Self-Regulatory Organizations; The Options Clearing Corporation; Order Approving Proposed Rule Change Related to The Options Clearing Corporation's Board of Directors and Board Committee Charters, 54385-54395 [2018-23506]
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designed to promote just and equitable
principles of trade, to foster cooperation
and coordination with persons engaged
in regulating transactions in securities,
to remove impediments to and perfect
the mechanism of a free and open
market and a national market system
and, in general, to protect investors and
the public interest, and not be designed
to permit unfair discrimination between
customers, issuers, brokers, or dealers.
The Commission also finds that the
proposed rule change is consistent with
Section 6(b)(8) of the Act,19 which
requires that the rules of an exchange
not impose any burden on competition
that is not necessary or appropriate in
furtherance of the purposes of the Act.
The proposal would set forth an
additional procedure governing how the
Exchange would determine the Official
Closing Price in Exchange-listed
securities that are Derivative Securities
Products when the Exchange does not
conduct a Closing Auction or if a
Closing Auction trade is less than a
round lot. The Commission notes that
the primary listing market’s closing
price for a security is relied upon by
market participants for a variety of
reasons, including, but not limited to,
calculation of index values, calculation
of the net asset value of mutual funds
and exchange-traded products, the price
of derivatives that are based on the
security, and certain types of trading
benchmarks such as volume weighted
average price strategies. As the
Exchange notes, its current calculation
for the Official Closing Price in such a
scenario is designed to utilize more
recent and reliable market information
to provide a closing price that more
accurately reflects the true and current
value of a security that may be thinly
traded or generally illiquid and when
the Official Closing Price for such
security may otherwise be based on a
potentially stale last-sale trade.20 The
Exchange now proposes to exclude from
the TWAP calculation used under this
process a midpoint that is based on an
NBBO that the Exchange believes is too
wide and therefore not reflective of the
security’s true and current value.21 The
Commission believes that this
exclusion, utilizing a specified
percentage of the midpoint value, is a
reasonable approach to avoid utilizing
market information in the TWAP
calculation that may provide less
accurate information about the true
value of a security. The Commission
therefore believes that the Exchange’s
proposal is reasonably designed to
19 15
U.S.C. 78f(b)(8).
Notice, supra note 6, at 46981.
21 See id.
20 See
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achieve the Act’s objectives to protect
investors and the public interest.
Accordingly, the Commission finds that
the proposed rule change is consistent
with the requirements of the Act.
IV. Conclusion
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act,22 that the
proposed rule change (SR–NYSEArca2018–63) be, and hereby is, approved.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.23
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018–23507 Filed 10–26–18; 8:45 am]
BILLING CODE P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–84473; File No. SR–OCC–
2018–012]
Self-Regulatory Organizations; The
Options Clearing Corporation; Order
Approving Proposed Rule Change
Related to The Options Clearing
Corporation’s Board of Directors and
Board Committee Charters
October 23, 2018.
I. Introduction
On August 24, 2018, The Options
Clearing Corporation (‘‘OCC’’) filed with
the Securities and Exchange
Commission (‘‘Commission’’) the
proposed rule change SR–OCC–2018–
012 (‘‘Proposed Rule Change’’) pursuant
to Section 19(b) of the Securities
Exchange Act of 1934 (‘‘Exchange
Act’’) 1 and Rule 19b–4 2 thereunder to
make changes to OCC’s (1) Audit
Committee Charter, (2) Compensation
and Performance Committee Charter, (3)
Governance and Nominating Committee
Charter, (4) Risk Committee Charter, (5)
Technology Committee Charter and (6)
Board of Directors Charter. The
Proposed Rule Change was published
for comment in the Federal Register on
September 10, 2018,3 and the
Commission has received no comments
in response.
II. Background 4
The Proposed Rule Change would
make certain changes to OCC’s (1) Audit
22 15
U.S.C. 78s(b)(2).
CFR 200.30–3(a)(12).
1 15 U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 Securities Exchange Act Release No. 84021 (Sep.
4, 2018), 83 FR 45706 (Sep. 10, 2018) (SR–OCC–
2018–012) (‘‘Notice’’).
4 All terms with initial capitalization that are not
otherwise defined herein have the same meaning as
23 17
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54385
Committee (‘‘AC’’) Charter (‘‘AC
Charter’’), (2) Compensation and
Performance Committee (‘‘CPC’’)
Charter (‘‘CPC Charter’’), (3) Governance
and Nominating Committee (‘‘GNC’’)
Charter (‘‘GNC Charter’’), (4) Risk
Committee (‘‘RC’’) Charter (‘‘RC
Charter’’), (5) Technology Committee
(‘‘TC’’) Charter (‘‘TC Charter’’), and (6)
Board of Directors (‘‘Board’’) Charter
(‘‘Board Charter’’).5 These changes are
described and broadly categorized
below.6
As a general matter, the Proposed
Rule Change would amend the charters
to provide that in carrying out their
responsibilities the Board and the
committees would prioritize the safety
and efficiency of OCC, generally support
the stability of the broader financial
system and consider the legitimate
interests of Clearing Members,
customers of Clearing Members and
other relevant stakeholders, including
OCC’s shareholders and other
participant exchanges, taking into
account prudent risk management
standards (including systemic risk
mitigation) and industry best practices.
A. Clarity and Transparency
Several of the changes within the
Proposed Rule Change seek to better
describe OCC’s current processes. Such
changes range from clarification (e.g.,
changing ‘‘annually’’ to ‘‘each calendar
year’’) to removal of redundancies (e.g.,
where a requirement is found elsewhere
in OCC’s rules) to stating the existing
functions and responsibilities of OCC’s
Board and Board committees. These
changes are described in more detail
below.
The Proposed Rule Change would
make a number of changes to OCC’s
Board committee charters to clarify that,
where certain actions were required to
be performed ‘‘annually’’ under the
charters, those actions would now be
required to occur ‘‘each calendar year.’’
OCC believes that it is appropriate to
clarify which actions are required on an
every twelve months-basis, particularly
in cases where a regulatory requirement
set forth in the OCC By-Laws and Rules. OCC’s ByLaws and Rules can be found on OCC’s public
website: https://optionsclearing.com/about/
publications/bylaws.jsp.
5 See Notice at 45707–08. As discussed below, the
changes to the Board Charter would involve
incorporating provisions from OCC’s Corporate
Governance Principles (‘‘CGP’’) and changing the
title of the resultant document to the Board Charter
and Corporate Governance Principles.
6 Many of the components of the Proposed Rule
Change may serve more than one purpose and
could, therefore, be discussed in more than one
category herein. The categorization of changes is
not designed to denote otherwise.
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to do so exists.7 Such changes include
amending the committee charters to
provide that the following activities
must occur on a calendar year basis: (i)
Appointment of directors to particular
committees; (ii) committee meetings
with certain members of management in
executive sessions conducted regularly
(no less than once per calendar year);
(iii) reporting from each committee to
the Board summarizing that committee’s
activities for the prior year; (iv)
confirmation by each committee to the
Board that all responsibilities outlined
in the committee’s charter have been
carried out; and (v) provision of each
committee’s assessment of its and its
individual members’ performance to the
GNC for review.
The Proposed Rule Change would
also make a number of clarifying
changes to each charter. For example,
with respect to the AC Charter, the
Proposed Rule Change would replace
the current reference to ‘‘financial and
senior management’’ to OCC’s
‘‘Corporate Finance Department’’ in
describing the AC’s responsibility to
facilitate open communication between
external auditors and certain groups
within OCC. Additionally, the AC
Charter would be amended to provide
that the AC is authorized to approve the
‘‘issuance of the annual financial’’
statements after its review of such
statements.
