improvements should be made when necessary. The GNC Charter would also provide that the GNC assists the Board in identifying, screening, and reviewing individuals qualified to serve as directors and by recommending candidates to the Board for nomination for election at the annual meeting of stockholders or to fill vacancies. The GNC Charter would also specify that the GNC would develop and recommend to the Board, and oversee the implementation of, a Board Code of Conduct. mstockstill on DSK4VPTVN1PROD with NOTICES 2. GNC Membership and Organization The requirement in the GC Charter that the GC hold four meetings annually would be modified to also permit the GNC to call additional meetings as it deems appropriate.13 The GC Charter requirement for regular reporting to the Board on Committee activities by the GC chair or a designee would be revised in favor of placing the reporting responsibility solely on the GNC Chair and requiring the GNC Chair to make timely reports to the Board on important issues discussed at GNC meetings. Taking into consideration certain preestablished guidelines in the GNC Charter, the GNC Chair would also be given responsibility for determining whether minutes should be recorded at any executive session. Aside from this exception for executive sessions, GNC meeting minutes would be required to be recorded. The GNC Charter would also create a position to be filled by an 13 This would bring the Governance and Nominating Committee Charter in line with the Charters of OCC’s other Board Committees. VerDate Mar<15>2010 19:25 Jul 11, 2014 Jkt 232001 OCC officer who would assist the GNC and liaise between it and OCC’s staff. 3. GNC Authority As in the case of the existing GC, the GNC would have authority to inquire into any matter relevant to its purpose and responsibilities in the course of carrying out its duties. The GNC Charter would further specify that in connection with any such inquiry the GNC would have access to all books, records, facilities, and personnel of OCC. Unlike the existing GC Charter, the GNC Charter would not provide express authority for the GNC to rely on members of OCC’s management for assistance. Instead, this relationship between the GNC and OCC’s management would be more specifically addressed through the role of the newly created staff liaison position. Additional revisions to the GC Charter would also establish that the GNC Chair would not have discretion to take unilateral action on behalf of the Committee, even in special circumstances. 4. Board Composition Without limiting the GNC to particular activities, the GNC Charter would specify certain responsibilities meant to guide the GNC in achieving its purposes, including with respect to its role in the development of the Board’s composition. The GNC’s Charter would require it to pursue development of a Board comprised of individuals who have a reputation for integrity and represent diverse professional backgrounds as well as a broad spectrum of experience and expertise. The GNC Charter would also prescribe more detailed responsibilities designed to further this goal. For example, the GNC would be required to conduct periodic reviews of the composition of the Board against the goal, including whether the Board reflects the appropriate balance of types of directors, business specialization, technical skills, diversity, and other qualities.14 The GNC would be required to recommend policies and procedures to the Board for identifying and reviewing Board nominee candidates, and it would implement and oversee the effectiveness of those policies, including with regard to criteria for Board nominees. Using criteria approved by the Board, the GNC would identify, screen, and review persons it determines are qualified to serve as directors. This process would also extend to incumbent directors 14 The GNC would also review director conflicts of interest and the manner in which any such conflicts are to be monitored and resolved. PO 00000 Frm 00123 Fmt 4703 Sfmt 4703 40827 concerning any potential re-nomination. In all cases, the GNC would only recommend candidates to the Board for nomination for election after consulting with OCC’s Executive Chairman. In the event that a sitting director offers to resign because of a change in occupation or business association, the GNC would be responsible for reviewing whether continued service is appropriate and making a recommendation of any action, consistent with OCC’s By-Laws and Rules, that should be taken by the Board. The GNC would also undertake periodic reviews of term limits for certain directors and recommend changes to these limits where appropriate. 5. Governance Practices The GNC would have responsibility for reviewing the Board’s Charter for consistency with regulatory requirements, transparency of the governance process, and other sound governance practices. Currently, this is a GC function, and certain GC Charter amendments are proposed to help further detail the GNC’s review responsibilities. These include a general responsibility to recommend changes, as the GNC deems appropriate, to the Board concerning Committee Charters. This would include the GNC Charter, which the GNC would be required to review annually.15 In connection with a periodic review of Board Committee structure, the GNC would advise the Board regarding related matters of structure, operations, and charters. Furthermore, and in each case after consultation with OCC’s Executive Chairman, the GNC would recommend to the Board for its approval certain directors for Committee service as well as for assignment as Committee chair persons. The GNC would develop and recommend to the Board the annual process used by the Board and Board Committees for self-evaluation of their role and performance in the governance of OCC. The GNC would also be responsible for coordinating and providing oversight of that process. Corporate governance principles applicable to OCC would be developed by the GNC for recommendation to the Board, and the GNC would review them at least once a year. 15 As part of the annual review, the GNC would also submit the GNC Charter to the Board for reapproval, including any changes the GNC deems advisable. E:\FR\FM\14JYN1.SGM 14JYN1 40828 Federal Register / Vol. 79, No. 134 / Monday, July 14, 2014 / Notices 6. Other Proposed GC Charter Amendments The GNC Charter would require the GNC to regularly evaluate its performance and the performance of its individual members and provide results of such assessments to the Board. It would also require an annual report to be prepared by the GNC and delivered to the