The Proposed Rule Change would
also amend certain descriptions of the
AC’s responsibilities. For example, the
Proposed Rule Change would revise text
describing the role of the AC, along with
external auditors, as responsible for
‘‘planning and carrying out audit work,
as appropriate’’ rather than ‘‘planning
and carrying out a proper audit.’’ The
AC Charter’s description of the AC’s
power to delegate to the Chief Audit
Executive (‘‘CAE’’) ‘‘within the external
audit limits’’ would be changed for
accuracy to read ‘‘within the co-sourced
audit hour limits.’’
With respect to the CPC Charter, the
Proposed Rule Change would remove a
number of specified responsibilities and
replace them with a general statement
that the committee is required to
perform activities consistent with the
CPC Charter as it deems necessary or
appropriate or as are delegated to the
committee by the Board. The specified
responsibilities that would be removed
include, for example, a provision that
states that the committee reviews
special financial matters as requested by
the Board, and provisions addressing
the committee’s review and approval of
policies and programs regarding salary
7 See
Notice at 45708.
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compensation and incentive
compensation and its review of material
changes to executive management
benefits.
With respect to the GNC Charter, the
Proposed Rule Change would make
revisions such that the GNC is no longer
responsible for recommending to the
Board candidates for nomination for
election or re-election by the
stockholders and any Board vacancies
that are to be filled by the Board.8
With respect to the RC Charter, the
Proposed Rule Change would add a
clarifying statement to state that the RC
is required to perform its
responsibilities in accordance with the
provisions of the RC Charter and
applicable regulatory requirements.
Regarding meetings of the RC, the RC
Charter would specify that joint
meetings with other Board committees
count toward the requirement to meet at
least six times a year. The Proposed
Rule Change would also clarify that inperson attendance at meetings is
preferred.
With respect to the TC Charter, the
Proposed Rule Change would revise the
TC Charter to remove specific references
to the committee’s oversight of OCC’s
physical security and instead describe
the committee’s responsibility for
overseeing the adequacy of OCC’s
management of information security
risks, which generally includes:
Oversight of the confidentiality,
integrity, and availability of OCC data;
the security of the information systems
used to process, transmit, and store OCC
information; and the physical,
personnel, procedural, administrative,
and environment security disciplines.
The Proposed Rule Change would
replace language stating that the TC will
periodically review and appraise OCC’s
crisis management plans with language
stating that the TC will oversee and
receive a quarterly report on OCC’s
Business Continuity and Disaster
Recovery Programs because crisis
management plans are incorporated
within the Business Continuity and
Disaster Recovery Programs.
The Proposed Rule Change would
delete certain general statements
regarding the TC’s duty to make
recommendations to the Board with
respect to IT-related projects and
investments and critically review the
progress of such projects and/or
technology architecture decisions.
8 The requirement that the GNC nominate
candidates is provided explicitly in the By-Laws.
See OCC By-Law Article III, Sections 5 and 6A. The
GNC Charter would specify that the GNC’s role in
this context applies specifically to Public Directors
and Member Directors to promote consistency with
the By-Laws.
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These general statements would be
replaced with more specific
descriptions of the TC’s duties. For
example, the TC will receive a report on
management’s progress in executing on
major information technology (‘‘IT’’)
initiatives, technology architecture
decisions and IT priorities. The TC will
also review and recommend to the
Board for approval material changes to
(i) the operational execution and
delivery of core clearing and settlement
services, and (ii) written policies
concerning information security risk.
The Proposed Rule Change would
make similar changes to the TC Charter
with respect to other TC
responsibilities. For example, the
Proposed Rule Change would revise the
language describing the TC’s
responsibility to monitor and assess
OCC’s management of IT-related
compliance risks as a responsibility to
monitor and oversee the overall
adequacy of OCC’s IT and operational
control environment, including the
implementation of key controls in
response to regulatory requirements.
With respect to the Board Charter, the
Proposed Rule Change will incorporate
the existing CGP into the Board Charter
and rename the charter as the ‘‘Board of
Directors Charter and Corporate
Governance Principles’’ to reflect the
change. OCC believes this change is
appropriate to eliminate significant
overlap between the contents of the two
existing documents and thereby make
the consolidated provisions in the Board
Charter easier for Clearing Members and
other OCC stakeholders to access, use,
and understand.9 For example, the
existing CGP and Board Charter each
address aspects of the Board such as its
size and composition. The Proposed
Rule Change would make changes to the
contents of the CGP to conform the
existing provisions to the structure and
organization of the Board Charter and
related requirements in the By-Laws and
Rules.10 However, the majority of the
provisions in the CGP would be
incorporated in their existing form, and
these provisions address, for example,
the size of the Board and its
9 See
Notice at 45713.
example, the CGP provides in one instance
that all materials for Board meetings are made
available online by the office of the secretary. This
particular provision in the CGP would not be
incorporated into the Board Charter, but the Board
Charter would be amended to provide that OCC
operates a portal for the general dissemination of
meeting and other written materials to directors, a
process that is consistent with how OCC distributes
such materials today. In addition, the Proposed
Rule Change would state in the Board Charter that
Public Directors do not have term limits, consistent
with the requirements in Article III, Section 6 of the
OCC By-Laws.
10 For
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composition, membership criteria,
appointment of the GNC, the selection
of Member, Public, Exchange, and
Management Directors, conduct matters,
ethics and conflicts of interest,
compensation, access to senior
management, and Board and Board
committee evaluations.
As a further result of incorporation of
the CGP into the Board Charter, the
Proposed Rule Change would remove
certain existing provisions in the Board
Charter that specifically reference, or are
duplicative of, more comprehensive
descriptions from the CGP. Specifically,
sections of the Board Charter would be
replaced with more detailed
explanations drawn from the CGP with
respect to: (i) Board composition; (ii)
qualification standards for directors; (iii)
election of directors, resignation, and
disqualification; (iv) tenure, term, and
age limitations; and (v) calling of Board
meetings, selection of agenda items, and
attendance.
Currently, the Board Charter sets forth
a number of functions and
responsibilities of the Board. The
Proposed Rule Change would reorganize
this list of functions and responsibilities
in a new section regarding the mission
of the Board and would make nonsubstantive changes to some of the
descriptions of the Board’s
responsibilities. For example, the Board
Charter currently provides that the
Board is responsible for advising,
approving, and overseeing OCC’s
business strategies, including
expansions of clearing and settlement
services to new business lines, as well
as monitoring OCC’s performance in
delivering clearance and settlement
services. The Proposed Rule Change
would amend the Board Charter to
provide that the Board is responsible for
overseeing OCC’s business strategies,
including expansions of clearance and
settlement services to new business
lines and product types, to ensure they
reflect the legitimate interests of
relevant stakeholders and are consistent
with the public interest. As a further
example, the Proposed Rule Change
would revise the Board’s responsibility
to oversee ‘‘OCC’s information
technology strategy, infrastructure,
resources and risks’’ to provide that the
Board’s responsibility is to oversee
‘‘OCC’s technology infrastructure,
resources, and capabilities to ensure
resiliency with regard to OCC’s
provision of its clearing, settlement, and
risk management services.’’ The
Proposed Rule Change would also
remove oversight of human resources
programs from the Board Charter
because that responsibility has been
delegated to the CPC under the current
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CPC Charter. OCC stated that the
changes described above are designed to
improve the readability of the Board
Charter as well as to specify additional,
specific considerations of the Board
with respect to particular
responsibilities.11
In addition to the changes described
above, the Proposed Rule Change would
specify that the Board’s authority
extends to performing such functions as
it believes are appropriate or necessary,
or as otherwise prescribed by rules or
regulation, including OCC’s By-Laws
and Rules, ‘‘or other policies.’’ OCC
stated that this change is intended to
clarify that the scope of the Board’s
authority extends to all of OCC’s
policies.12
The Board Charter would also provide
that the Board is responsible for the
business and affairs of OCC, and that the
Board will continue to be responsible
for performing such other functions as
the Board believes appropriate or
necessary or as otherwise prescribed by
rules or regulations, including OCC’s
By-Laws and Rules. Pursuant to this
broad responsibility, OCC believes that
the functions and responsibilities of the
Board will remain consistent
notwithstanding certain proposed
deletions or rephrasing regarding the
existing list of responsibilities.13 For
example, the Board Charter would no
longer specify that the Board will
review committee charters and reports
of committee activities; however, it
would nevertheless provide that the
Board is responsible for establishing a
written charter for each committee and
that each committee will be responsible
for providing an annual report to the
Board regarding its activities.
The Proposed Rule Change would
make certain other changes to the Board
Charter. The Proposed Rule Change
would delete the provision noting that
the Member Vice Chairman of the Board
has the responsibilities set forth in the
By-Laws. The Proposed Rule Change
would also delete the current footnote
one (1) from the Board Charter, which
provides an example of an instance in
which certain provisions of the By-Laws
provide that the Board should not take
action. The amended Board Charter will
continue to provide that the Board’s
responsibilities and duties are subject to
any exceptions provided in OCC’s
Amended and Restated Certificate of
Incorporation or the By-Laws and Rules.
OCC believes that the footnote
providing an example of such an
instance is unnecessary, and that its
Notice at 45714.
Notice at 45714, n. 78.
13 See Notice at 45714, n. 79.
deletion would improve readability of
the Board Charter.14
Additionally, the Proposed Rule
Change includes revisions (including by
removing or relocating existing content
and changing word choices) intended to
reduce redundancy and better organize
the content of the charters to more
clearly state what a committee is
authorized or obligated to do. OCC
stated that such changes will not
substantively alter the responsibilities
or activities of the relevant committee.15
For example, all of the charters would
be amended to state that the Board or
the relevant committee will review the
charter ‘‘at least once every twelve
months’’ instead of ‘‘annually’’ to
provide further clarity around the
intended frequency. Further, the
statement in the TC Charter that the TC
‘‘shall also have the authority to perform
any other duties’’ consistent with the TC
Charter would be revised to provide that
the TC ‘‘is authorized to perform any
other duties’’ consistent with the TC
Charter. In addition, the statement in
the AC Charter that the committee shall
‘‘approve material changes in
accounting principles and practices’’
would state that the AC ‘‘is authorized
to approve material changes in
accounting principles and practices.’’
Consistent with this change, where a
charter currently states that the Board or
a committee ‘‘shall approve’’ a
particular matter, the charter would
state instead that the Board or a
committee is ‘‘authorized to approve’’
the particular matter. OCC believes such
changes properly clarify the oversight
role of the Board and the committees,
and that approval of a particular matter
is not mandatory.16
The Proposed Rule Change would
make amendments acknowledging,
where relevant based on the particular
charter, that its Executive Chairman
(‘‘EC’’) also serves as its Chief Executive
Officer (‘‘CEO’’), and that therefore
certain responsibilities and
considerations that currently apply to
the EC would also apply to the CEO. All
charters would also be revised to state
that a role of the Board or the
committee, as applicable, is to advise
management.
B. Public and Stakeholder Interests
The Proposed Rule Change would
specify that the GNC shall review the
composition of the Board for
consistency with public interest and
regulatory requirements at least every
three years rather than periodically. The
11 See
14 See
12 See
15 See
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54387
Notice at 45715.
Notice at 45707.
16 See Notice at 45707, n. 16.
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GNC Charter would further be amended
to require yearly GNC review of the
committee charters for consistency with
the public interest and other regulatory
requirements.17 Lastly, the Proposed
Rule Change would require the GNC
annually to review and advise the Board
with regard to director independence.
C. Board and Management Expertise
The Proposed Rule Change would
make several changes related to the
experience and skills of the Board and
management. With respect to the CPC
Charter, the Proposed Rule Change
would clarify the role that the CPC plays
in oversight of succession planning
regarding OCC’s Management
Committee. A new provision would also
provide that the CPC must review the
results of Management Committee
succession planning activities at least
once every twelve months.
With respect to the GNC Charter, the
Proposed Rule Change would make two
revisions that specifically address the
experience and skills of the Board and
management. First, the Proposed Rule
Change would amend the GNC Charter
to establish new responsibilities for the
GNC to advise the Board on matters
pertaining to director leadership
development and succession planning.
Second, the Proposed Rule Change
would revise the language regarding the
GNC’s responsibilities with respect to
ensuring that directors are appropriately
qualified. For example, rather than
providing that the GNC will work
toward developing a Board with a broad
spectrum of experience and expertise,
the GNC Charter would provide that the
GNC shall identify, for purposes of
making recommendations to the Board,
the criteria, skills, experience, expertise,
attributes, and professional backgrounds
(collectively, the ‘‘Standards’’) desirable
in directors to ensure the Board is able
to discharge its duties and
responsibilities. Relatedly, the GNC
Charter would no longer include
language providing that the GNC is
responsible for recommending to the
Board for approval and overseeing the
implementation and effectiveness of
OCC’s policies and procedures for
identifying and reviewing Board
nominee candidates, including the
criteria for Board nominees.
With respect to the Board Charter, the
Proposed Rule Change would provide
that the Board is responsible for
overseeing OCC’s activities through
regular assessments of Board and
individual director performance.
Because the Board has delegated
responsibility to the GNC for the annual
evaluation of the Board and its
committees, OCC believes that it is no
longer necessary to specify that the
Board would have an annual selfevaluation obligation, as provided in the
current charter.18 The Proposed Rule
Change would further amend the Board
Charter to provide that the regular
assessments will no longer include a
focus on individual director
performance, but will instead focus
primarily on the performance of the
Board and each committee as a whole.
OCC stated that focusing the annual
self-evaluation on individual director
performance is less effective than
focusing on the performance of each
committee as a whole because not every
director has the opportunity to work
with each other director.19
D. Clear and Direct Lines of
Responsibility
The Proposed Rule Change would
amend the charters to provide clearer
information regarding the functions and
responsibilities of the Board and
committees and reporting requirements.
The Proposed Rule Change would
amend all of the charters to specify that
the Board and each committee may
delegate authority to one or more
designated officers of OCC or may refer
a risk under its oversight to another
committee or the Board as advisable or
appropriate. The proposed revisions
would provide, however, that the
delegating body will retain the
obligation to oversee any such
delegation or referral and assure itself
that delegation and reliance on the work
of any delegate is reasonable.