Board regarding the GNC’s activities for the preceding year, and the GNC would be required to include a statement that it carried out all of its GNC Charter responsibilities. In addition to such responsibilities, the GNC would generally be empowered to perform any other duties that it deems necessary or appropriate and consistent with the GNC Charter or as may otherwise be further delegated to it by the Board. III. Discussion Section 19(b)(2)(C) of the Act 16 directs the Commission to approve a proposed rule change of a selfregulatory organization if it finds that the proposed rule change is consistent with the requirements of the Act and the rules and regulations thereunder applicable to such organization. Section 17A(b)(3)(C) of the Act requires the rules of a clearing agency to assure fair representation of its shareholders (or members) and participants 17 in the selection of its directors and administration of its affairs.18 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.19 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 16 15 U.S.C. 78s(b)(2)(C). relevant part, a clearing agency participant is defined in Section 3(a)(24) of the Act as ‘‘any person who uses a clearing agency to clear or settle securities transactions or to transfer, pledge, lend, or hypothecate securities . . .’’ 18 15 U.S.C. 78q–1(b)(3)(C). The statute further provides that one way of establishing that the representation of participants is fair is by affording them a reasonable opportunity to acquire voting stock of the clearing agency in reasonable proportion to their use. 19 Securities Exchange Act Release No. 20221 (September 23, 1983), 48 FR 45167, 45172 (October 3, 1983) (Depository Trust Co., et. al.; Order). mstockstill on DSK4VPTVN1PROD with NOTICES 17 In VerDate Mar<15>2010 19:25 Jul 11, 2014 Jkt 232001 interests of shareholders and a crosssection of the community of participants.’’ 20 The Commission finds that the proposed rule change is consistent with the requirements of the Act, and specifically the requirements in Section 17A(b)(3)(C) that the rules of a clearing agency assure fair representation of its shareholders (or members) and participants 21 in the selection of its directors and administration of its affairs.22 The GNC would be composed of and selected by OCC’s participants and shareholders or their representatives because, along with at least one Public Director, the GNC would be composed of Board members who represent OCC’s Clearing Members and equity exchanges. Furthermore, the GNC would be obligated by OCC’s By-Laws and the GNC Charter to make nominations that serve the interests of shareholders and a cross-section of participants because it would be required to nominate candidates with a view toward ensuring: (1) That the Board consists of, among other things, individuals who have a reputation for integrity and represent diverse professional backgrounds and a broad spectrum of experience and expertise; (2) that not all Member Directors of the Board will represent the largest Clearing Member Organizations; and (3) that the mix of Member Directors on the Board will include representatives of Clearing Member Organizations primarily engaged in agency trading on behalf of retail customers or individual investors. The Commission also finds that the proposed rule change is consistent with Rule 17Ad–22(d)(8), which requires that each ‘‘registered clearing agency establish, implement, maintain and enforce written policies and procedures reasonably designed to have governance arrangements that are clear and transparent to fulfill the public interest requirements of Section 17A of the Act . . . to support the objectives of owners and participants, and to promote the effectiveness of the clearing agency’s risk management procedures.’’ 23 The 20 Securities Exchange Act Release No. 20221 (September 23, 1983), 48 FR 45167, 45172 (October 3, 1983) (Depository Trust Co., et. al.; Order). 21 In relevant part, a clearing agency participant is defined in Section 3(a)(24) of the Act as ‘‘any person who uses a clearing agency to clear or settle securities transactions or to transfer, pledge, lend, or hypothecate securities . . .’’ 22 15 U.S.C. 78q–1(b)(3)(C). The statute further provides that one way of establishing that the representation of participants is fair is by affording them a reasonable opportunity to acquire voting stock of the clearing agency in reasonable proportion to their use. 23 17 CFR 240.17Ad–22(d)(8). PO 00000 Frm 00124 Fmt 4703 Sfmt 9990 proposed rule change requires the GNC to be composed of representatives of at least one Member Director, Exchange Director, and Public Director. We believe this composition of the committee nominating directors is consistent with the requirement to have policies and procedures reasonably designed to support the objectives of both owners and participants. The proposed rule change requires the GNC to endeavor to develop a Board that represents a broad range of skills and experience. We believe this is consistent with the requirement to have policies and procedures reasonably designed to promote the effectiveness of the clearing agency’s risk management procedures. A Board with a broad range of skill and expertise, including in risk management, will be better able to oversee the development, implementation, effectiveness, and potential areas in need of improvement or change of a clearing agency’s risk management framework, policies, and procedures. The Commission also believes that increasing the number of Public Directors from three to five is consistent with both the Act and Rule 17Ad22(d)(8). The Commission agrees with OCC that the input and expertise of two more Public Directors will further benefit OCC in the administration of its affairs in respect of the markets that it serves, and in the discharge of its obligations as a systemically important financial market utility. V. 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 24 and the rules and regulations thereunder. It is therefore ordered, pursuant to Section 19(b)(2) of the Act,25 that the proposed rule change (File No. SR– OCC–2014–09) be and hereby is approved.26 For the Commission by the Division of Trading and Markets, pursuant to delegated authority.27 Kevin M. O’Neill, Deputy Secretary. [FR Doc. 2014–16370 Filed 7–11–14; 8:45 am] BILLING CODE 8011–01–P 24 15 U.S.C. 78q–1. U.S.C. 78s(b)(2). 26 In approving the proposed rule change, the Commission considered the proposal’s impact on efficiency, competition, and capital formation. 15 U.S.C. 78c(f). 27 17 CFR 200.30–3(a)(12). 25 15 E:\FR\FM\14JYN1.SGM 14JYN1