The Proposed Rule Change would
further clarify that, where the Board or
a committee has authority to approve
reports or other proposals in its business
judgment, such as materials provided by
management, it is not obligated to
approve such reports or other proposals,
and related modifications would
articulate a clear means of recourse for
the committee or the Board if it does not
approve. OCC stated that the purpose of
these changes would be to promote
governance arrangements that clearly
prioritize the safety and efficiency of
OCC and specify clear and direct lines
of responsibility in its governance
arrangements.20 The Proposed Rule
Change would amend certain committee
charters to address committee member
vacancies to provide that in the event of
a vacancy, the applicable committee
would continue to undertake its
18 See
17 The
GNC currently performs such a review of
the Board Charter annually.
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Notice at 45715.
id.
20 See Notice at 45708, n. 23.
19 See
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responsibilities, so long as the
remaining committee members are
capable of satisfying the quorum
requirement.21
The AC Charter would describe new
responsibilities for the AC that include
reviewing the impact of litigation and
other legal matters that may have a
material impact on OCC’s financial
statements and overseeing the structure,
independence and objectivity, staffing,
resources, and budget of OCC’s
compliance and audit departments. The
Proposed Rule Change would amend the
AC Charter and the RC Charter to
transfer responsibility for reviewing the
investigation and enforcement outcomes
of disciplinary actions taken by OCC
against Clearing Members from the AC
to the RC. OCC believes that the RC is
appropriately situated to review
disciplinary actions against Clearing
Members given the committee’s broader
role in overseeing OCC’s management of
third party risks, which includes OCC
counterparties such as Clearing
Members.22
The Proposed Rule Change would
revise the description of the AC’s
responsibility with respect to OCC’s
compliance department by providing
more generally that the AC will review
ongoing compliance monitoring
activities by reviewing reports and other
communications prepared by the Chief
Compliance Officer (‘‘CCO’’) and
inquire of management regarding steps
taken to deal with items raised. As a
result of this change, the AC Charter
would no longer specify that the AC is
responsible for approving the annual
Compliance Testing Plan, monitoring
progress against the annual Compliance
Testing Plan, and approving any
recommendations by the CCO relating to
that plan. OCC stated that the purpose
of this change is to shift OCC’s
compliance department to a monitoring
role and away from its historic role of
creating a specific plan to follow, as
well as to facilitate the transition of
validation responsibilities to OCC’s
internal audit department, over which
the compliance department would have
monitoring responsibilities.23 The AC
would also be authorized to approve
management’s recommendations
regarding approval or replacement of
the CCO.
Under the Proposed Rule Change, the
AC charter would no longer expressly
require annual Board approval regarding
audit services. However, the AC would
21 No such change would be added to the GNC
Charter because the matter is already addressed
therein.
22 See Notice at 45712.
23 See Notice at 45709.
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be required to confirm annually to the
Board that all of the AC’s
responsibilities have been carried out
and provide an annual report to the
Board summarizing the AC’s activities
during the previous year.
The Proposed Rule Change would
amend the AC Charter to provide that,
in addition to the CAE and CCO, the
Chief Financial Officer (‘‘CFO’’) also
will be authorized to communicate
directly with the Chair of the AC with
respect to any of the responsibilities of
the AC between meetings of the AC
given the CFO’s role as part of OCC’s
executive team and his/her
responsibility for OCC finances.
The Proposed Rule Change would
revise the CPC Charter to provide that
the CPC will oversee and monitor the
activities of OCC’s Administrative
Committee, including the approval of
the Administrative Committee’s charter
and changes thereto and of the members
of the Administrative Committee. OCC
believes that these allocations of
responsibility are appropriate given the
CPC’s current oversight of the
Administrative Committee, whereby the
CPC is responsible for, among other
things, appointing members of the
Administrative Committee and
overseeing and monitoring the activities
of the Administrative Committee with
respect to retirement and retirement
savings plans.24
The Proposed Rule Change would
amend the CPC Charter to state that the
CPC assists the Board in overseeing
risks related to OCC’s general business,
regulatory capital, investments,
corporate planning, compensation, and
human capital in addition to assisting
the Board in executive management
succession planning and performance
assessments; however, OCC
management will continue to identify,
manage, monitor, and report the
associated risks to the Board. The
Proposed Rule Change would clarify
that the corporate plan and budget are
annual arrangements, and that the CPC
oversees their alignment with OCC’s
business strategy.
The Proposed Rule Change would
also address the CPC’s oversight of
OCC’s capital plan. The CPC Charter
would clarify that oversight of OCC’s
capital plan includes the written
policies adopted thereunder, which
include OCC’s fee, dividend, and refund
policies. Revisions to the CPC Charter
would also clarify that the CPC must
review the capital plan at least once
every twelve months, and that the
committee makes recommendations to
the Board concerning capital
requirements, refund payments, and
dividend payments. In addition, the
Proposed Rule Change would add a
provision to the CPC Charter requiring
management to provide a quarterly
performance report to the committee
against the capital plan.
Regarding the CPC’s review of Public
Director compensation and the
recommendations that it provides to the
Board related thereto, a requirement
would be added to the CPC Charter for
the committee to engage in these
activities not less than once every two
years. OCC believes that a two-year
period is appropriate for such a review
because the overall trends in industry
compensation generally do not change
dramatically from year-to-year.25 The
CPC would no longer be required to
perform a full review of each
component of Public Director
compensation packages and recommend
adjustments to the Board on a yearly
basis. The Proposed Rule Change would
also clarify that the CPC is not
authorized to adopt or amend
compensation, retirement, or welfare
benefit plans that require Board
approval. The Proposed Rule Change
would also add a new requirement that
the CPC must review OCC’s insurance
program at least once every twelve
months.
The Proposed Rule Change would
amend the GNC Charter to establish new
responsibilities for the GNC to approve
all material changes to written policies
concerning related-party transactions
and recommend such changes to the
Board for approval. The GNC Charter
would also be amended to provide that
the GNC shall review and, if
appropriate, approve or ratify, any
related-party transactions involving
OCC in accordance with the written
policy governing such transactions.
Because the GNC is already responsible
for the review of conflicts of interests of
directors and the manner in which such
conflicts will be monitored and
resolved, OCC believes that it is
appropriate for the GNC to assume the
additional responsibility of reviewing
related-party transactions.26
Additionally, the Proposed Rule Change
would remove the ability for a designee
of the chair of the GNC to call an
additional meeting beyond the four
times per year that the GNC must meet.
OCC believes this change would help
ensure that the committee’s time and
resources would be utilized
appropriately.27
25 See
id.
Notice at 45710–11.
27 See Notice at 45711, n. 47.
26 See
24 See
Notice at 45710.
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The RC Charter currently provides
that the RC assists the Board in
overseeing OCC’s policies and processes
for identifying and addressing strategic,
operational, and financial (e.g., credit,
market, liquidity, and systemic) risks.
The Proposed Rule Change would
amend the RC Charter to state more
specifically that the RC will have
responsibility for assisting the Board in
its oversight of OCC’s financial,
collateral, risk model, and third party
risk management processes.28
Corresponding changes would also be
made to clarify that the RC has an
oversight role regarding these
responsibilities, and that it remains OCC
management’s responsibility to identify,
manage, monitor, and report risks in
these areas. The RC would continue to
be responsible for functions delegated to
it under the By-Laws and Rules and as
may be delegated to it by the Board.
The current provisions of the RC
Charter dealing with the oversight of
credit, collateral, liquidity, and third
party risks would be replaced with more
specific provisions. At least once every
twelve months, the RC would be
required to review the adequacy of
OCC’s management of credit, collateral,
liquidity, and third party risks. In
connection with these responsibilities,
the RC would receive monthly reports
from OCC management regarding the
effectiveness of OCC’s management of
credit exposures and liquidity risks.29
The RC would also be required to
review the adequacy of OCC’s secured
committed liquidity facilities at least
once every twelve months and
recommend the size and composition of
such facilities to the Board for approval.
The RC would also be responsible for
approval of all material changes to
written policies regarding risk
management in these areas and
recommending such changes to the
Board.
The Proposed Rule Change would
make explicit the RC’s responsibilities
in connection with the review and
approval of any new products that
materially impact OCC’s established risk
profile or introduce novel or unique
financial, risk model, and third party
risks. The RC would refer any such new
28 As described below, the RC would no longer be
responsible for oversight of strategic or operational
risks because those matters would be overseen by
the Board as they relate to enterprise risk
management.
29 For example, the report regarding the
effectiveness of the management of credit exposures
would include the results of: (i) A comprehensive
analysis of OCC’s existing stress testing scenarios,
models and underlying parameters and
assumptions, and (ii) a sensitivity analysis of OCC’s
margin models and a review of the associated
parameters and assumptions for back testing.
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products that it approves to the Board
for its potential approval.
The Proposed Rule Change would
amend the RC Charter to codify the RC’s
responsibility to oversee OCC’s
Recovery and Orderly Wind-down Plan
(‘‘RWD Plan’’). This responsibility
would include reviewing the adequacy
of the RWD Plan at least once every
twelve months. If the committee
approves the RWD Plan, it would next
recommend the RWD Plan to the Board
for potential Board approval. The RC
would also have responsibility for
reviewing and approving any material
changes to the RWD Plan. In the event
the RC approves any such changes, it
would, in turn, recommend the changes
to the Board for its potential approval.
The Proposed Rule Change would
amend the RC Charter to detail the RC’s
responsibility regarding the structure
and staffing of OCC’s corporate risk
management functions in addition to
OCC’s financial risk management group.
The RC must review structure and
staffing in these areas at least once every
twelve months. A provision would also
be added requiring that the RC review
and approve the Chief Risk Officer’s
goals and objectives, and any material
changes thereto, at least once every
twelve months.
Further, the Proposed Rule Change
would add a statement to the RC Charter
to clarify that the RC is responsible for
reviewing third-party assessment
reports as to financial, collateral, risk
model, and third-party risk management
processes and for reviewing OCC
management’s remediation efforts
pertaining to any such reports.
The Proposed Rule Change would
amend the TC Charter to clarify that the
TC’s role is one of oversight, and that it
remains the responsibility of OCC
management to identify, manage,
monitor, and report on IT and other
operational risks arising from OCC’s
business activities. The Proposed Rule
Change would also amend the TC
Charter such that the TC would have
responsibility for OCC’s operational
initiatives, including approving major
IT and operational initiatives,
recommending major capital
expenditures to the Board, and
approving the IT and operational budget
for each calendar year.30
The Proposed Rule Change would
amend the Board Charter to set forth
certain key considerations and
30 Relatedly, the Proposed Rule Change would
amend the TC Charter so that it would no longer
require that the TC work with, or report to, the AC
and RC to monitor the quality and effectiveness of
IT systems and processes that relate to or affect
OCC’s internal control systems and risk
management systems.
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responsibilities. These include
providing that the Board will exercise
its authority to provide for governance
arrangements that, among other things,
support applicable public interest
requirements and the objectives of
owners and participants, establish that
the Board and senior management have
appropriate experience and skills to
discharge their duties and
responsibilities, specify clear and direct
lines of responsibility, and consider the
interests of Clearing Members’
customers.31 The Proposed Rule Change
would also revise the Board Charter to
note that the Board has explicitly
delegated management of specific risks
to the Board committees, and that to the
extent a specific risk is not retained by
the Board or otherwise assigned to a
Board committee, such risk shall be
overseen by the RC.32 Similarly, the
Proposed Rule Change would amend the
Board Charter to state that the Board is
responsible for approving the
compensation of the EC and certain
other officers because the Board has
delegated responsibility to the CPC to
evaluate and fix such compensation.
Finally, the Proposed Rule Change
would amend the Board Charter to
provide that a number of different
activities related to the conduct and
functioning of the Board would involve
participation by or input from certain
other officers of OCC that serve
functions relevant to the topic at issue.
For example, the Board Charter would
state that the EC and CEO, in
consultation with the Chief Operating
Officer (‘‘COO’’) and Chief
Administrative Officer (‘‘CAO’’), other
directors or officers of OCC, and the
Corporate Secretary shall establish the
agenda for Board meetings.33 OCC
31 The Board Charter would also provide as a
guiding principle that the Board is, among other
things, mindful of the public interest as it fulfills
its duties by complying with the obligations
imposed on it under relevant law, and that it
discloses major decisions to relevant stakeholders
and the public.
32 The amended Board Charter would further
specify that the Board may form and delegate
authority to committees and may delegate authority
to one or more of its members and to one or more
designated officers of OCC, but would note that the
Board retains the obligation to oversee any such
delegation or referral and assure itself that
delegation and reliance on the work of any delegate
is reasonable.
33 Similarly, the Proposed Rule Change would
amend the Board Charter to provide that the CEO,
COO and CAO would have the authority to invite
employees to Board meetings, that such officers
encourage members of senior management to
respond to questions posed by directors relating to
their areas of expertise, and that directors shall
coordinate access to members of senior
management and outside advisors through such
officers. The criteria for Board member eligibility
would also be expanded to ensure that candidates’
experience and expertise are not only adequate to
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stated that these changes are designed to
make clear the roles and authority of
certain officers and to ensure that input
from additional officers is included
where appropriate.34
The Proposed Rule Change would
also amend the charters to provide for
clear reporting requirements. The
Proposed Rule Change would amend the
AC Charter to provide that certain
mandatory reports be sent to the AC for
review, including quarterly reports from
the CAE regarding the internal audit
plan and from the General Counsel
regarding existing, pending, or
threatened litigation.35 OCC believes
that such quarterly reports would help
provide the AC with the necessary
information to appropriately discharge
its duties and responsibilities.36 OCC
also believes that these quarterly reports
to the AC would help specify clear and
direct lines of responsibility in OCC’s
governance arrangements by ensuring
that these officers keep the AC apprised
of OCC’s ongoing performance or
handling of these matters, which in turn
would allow the AC to more effectively
carry out its oversight functions and the
responsibilities associated therewith.37
A new provision of the CPC Charter
would require management to provide a
quarterly report to the committee that
contains information on OCC’s
performance against the corporate plan
and the budget. OCC believes that
quarterly reporting by management to
the CPC would help specify clear and
direct lines of responsibility in OCC’s
governance arrangements by ensuring
that management keeps the CPC
apprised of OCC’s ongoing performance
on these matters, which, in turn, would
allow the CPC to more effectively carry
out its oversight functions and the
responsibilities associated therewith.38
The Proposed Rule Change would
also require OCC management to
provide the RC with quarterly reports
regarding the effectiveness of OCC’s
management of collateral and thirdparty risks. OCC believes that this
quarterly reporting would help specify
clear and direct lines of responsibility in
OCC’s governance arrangements by
offer advice and guidance to the Executive
Chairman, but also to the CEO, COO, and CAO.
34 See Notice at 45715.
35 The Proposed Rule change would also include
certain other descriptive changes to the AC Charter,
such as providing that the AC will review OCC’s
Reporting Concerns and Whistleblower Policy (and
specifying that such review will occur each
calendar year), rather than providing a more
detailed description of what the reporting concerns
and whistleblower procedures under the relevant
policy entail.