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 79, Number 134 (Monday, July 14, 2014)]
[Notices]
[Pages 40824-40828]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-16370]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-72564; File No. SR-OCC-2014-09]


Self-Regulatory Organizations; The Options Clearing Corporation; 
Order Approving Proposed Rule Change Concerning the Consolidation of 
the Governance Committee and Nominating Committee Into a Single 
Committee, Changes to the Nominating Process for Directors, and 
Increasing the Number of Public Directors on the Options Clearing 
Corporation's Board of Directors

July 8, 2014.

I. Introduction

    On May 13, 2014, The Options Clearing Corporation (``OCC'') filed 
with the Securities and Exchange Commission (``Commission'') the 
proposed rule change SR-OCC-2014-09 pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 
thereunder.\2\ The proposed rule change was published for comment in 
the Federal Register on May 30, 2014.\3\ The Commission received no 
comment letters. For the reasons discussed below, the Commission is 
granting approval of the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Securities Exchange Act Release No. 72242 (May 23, 2014), 79 
FR 31166 (May 30, 2014).
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II. Description

    OCC is proposing to: (i) Amend its By-Laws and Governance Committee 
Charter to combine the Nominating Committee (``NC'') and the Governance 
Committee (``GC'') to establish a single Governance and Nominating 
Committee (``GNC''), (ii) make changes concerning OCC's nomination 
process for Directors, and (iii) increase the number of Public 
Directors on OCC's Board of Directors (``Board'') from three to five. 
The proposed modifications are based on recommendations from the GC in 
the course of carrying out its mandate of reviewing the overall 
corporate governance of OCC and recommending improvements to the 
structure of OCC's Board. In part, the GC's

[[Page 40825]]

recommendations stem from suggestions of an outside consultant that was 
retained to review and report on OCC's governance structure in 
relationship to industry governance practices. To conform to these 
proposed changes, OCC is also proposing to make certain edits to its 
Stockholders Agreement, Board of Directors Charter, and Fitness 
Standards for Directors.
    Currently, the GC operates pursuant to its own Charter.\4\ The NC 
is not a Board level Committee and does not operate pursuant to a 
charter; however, provisions in Article III of OCC's By-Laws prescribe 
certain aspects of the NC's structure and operation. OCC is proposing 
to apply to the GNC many of the existing provisions of the relevant By-
Laws that apply to the NC and GC Charter. Amendments to the existing 
By-Laws and GC Charter are discussed below.
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    \4\ Securities Exchange Act Release Nos. 71030 (Dec. 11, 2013), 
78 FR 7612 (Dec. 16, 2013) (SR-OCC-2013-18); 71083 (Dec. 16, 2013), 
78 FR 77182 (Dec. 20, 2013) (SR-OCC-2013-807).
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    Certain provisions of Article III of OCC's By-Laws govern the role 
the NC plays in nominating persons as Member Directors \5\ on OCC's 
Board as well as the composition and structure of the NC itself. The NC 
is required to endeavor to achieve balanced representation in its 
Member Director and Non-Director Member nominees, giving due 
consideration to business activities and geographic distribution.
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    \5\ Under Article III, Section 2 every Member Director must be 
either a Clearing Member or a representative of a Clearing Member 
Organization.
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    The NC is composed of seven total members: one Public Director and 
six Non-Director Members.\6\ The Public Director member, who is 
nominated by the Executive Chairman with the approval of a majority of 
the Board, generally serves a three year term, unless she ceases to 
qualify as a Public Director.\7\ The six Non-Director Members nominated 
by the NC and selected by OCC's stockholders are divided into two equal 
classes of three members, and the classes serve staggered two year 
terms.\8\ By comparison, the GC Charter requires the current GC to have 
no fewer than five directors and to include at least one Public 
Director, at least one Exchange Director, and at least one Member 
Director. It also provides that no Management Directors may serve on 
the GC.
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    \6\ Under Sections 4 and 5 of Article III, a Non-Director Member 
of the NC must be a representative of a Clearing Member and no 
person associated with the same Clearing Member Organization as a 
member of the NC may be nominated by the NC for a position as a 
Member Director on the Board of Directors or a Non-Director Member 
of the NC for the ensuing year.
    \7\ Public Directors may not be affiliated with any national 
securities exchange or national securities association or any broker 
or dealer in securities, and OCC's Executive Chairman and President, 
who are Management Directors. See OCC By-Laws Article III, Section 
6A.
    \8\ This tiered structure eliminated the complete turnover of 
the members of the NC each year and fostered greater continuity 
among its elected members. Securities Exchange Act Release No. 29437 
(July 12, 1991), 56 FR 33319 (July 19, 1991) (SR-OCC-91-11).
---------------------------------------------------------------------------