36 See Notice at 45709.
37 See Notice at 45709, n. 33.
38 See Notice at 45710, n. 42.
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ensuring that management keeps the RC
apprised of OCC’s ongoing performance
on these matters, which, in turn, would
allow the RC to more effectively carry
out its oversight functions and the
responsibilities associated therewith.39
A new provision in the RC Charter
would provide that, from time to time,
the RC may receive reports and
guidance relating to financial risk issues
from, among others, OCC’s Financial
Risk Advisory Council, and that the RC
would consider and discuss such
reports and consider how such financial
risk issues may impact the options and
futures industries. The RC would take
such guidance into account in the
exercise of its fiduciary judgment and
the performance of its functions and
responsibilities.
The Proposed Rule Change would
amend the TC Charter to introduce
mandatory periodic reporting from
management on major IT initiatives. The
TC would oversee and receive quarterly
reports from management that provide
information on: (i) Executing on major
IT initiatives, technology architecture
decisions (as applicable) and IT
priorities as well as overall IT
performance; (ii) the effectiveness of the
management of information security
risks; (iii) OCC’s Business Continuity
and Disaster Recovery Programs,
including the progress on executing the
annual test plan and achieving recovery
time objectives; and (iv) major
operational initiatives and metrics on
the effectiveness of OCC’s operations
with reference to key indicators. OCC
believes that such reports would
provide the TC with the necessary
information to discharge its oversight
duties and responsibilities appropriately
and would facilitate dialogue between
the TC and OCC’s senior IT management
team. OCC believes that this reporting
would also help specify clear and direct
lines of responsibility in OCC’s
governance arrangements by ensuring
that management keeps the TC apprised
of OCC’s ongoing performance on these
matters, which, in turn, would allow the
TC to more effectively carry out its
oversight functions and the associated
responsibilities.40
E. Risk Management
The Proposed Rule Change would
amend the committee charters to
provide that each committee would
perform, and is authorized to perform,
such other responsibilities and
functions as may, from time to time, be
assigned to it under the By-Laws and
Rules, other policies, or delegated to it
39 See
40 See
Notice at 45712, n. 55.
Notice at 45713, n. 63.
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by the Board.41 The Proposed Rule
Change would amend the committee
charters to provide that each committee
shall perform any other duties
consistent with their respective charters
as the committee deems necessary or
appropriate, or as the Board shall
further delegate to the particular
committee.42 OCC believes that these
changes would provide for flexibility for
each committee to supervise and
account for matters naturally within the
scope of their responsibility or that may
be assigned to them by the Board.43
The Proposed Rule Change would
modify the description of the Board’s
functions and responsibilities as part of
the description of the mission of the
Board to include: (i) Overseeing OCC’s
governance structures and processes,
including through regular assessments
of Board and individual director
performance, to ensure that the Board is
positioned to fulfill its responsibilities
effectively and efficiently, consistent
with applicable requirements; (ii)
ensuring that risk management,
compliance, and internal audit
personnel have sufficient authority,
resources, independence from
management, access to the Board, and a
direct reporting line to, and oversight
by, certain committees; (iii) ensuring
that the Audit Committee of the Board
is independent; (iv) transitioning the
overall oversight of ERM to the Board;
and (v) assigning responsibility for risk
decisions and policies to address
decision-making during a crisis. The
Board Charter would also be amended
to codify the Board’s existing
responsibility for overseeing and
approving OCC’s RWD Plan.
As noted above, the Proposed Rule
Change would transfer responsibility for
the oversight of the enterprise risk
management (‘‘ERM’’) program from the
RC to the Board.44 This change would
41 OCC noted that a comparable provision to this
exists in the RC Charter. See Notice at 45708.
42 OCC noted that comparable language currently
appears in the AC Charter, GNC Charter, and TC
Charter. See Notice at 45708, n. 25.
43 See Notice at 45708.
44 For example, the Proposed Rule Change would
modify the description of the Board’s functions and
responsibilities as part of the description of the
mission of the Board to include transitioning the
overall oversight of ERM to the Board. The RC
Charter currently provides that the committee is
responsible for overseeing OCC’s overall ERM
framework, including ‘‘reviewing material policies
and processes relating to (i) membership criteria
and financial safeguards, (ii) member and other
counterparty risk exposure assessments, (iii)
liquidity requirements and maintenance of financial
resources, (iv) risk modeling and assessments, (v)
default management planning, and (vi) risks related
to new initiatives.’’ The revised descriptions in the
RC Charter regarding its oversight of these areas
would continue to involve responsibilities related
to credit, market, liquidity and systemic risk, but
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allow the Board to retain responsibility
for the comprehensive oversight of
OCC’s overall risk management
framework, while retaining the ability to
delegate oversight of specific risks to
designated committees, which would
then report to and be subject to
oversight by the Board. OCC believes
that shifting enterprise risk oversight
responsibility from the RC to the Board
would promote further engagement by
and attention from the Board regarding
OCC’s risk universe and how such risks
impact OCC’s strategic direction and
priorities, as well as provide for more
meaningful dialogue and discussion at
Board meetings.45 OCC believes,
moreover, that the change would
alleviate the potential for overburdening
the RC and establish clearer lines of
oversight responsibilities for particular
risks across the Board’s committees.46
Additionally, the collective expertise of
the Board would be available to provide
appropriate guidance relative to each
key risk within OCC’s risk universe.47
Consistent with changes to the RC
Charter that provide that the RC would
no longer have responsibilities related
to the ERM program, the Proposed Rule
Change would remove the RC’s
responsibility for strategic and
operational risks. OCC believes that
these changes are appropriate because
issues regarding ERM are central to
OCC’s comprehensive management of
risk and would therefore benefit from
the experience and attention of the full
Board.48
In connection with the RC no longer
having responsibilities regarding the
ERM program, several related provisions
would be removed from the RC Charter.
For example, the RC would no longer
have responsibility to oversee the
structure, staffing, and resources of the
ERM program or approve its goals and
objectives on an annual basis.
Additionally, the RC would no longer be
responsible for reviewing OCC’s risk
appetite statements and risk tolerances
because the Board would assume
responsibility for approval of these
matters.
The Proposed Rule Change would
require that the TC review, at least every
twelve months, the adequacy of OCC’s
management of information security
risks, approve all material changes to
written polices related to the managing
information security risks, and
recommend such changes to the Board.
would no longer include responsibility for
overseeing those aspects related to the ERM
program.
45 See Notice at 45714.
46 See id.
47 See Notice at 45715.
48 See Notice at 45711.
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Additionally, the Proposed Rule
Change would address the identification
and escalation of risks. The AC Charter,
the RC Charter, and the TC Charter
would each be amended to require the
respective committees to identify risk
issues relating to their areas of oversight
that should be escalated to the Board for
its review and consideration.
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F. Internal Audit
The AC Charter would be amended to
clarify that the AC shall oversee the
independence and objectivity of the
internal audit department. Further, the
Proposed Rule Change would amend the
AC Charter to provide that the AC must
review the effectiveness of the internal
audit function, including conformance
with the Institute of Internal Auditor’s
Code of Ethics and the International
Standards for Professional Practice of
Internal Auditing. The AC Charter
would also be amended to authorize the
AC to approve deviations to the audit
plan that may arise over the course of
an audit. OCC believes that these
changes would be a natural extension of
the AC’s role and responsibilities.49
Additionally, the Proposed Rule Change
would amend the AC charter to
authorize the AC to approve
management’s recommendation to
appoint or replace the CAE.
The Proposed Rule Change would
also amend the AC charter to authorize
the AC to approve OCC’s audited
financial statements after review, to
oversee the timing and process for
implementing a rotation of the
engagement partner of the external
auditor, and to discuss certain
significant issues with the external
auditor. OCC believes that framing the
AC’s responsibilities in this manner
would provide appropriate flexibility
for the committee to carry out its
oversight and advisory responsibilities
using its business judgment.50
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 selfregulatory organization if it finds that
such proposed rule change is consistent
with the requirements of the Act and the
rules and regulations thereunder
applicable to such organization.51 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
Notice at 45709.
50 See id.
51 15 U.S.C. 78s(b)(2)(C).
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A. Consistency With Section
17A(b)(3)(F) of the Exchange Act
Section 17A(b)(3)(F) of the Act
requires, among other things, that the
rules of a clearing agency be designed to
promote the prompt and accurate
clearance and settlement of securities
transaction and, in general, to protect
investors and the public interest.54
As described above, the Proposed
Rule Change would make numerous
changes to OCC’s rules. The changes
address a number of areas, including
providing clarification and transparency
to the committees’ processes and
responsibilities, reducing redundancy
and improving readability of the
charters, addressing the consistency of
the charters with the public interest,
providing further detail and specificity
regarding the Board and management
expertise, specifying clear and direct
lines of responsibility, including the
responsibilities of the Board and the
committees and the responsibilities of
management to provide particular
information to the Board and the
committees, and ensuring that the Board
is responsible for OCC’s overall risk
management.
The Commission believes that, as a
general matter, the Proposed Rule
Change should help ensure that OCC
has governance arrangements that
support its ability to promptly and
accurately offer clearance and
settlement services to its Clearing
Members and the markets OCC serves,
and effectively manage the range of risks
that arise in the course of providing
such services. Moreover, the
Commission believes that the Proposed
Rule Change should provide greater
accessibility, transparency and clarity to
market participants to better understand
OCC’s governance arrangements. For
both of these reasons, the Commission
believes that the Proposed Rule Change
is consistent with the prompt and
accurate clearance and settlement of
securities transaction, and, accordingly,
with Section 17A(b)(3)(F) of the
Exchange Act.55
The Proposed Rule Change is also
designed, in part, to reallocate
responsibilities across OCC’s governing
bodies. For example, the Proposed Rule
Change would shift responsibility for
U.S.C. 78q–1(b)(3)(F).
CFR 240.17Ad–22(e)(2) and (3).
54 15 U.S.C. 78q–1(b)(3)(F).
55 Id.
49 See
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applicable to OCC. More specifically,
the Commission finds that the proposal
is consistent with Section 17A(b)(3)(F)
of the Exchange Act 52 and Rules 17Ad–
22(e)(2) and (3) thereunder.53
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investigations and enforcement
outcomes from the AC to the RC, which
OCC has stated is appropriate because
the RC is better situated to review such
matters given its oversight the OCC’s
Clearing Membership framework.56
Similarly, the Proposed Rule Change
would shift responsibility for ERM from
the RC to the Board, which OCC has
stated would promote engagement by
and attention from the Board regarding
OCC’s risk universe and how risks
impact OCC’s strategic direction and
priorities.57 The Commission believes
that these aspects of the Proposed Rule
Change should better align these
particular responsibilities with the
relevant expertise within OCC’s Board
and promote Board engagement in a
manner that should provide for a more
effective framework for comprehensive
risk management, which, in turn,
should help protect the public interest.
The Commission believes, therefore,
that the Proposed Rule Change is
consistent, in general, with the
protection of investors and the public
interest, and, accordingly, with Section
17A(b)(3)(F) of the Exchange Act.58
B. Consistency With Rule 17Ad–22(e)(2)
Under the Exchange Act
Rule 17Ad–22(e)(2) under the
Exchange Act requires, among other
things, that a covered clearing agency
establish, implement, maintain, and
enforce written policies and procedures
reasonably designed to provide for
governance arrangements that meet
certain criteria.59
As described above in section II., the
Proposed Rule Change would amend the
charters to provide that, in carrying out
their responsibilities, the Board and the
committees would prioritize the safety
and efficiency of OCC, generally support
the stability of the broader financial
system and consider legitimate interests
of Clearing Members, customers of
Clearing Members and other relevant
stakeholders, including OCC’s
shareholders and other participant
exchanges, taking into account prudent
risk management standards (including
systemic risk mitigation) and industry
best practices. Such amended charter
language would be, at least in part,
aligned with the provisions of Exchange
Act Rule 17Ad–22(e)(2), such as
prioritizing the safety and efficiency of
a covered clearing agency and
considering the interests of participants’
customers, securities issuers and
holders, and other relevant stakeholders
52 15
56 See
53 17
57 See
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Notice at 45709.
Notice at 45712.
58 15 U.S.C. 78q–1(b)(3)(F).
59 17 CFR 240.17Ad–22(e)(2).
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of the covered clearing agency.60 The
Commission believes that these
amendments should provide for
governance arrangements that allow the
Board and the committees to consider
whether their actions are consistent
with such considerations. Accordingly,
the Commission believes that the
proposed change providing for the
inclusion of such a statement is
consistent with Exchange Act Rule
17Ad–22(e)(2).61
Rule 17Ad–22(e)(2)(i) under the
Exchange Act requires that such
governance arrangements are clear and
transparent.62 As described above in
section II.A., the Proposed Rule Change
includes changes that should better
clarify and assign certain
responsibilities for the governance and
oversight of OCC among the Board and
its respective committees. Certain
aspects of the Proposed Rule Change
would amend OCC’s rules to provide
clear and transparent descriptions of
existing operating procedures and lines
of responsibility throughout OCC. For
example, the RC Charter would clarify
that joint meetings of the RC with other
Board committees count toward the
requirement to meet at least six times a
year. The Board Charter would remove
the language stating that the Board
oversees ‘‘OCC’s information technology
strategy, infrastructure, resources and
risks’’ and replace it with language
stating that the Board oversees ‘‘OCC’s
technology infrastructure, resources,
and capabilities to ensure resiliency
with regard to OCC’s provision of its
clearing, settlement, and risk
management services.’’ Additionally,
such statements include the
replacement of general statements in the
TC Charter with specific duties such as
the review material changes to the
operational execution and delivery of
core clearing and settlement services.
The Commission believes that these
aspects of the Proposed Rule Change
should improve the clarity and
transparency of OCC’s governance
arrangements by clearly identifying the
current responsibilities of the Board, its
committees, and management.
The Proposed Rule Change also
includes changes ranging from
clarification (e.g., changing ‘‘annually’’
to ‘‘each calendar year’’) to removal of
redundancies (e.g., where a requirement
is found elsewhere in OCC’s rules).
Delineating between those tasks that
must be completed once each calendar
year and those that must be completed
annually provides more specificity and
17 CFR 240.17Ad–22(e)(2)(ii) and (vi).
17 CFR 240.17Ad–22(e)(2).
62 17 CFR 240.17Ad–22(e)(2)(i).
clarity around the requirements of
OCC’s rules. Similarly, the removal of
redundant language, such as the
removal of statements in the GNC
Charter are regarding candidate
nominations, which is in OCC’s byLaws, reduces the likelihood of later
interpretive conflicts arising. In
addition, the consolidation of
documents, such as the Board Charter
and CGP, along with the removal of
redundancies between such documents
would improve the accessibility and
clarity of OCC’s rules. The Commission
believes that such consolidation and
removal of redundancies would make
OCC’s rules more readable for the public
and reduce the potential for internal
inconsistencies in OCC’s rules.