    OCC's Board currently has 19 members consisting of nine Member 
Directors, five Exchange Directors, three Public Directors, and two 
Management Directors. Based on recommendations from the GC in the 
course of review of OCC's overall corporate governance, OCC is 
proposing certain amendments detailed below to merge OCC's NC and GC 
into a single GNC, change the nominating process for directions, and 
increase the number of Public Directors from three to five.

A. Proposed Amendments Common to the By-Laws and Other OCC Governance 
Documents

    Certain of the proposed changes would amend the existing By-Laws as 
well as other governance documents of OCC. For example, conforming 
edits would be made throughout the By-Laws and GC Charter to delete NC 
and GC references and replace them with references to the GNC.
1. GNC Composition
    The new GNC would be composed of a minimum of three total members: 
at least one Public Director, at least one Exchange Director, and at 
least one Member Director. To reflect this change, OCC would: (i) 
Eliminate in Section 4 of Article III of the By-Laws the requirement 
for six Non-Director Members, (ii) add requirements for at least one 
Member Director and one Exchange Director, and (iii) modify the current 
requirement for one Public Director to instead require that there must 
be at least one Public Director. The proposed composition for the GNC 
mirrors the existing composition specified in the GC Charter. 
Therefore, no changes are proposed to the current GC Charter other than 
the elimination of the requirements that the GNC have no fewer than 
five directors. In its filing with the Commission, OCC stated that that 
limitation would be eliminated with the goal of providing the Board 
with greater flexibility to determine the optimal size and composition 
of the GNC, so long as the composition also facilitates diverse 
representation by satisfying the proposed requirement for at least one 
GNC representative from each of the Member Director, Exchange Director, 
and Public Director categories. The prohibition on Management Directors 
serving on the GC would continue to apply to the GNC.
2. GNC Member Appointment Process and Term Limits
    The members of the GNC would be appointed annually by the Board 
from among certain Board members recommended by the GNC after 
consultation with OCC's Executive Chairman. GNC Members would serve at 
the pleasure of the Board. The GNC's Chairman (``GNC Chair'') would be 
designated from among the GNC's Public Directors. Provisions 
implementing these changes would be added to Section 4 of Article III 
of the By-Laws to entirely supplant the class and term limit structure 
and nominations process that currently applies to the NC and its Non-
Director Members and Public Director, and references to Non-Director 
Members would be removed from the By-Laws. The GC Charter would also be 
amended to reflect this structure for GNC nominations and appointments.
3. Number of Public Directors and Member Directors
    OCC is proposing to amend its By-Laws to increase the minimum 
number of Public Directors on its Board from three to five. It is also 
making certain other changes related to the overall composition of the 
Board and the classification and term of office of Public Directors. 
The proposed change in the number of Public Directors from three to 
five would reconstitute OCC's Board with a total of 21 directors. OCC 
believes that, as indicated in its initial proposal to add Public 
Directors to its Board,\9\ Public Directors broaden the mix of 
viewpoints and business expertise that is represented on the Board. 
Accordingly, OCC believes that the input and expertise of two more 
Public Directors will further benefit OCC in the administration of its 
affairs in respect of the markets that it serves, and in the 
performance of its duties as a systemically important financial market 
utility.
---------------------------------------------------------------------------

    \9\ Securities Exchange Act Release No. 30328 (January 31, 
1992), 57 FR 4784 (February 7, 1992) (SR-OCC-1992-02).
---------------------------------------------------------------------------

    The proposed changes would remove a provision that, under certain 
conditions, automatically adjusts the number of Member Directors 
serving on the Board. OCC's By-Laws currently require that if the 
aggregate number of Exchange Directors and Public Directors equals at 
least nine, the total number of

[[Page 40826]]

Member Directors must be automatically adjusted to exceed that number 
by one.\10\ OCC believes that the removal of this provision would 
provide the Board with greater flexibility to determine its optimal 
composition. The proposed changes also remove a provision that reduces 
the number of Member Directors if the number is above nine and exceeds 
the sum of the number of Exchange Directors and the number of Public 
Directors by more than one, because the number of Member Directors 
would be fixed at nine.
---------------------------------------------------------------------------

    \10\ OCC By-Laws Article III, Section 1.
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    OCC is also proposing certain amendments to its Stockholders 
Agreement, Board of Directors Charter, and Fitness Standards for 
Directors, Clearing Members, and Others. In each case, conforming 
changes would be made to recognize the merger of the NC and GC into the 
GNC as a standing Committee of the Board and reflect the role it would 
play in OCC's director nomination process. The proposed modifications 
to the Board Charter and Fitness Standards would reflect the increase 
in the number of Public Directors serving on the Board from three to 
five and the removal of the provision that automatically adjusts the 
number of Member Directors serving on the Board when certain conditions 
are met. The criteria specified in the Fitness Standards for Directors, 
Clearing Members, and Others for use in considering individuals 
nominated to be Member Directors would also be revised for consistency 
with the criteria proposed to be added to Article III, Section 5 of the 
By-Laws, discussed below, designed to achieve balanced Board 
representation.
    The Stockholders Agreement also contains proposed amendments to 
replace the term Chairman with Executive Chairman. This parallels a 
separate proposed amendment by OCC to implement this change in its By-
Laws and Rules, but a consolidated amendment to the Stockholders 
Agreement is proposed for ease of administration.

B. Proposed Amendments to By-Laws

    As explained in more detail below, certain of the proposed changes 
would require amendments only to OCC's existing By-Laws. One such 
example is that Sections 2 and 5 of Article III of the By-Laws would be 
amended to remove prohibitions against representation of the same 
Clearing Member Organization on the Board and the NC.\11\ This 
prohibition would be eliminated since GNC members will be selected from 
among the members of the Board under the new approach.
---------------------------------------------------------------------------

    \11\ A Clearing Member Organization is a Clearing Member that is 
a legal entity rather than a natural person.
---------------------------------------------------------------------------

1. Balanced Representation
    The NC's responsibility to endeavor to achieve balanced 
representation among Clearing Members on the Board would be carried 
over to the GNC. Specifically, the GNC would be required to ensure that 
(1) not all of the Member Directors are from the members having the 
largest volume of business with OCC during the prior year and (2) the 
mix of Member Directors includes members primarily engaged in agency 
trading on behalf of retail investors.
2. Nomination and Election Process
    The Board would appoint members to the GNC from among the Board's 
members who are recommended by the GNC. This change requires certain 
proposed modifications to the nomination and election process currently 
reflected in Article III, Section 5 of the By-Laws. Changes are also 
proposed that would change the deadlines for nominations of Member 
Directors by both the GNC and Clearing Members, and OCC would preserve 
the petition process by which Clearing Members may nominate additional 
candidates to be Member Directors on the Board. In recognition of the 
elimination of the concept of Non-Director Members, several provisions 
in Section 5 of Article III of the By-Laws addressing the ability of 
stockholders to elect or nominate Non-Director Members of the NC would 
be deleted. In relevant part, however, these provisions would be 
retained to the extent they apply to the ability of stockholders under 
certain conditions to nominate and elect Member Directors of the Board.
3. Public Directors
    Proposed changes to Section 6A of Article III of the By-Laws would 
require the GNC to nominate Public Directors for election by OCC's 
stockholders and to use OCC's fitness standards in making such 
nominations. Currently, OCC's Executive Chairman nominates Public 
Directors with Board approval. Changes are also proposed to help 
clarify the class structure and term limits of Public Directors that 
are independent of changes proposed to facilitate the formation of the 
GNC.\12\
---------------------------------------------------------------------------

    \12\ These changes would specify that, aside from the Class II 
Public Director who was elected to the Board at the 2011 annual 
meeting, two other Public Directors were appointed to the Board 
prior to its 2013 annual meeting, one designated as a Class I Public 
Director and the other designated as a Class III Public Director. 
Generally, the three year terms for Public Directors with staggered 
expiration for each class would be preserved; however, an exception 
would be added for the initial Class I and III Public Directors.
---------------------------------------------------------------------------

    The proposed changes to Article III, Section 6A of the By-Laws 
would also provide for the classification of the two new Public 
Directors. One of the new Public Directors will be designated as a 
Class I Public Director, and the other will be designated as a Class 
III Public Director. The proposed changes also establish the times at 
which the successors of the two new Public Directors will be elected. 
The successor of the new Public Director that is a Class III Public 
Director will be elected at the 2015 annual meeting of stockholders, 
and the successor of the new Public Director that is a Class I Public 
Director will be elected at the 2016 annual meeting.
4. Disqualifications and Filling Vacancies and Newly Created 
Directorships
    The disqualification provisions in Article III, Section 11 of the 
By-Laws would be revised to reflect that any determination to 
disqualify a director would be effective and result in a vacancy only 
if the GNC makes a recommendation for disqualification in addition to 
an affirmative vote for disqualification by a majority of the whole 
Board. The By-Laws currently provide that if a Member Director vacancy 
is filled by the Board, the person filling the vacancy will serve until 
the next scheduled election for the relevant class of Member Director 
and a successor is elected. However, if the term for that class of 
Member Director extends beyond the Board's next annual meeting the 
vacancy must be filled by a person who is recommended by the Nominating 
Committee. Proposed changes to these terms in respect of the GNC would 
require the Board in all cases to appoint a person who is recommended 
by the GNC. Similarly, Public Director vacancies would be required to 
be filled by the Board as generally provided for in Section 6A of 
Article III of the By-Laws, including with regard to candidates being 
nominated by the GNC using OCC's fitness standards for directors. 
Provisions concerning filling vacancies with respect to the NC would be 
deleted, consistent with its elimination in favor of the GNC.
5. Ministerial Changes
    The proposed changes to Article III of the By-Laws also include 
certain ministerial changes. A reference to stockholder exchanges in 
the

[[Page 40827]]

interpretation and policy to Section 6 would be replaced by the defined 
term Equity Exchanges, and a reference in Section 14 to notice by 
telegram would be changed to facsimile to reflect current means of 
communication.

C. Proposed Amendments to the GC Charter

    Certain of the proposed amendments relating to the creation of the 
GNC would apply only to OCC's existing GC Charter. These amendments are 
discussed below.
1. GNC Purpose
    The statement of purpose in the GC Charter would be revised to 
reflect the GNC's larger scope of responsibilities. The existing GC 
purpose of reviewing the overall corporate governance of OCC would be 
maintained, along with language clarifying that this review would be 
performed on a regular basis and that recommendations concerning Board 
improvements should be made when necessary. The GNC Charter would also 
provide that the GNC assists the Board in identifying, screening, and 
reviewing individuals qualified to serve as directors and by 
recommending candidates to the Board for nomination for election at the 
annual meeting of stockholders or to fill vacancies. The GNC Charter 
would also specify that the GNC would develop and recommend to the 
Board, and oversee the implementation of, a Board Code of Conduct.
2. GNC Membership and Organization
    The requirement in the GC Charter that the GC hold four meetings 
annually would be modified to also permit the GNC to call additional 
meetings as it deems appropriate.\13\ The GC Charter requirement for 
regular reporting to the Board on Committee activities by the GC chair 
or a designee would be revised in favor of placing the reporting 
responsibility solely on the GNC Chair and requiring the GNC Chair to 
make timely reports to the Board on important issues discussed at GNC 
meetings. Taking into consideration certain pre-established guidelines 
in the GNC Charter, the GNC Chair would also be given responsibility 
for determining whether minutes should be recorded at any executive 
session. Aside from this exception for executive sessions, GNC meeting 
minutes would be required to be recorded. The GNC Charter would also 
create a position to be filled by an OCC officer who would assist the 
GNC and liaise between it and OCC's staff.
---------------------------------------------------------------------------

    \13\ This would bring the Governance and Nominating Committee 
Charter in line with the Charters of OCC's other Board Committees.
---------------------------------------------------------------------------

3. GNC Authority
    As in the case of the existing GC, the GNC would have authority to 
inquire into any matter relevant to its purpose and responsibilities in 
the course of carrying out its duties. The GNC Charter would further 
specify that in connection with any such inquiry the GNC would have 
access to all books, records, facilities, and personnel of OCC. Unlike 
the existing GC Charter, the GNC Charter would not provide express 
authority for the GNC to rely on members of OCC's management for 
assistance. Instead, this relationship between the GNC and OCC's 
management would be more specifically addressed through the role of the 
newly created staff liaison position. Additional revisions to the GC 
Charter would also establish that the GNC Chair would not have 
discretion to take unilateral action on behalf of the Committee, even 
in special circumstances.
4. Board Composition
    Without limiting the GNC to particular activities, the GNC Charter 
would specify certain responsibilities meant to guide the GNC in 
achieving its purposes, including with respect to its role in the 
development of the Board's composition. The GNC's Charter would require 
it to pursue development of a Board comprised of individuals who have a 
reputation for integrity and represent diverse professional backgrounds 
as well as a broad spectrum of experience and expertise. The GNC 
Charter would also prescribe more detailed responsibilities designed to 
further this goal. For example, the GNC would be required to conduct 
periodic reviews of the composition of the Board against the goal, 
including whether the Board reflects the appropriate balance of types 
of directors, business specialization, technical skills, diversity, and 
other qualities.\14\
---------------------------------------------------------------------------

    \14\ The GNC would also review director conflicts of interest 
and the manner in which any such conflicts are to be monitored and 
resolved.
---------------------------------------------------------------------------

    The GNC would be required to recommend policies and procedures to 
the Board for identifying and reviewing Board nominee candidates, and 
it would implement and oversee the effectiveness of those policies, 
including with regard to criteria for Board nominees. Using criteria 
approved by the Board, the GNC would identify, screen, and review 
persons it determines are qualified to serve as directors. This process 
would also extend to incumbent directors concerning any potential re-
nomination. In all cases, the GNC would only recommend candidates to 
the Board for nomination for election after consulting with OCC's 
Executive Chairman.
    In the event that a sitting director offers to resign because of a 
change in occupation or business association, the GNC would be 
responsible for reviewing whether continued service is appropriate and 
making a recommendation of any action, consistent with OCC's By-Laws 
and Rules, that should be taken by the Board. The GNC would also 
undertake periodic reviews of term limits for certain directors and 
recommend changes to these limits where appropriate.
5. Governance Practices
    The GNC would have responsibility for reviewing the Board's Charter 
for consistency with regulatory requirements, transparency of the 
governance process, and other sound governance practices. Currently, 
this is a GC function, and certain GC Charter amendments are proposed 
to help further detail the GNC's review responsibilities. These include 
a general responsibility to recommend changes, as the GNC deems 
appropriate, to the Board concerning Committee Charters. This would 
include the GNC Charter, which the GNC would be required to review 
annually.\15\ In connection with a periodic review of Board Committee 
structure, the GNC would advise the Board regarding related matters of 
structure, operations, and charters. Furthermore, and in each case 
after consultation with OCC's Executive Chairman, the GNC would 
recommend to the Board for its approval certain directors for Committee 
service as well as for assignment as Committee chair persons.
---------------------------------------------------------------------------

    \15\ As part of the annual review, the GNC would also submit the 
GNC Charter to the Board for re-approval, including any changes the 
GNC deems advisable.
---------------------------------------------------------------------------

    The GNC would develop and recommend to the Board the annual process 
used by the Board and Board Committees for self-evaluation of their 
role and performance in the governance of OCC. The GNC would also be 
responsible for coordinating and providing oversight of that process. 
Corporate governance principles applicable to OCC would be developed by 
the GNC for recommendation to the Board, and the GNC would review them 
at least once a year.

[[Page 40828]]

6. Other Proposed GC Charter Amendments
    The GNC Charter would require the GNC to regularly evaluate its 
performance and the performance of its individual members and provide 
results of such assessments to the Board. It would also require an 
annual report to be prepared by the GNC and delivered to the Board 
regarding the GNC's activities for the preceding year, and the GNC 
would be required to include a statement that it carried out all of its 
GNC Charter responsibilities. In addition to such responsibilities, the 
GNC would generally be empowered to perform any other duties that it 
deems necessary or appropriate and consistent with the GNC Charter or 
as may otherwise be further delegated to it by the Board.

III. Discussion

    Section 19(b)(2)(C) of the Act \16\ directs the Commission to 
approve a proposed rule change of a self-regulatory organization if it 
finds that the proposed rule change is consistent with the requirements 
of the Act and the rules and regulations thereunder applicable to such 
organization. Section 17A(b)(3)(C) of the Act requires the rules of a 
clearing agency to assure fair representation of its shareholders (or 
members) and participants \17\ in the selection of its directors and 
administration of its affairs.\18\
---------------------------------------------------------------------------

    \16\ 15 U.S.C. 78s(b)(2)(C).
    \17\ In relevant part, a clearing agency participant is defined 
in Section 3(a)(24) of the Act as ``any person who uses a clearing 
agency to clear or settle securities transactions or to transfer, 
pledge, lend, or hypothecate securities . . .''
    \18\ 15 U.S.C. 78q-1(b)(3)(C). The statute further provides that 
one way of establishing that the representation of participants is 
fair is by affording them a reasonable opportunity to acquire voting 
stock of the clearing agency in reasonable proportion to their use.
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    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.\19\ 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.'' \20\
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    \19\ Securities Exchange Act Release No. 20221 (September 23, 
1983), 48 FR 45167, 45172 (October 3, 1983) (Depository Trust Co., 
et. al.; Order).
    \20\ Securities Exchange Act Release No. 20221 (September 23, 
1983), 48 FR 45167, 45172 (October 3, 1983) (Depository Trust Co., 
et. al.; Order).
---------------------------------------------------------------------------

    The Commission finds that the proposed rule change is consistent 
with the requirements of the Act, and specifically the requirements in 
Section 17A(b)(3)(C) that the rules of a clearing agency assure fair 
representation of its shareholders (or members) and participants \21\ 
in the selection of its directors and administration of its 
affairs.\22\ The GNC would be composed of and selected by OCC's 
participants and shareholders or their representatives because, along 
with at least one Public Director, the GNC would be composed of Board 
members who represent OCC's Clearing Members and equity exchanges.
---------------------------------------------------------------------------

    \21\ In relevant part, a clearing agency participant is defined 
in Section 3(a)(24) of the Act as ``any person who uses a clearing 
agency to clear or settle securities transactions or to transfer, 
pledge, lend, or hypothecate securities . . .''
    \22\ 15 U.S.C. 78q-1(b)(3)(C). The statute further provides that 
one way of establishing that the representation of participants is 
fair is by affording them a reasonable opportunity to acquire voting 
stock of the clearing agency in reasonable proportion to their use.
---------------------------------------------------------------------------

    Furthermore, the GNC would be obligated by OCC's By-Laws and the 
GNC Charter to make nominations that serve the interests of 
shareholders and a cross-section of participants because it would be 
required to nominate candidates with a view toward ensuring: (1) That 
the Board consists of, among other things, individuals who have a 
reputation for integrity and represent diverse professional backgrounds 
and a broad spectrum of experience and expertise; (2) that not all 
Member Directors of the Board will represent the largest Clearing 
Member Organizations; and (3) that the mix of Member Directors on the 
Board will include representatives of Clearing Member Organizations 
primarily engaged in agency trading on behalf of retail customers or 
individual investors.
    The Commission also finds that the proposed rule change is 
consistent with Rule 17Ad-22(d)(8), which requires that each 
``registered clearing agency establish, implement, maintain and enforce 
written policies and procedures reasonably designed to have governance 
arrangements that are clear and transparent to fulfill the public 
interest requirements of Section 17A of the Act . . . to support the 
objectives of owners and participants, and to promote the effectiveness 
of the clearing agency's risk management procedures.'' \23\ The 
proposed rule change requires the GNC to be composed of representatives 
of at least one Member Director, Exchange Director, and Public 
Director. We believe this composition of the committee nominating 
directors is consistent with the requirement to have policies and 
procedures reasonably designed to support the objectives of both owners 
and participants.
---------------------------------------------------------------------------

    \23\ 17 CFR 240.17Ad-22(d)(8).
---------------------------------------------------------------------------

    The proposed rule change requires the GNC to endeavor to develop a 
Board that represents a broad range of skills and experience. We 
believe this is consistent with the requirement to have policies and 
procedures reasonably designed to promote the effectiveness of the 
clearing agency's risk management procedures. A Board with a broad 
range of skill and expertise, including in risk management, will be 
better able to oversee the development, implementation, effectiveness, 
and potential areas in need of improvement or change of a clearing 
agency's risk management framework, policies, and procedures.
    The Commission also believes that increasing the number of Public 
Directors from three to five is consistent with both the Act and Rule 
17Ad-22(d)(8). The Commission agrees with OCC that the input and 
expertise of two more Public Directors will further benefit OCC in the 
administration of its affairs in respect of the markets that it serves, 
and in the discharge of its obligations as a systemically important 
financial market utility.

V. 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 \24\ and the 
rules and regulations thereunder.
---------------------------------------------------------------------------

    \24\ 15 U.S.C. 78q-1.
---------------------------------------------------------------------------

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\25\ that the proposed rule change (File No. SR-OCC-2014-09) be and 
hereby is approved.\26\
---------------------------------------------------------------------------

    \25\ 15 U.S.C. 78s(b)(2).
    \26\ In approving the proposed rule change, the Commission 
considered the proposal's impact on efficiency, competition, and 
capital formation. 15 U.S.C. 78c(f).

    For the Commission by the Division of Trading and Markets, 
pursuant to delegated authority.\27\
---------------------------------------------------------------------------

    \27\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-16370 Filed 7-11-14; 8:45 am]
BILLING CODE 8011-01-P

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