Accordingly, based on the foregoing, the
Commission believes that the proposed
changes pertaining to the clarity and
transparency of OCC’s rules are
consistent with Exchange Act Rule
17Ad–22(e)(2)(i).63
Rule 17Ad–22(e)(2)(iii) under the
Exchange Act requires that the
governance arrangements required
under Rule 17Ad–22(e)(2) support the
public interest requirements of Section
17A of the Exchange Act applicable to
clearing agencies, and the objectives of
owners and participants.64 Further, Rule
17Ad–22(e)(2)(vi) under the Exchange
Act requires that the governance
arrangements required under Rule
17Ad–22(e)(2) consider the interests of
participants’ customers, securities
issuers and holders, and other relevant
stakeholders of the covered clearing
agency.65 As described above in section
II.B., the Proposed Rule Change
includes changes relevant to the
consideration of the interests of OCC’s
various stakeholders. The GNC would
review the composition of the Board at
least once every three years and the
Board and committee charters at least
annually for consistency with public
interest and regulatory requirements.
Further, the GNC would annually
review and advise the Board with regard
to whether directors are independent as
defined by the Board. The Commission
believes that these requirements should
help ensure the protection of the public
interest.
The Proposed Rule Change would
also amend the charters to clarify,
among other things, that the Board and
committees will generally support the
stability of the broader financial system
and consider legitimate interests of
Clearing Members, customers of
Clearing Members and other relevant
stakeholders, including OCC’s
shareholders and other participant
exchanges. The Commission believes
that these amendments should provide
for governance arrangements that allow
the Board and the committees to
consider whether their actions support
the stability of the broader financial
system and to consider the legitimate
interests of Clearing Members,
customers, and other relevant
stakeholders. Accordingly, based on the
foregoing, the Commission believes that
the proposed changes pertaining to the
composition of the Board, charter
language, and director independence are
consistent with Exchange Act Rules
17Ad–22(e)(2)(iii) and (vi).66
Rule 17Ad–22(e)(2)(iv) under the
Exchange Act requires that the
governance arrangements required
under Rule 17Ad–22(e)(2) establish that
the board of directors and senior
management have appropriate
experience and skills to discharge their
duties and responsibilities.67 As
described above in section II.C., the
Proposed Rule Change includes
revisions relevant to ensuring that the
directors and senior management have
appropriate skills and experience. The
Proposed Rule Change would also
address the CPC’s role in management
succession planning and the GNC’s role
in director succession planning.
Succession planning is important to
ensuring that future members of OCC’s
senior management have appropriate
experience and skills. Relatedly, the
Proposed Rule Change would revise the
language describing the GNC’s role in
identifying the Standards for directors
on OCC’s Board. The Commission
believes that these aspects of the
Proposed Rule Change should provide
governance arrangements reasonably
designed to ensure that the board of
directors and senior management have
appropriate experience and skills. The
Proposed Rule Change would also
directly address the Board and GNC’s
responsibilities regarding Board and
director assessments. The Commission
believes that assessing the performance
of the Board and directors may provide
the information necessary for OCC to
identify gaps in the experience and
skills represented on its Board.
Accordingly, based on the foregoing, the
Commission believes that the proposed
changes pertaining to succession
planning, Standards for directors, and
Board assessments are consistent with
Exchange Act Rule 17Ad–22(e)(2)(iv).68
60 See
63 Id.
66 17
61 See
64 17
67 17
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65 17 CFR 240.17Ad–22(e)(2)(vi).
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CFR 240.17Ad–22(e)(2)(iii) and (vi).
CFR 240.17Ad–22(e)(2)(iv).
68 Id.
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Rule 17Ad–22(e)(2)(v) under the
Exchange Act requires that the
governance arrangements required
under Rule 17Ad–22(e)(2) specify clear
and direct lines of responsibility.69 As
described above in section II.D., the
Proposed Rule Change would amend the
charters in numerous places to clarify
the various responsibilities of the Board,
the committees, and OCC management.
For example, the Proposed Rule Change
addresses the delegation of authority
from the Board and committees and
describes the oversight responsibilities
of the delegating body. The Proposed
Rule Change addresses revisions to the
specific responsibilities of the Board
and committees, such as the oversight of
ERM by the Board and the review of
investigation and enforcement outcomes
of disciplinary actions by the RC. Such
changes document which bodies would
be granted various authorities while
clarifying where the ultimate
responsibilities would reside. More
generally, the Proposed Rule Change
would provide greater specificity and
clarity regarding the responsibilities of
particular Board committees and would
address how the committees interact
with the Board and also with
management. The Commission believes
that these assignments and
specifications of responsibilities among
the Board and its committees should
provide for clear and direct lines of
responsibility for particular areas and
functions performed by OCC.
The Proposed Rule Change also
describes channels of communication
from management to the Board, such as
authorization for the CFO to
communicate directly with the chair of
the AC, as well as routine reporting
requirements designed to keep OCC’s
governing bodies apprised of OCC’s
ongoing performance in areas relevant
to each body. Additionally, as noted
above, the Proposed Rule Change would
provide for quarterly reporting to the RC
from management regarding the
effectiveness of OCC’s management of
collateral and third party risks. The
Commission believes that such changes
should clarify reporting lines and access
to OCC’s Board and committees.
Accordingly, based on the foregoing, the
Commission believes that the proposed
changes pertaining to the assignment of
responsibilities and reporting are
consistent with Exchange Act Rule
17Ad–22(e)(2)(v).70
69 17
CFR 240.17Ad–22(e)(2)(v).
70 Id.
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C. Consistency With Rule 17Ad–22(e)(3)
Under the Exchange Act
Rule 17Ad–22(e)(3) under the
Exchange Act requires, among other
things, that a covered clearing agency
establish, implement, maintain, and
enforce written policies and procedures
reasonably designed to maintain a
sound risk management framework for
comprehensively managing legal, credit,
liquidity, operational, general business,
investment, custody, and other risks
that arise in or are borne by the covered
clearing agency, which meet certain
criteria.71 As described above in section
II.E., a number of the amendments that
would be made by the Proposed Rule
Change address Board and committee
responsibilities for risk-related
activities. For example, the transfer of
oversight of ERM from the RC to the
Board may elevate and strengthen the
focus on risk management at OCC.
Additionally, the Proposed Rule Change
would provide clarity regarding the
identification and escalation of risk
from committees to the Board. The
Commission believes that having in
place clear and transparent
arrangements that facilitate risk
identification and escalation is an
important component of a sound risk
management framework. Additionally,
the Proposed Rule Change is designed,
in part, to provide flexibility in stating
that the committees would perform
other duties as necessary or appropriate.
The Commission recognizes that, while
a covered clearing agency’s risk
management framework must be
detailed to be comprehensive, it can
also reflect a reasonable degree of
flexibility in order to allow the covered
clearing agency to respond to particular
risks or issues arising in its operations
in an effective manner.72 Therefore, the
Commission believes that including in
the Proposed Rule Change flexibility for
the committees to address such risks or
issues, where exercised appropriately,
may be a useful complement to a
detailed risk management framework
that otherwise is designed to
comprehensively manage foreseeable
risks that arise in or are borne by the
covered clearing agency.73 Accordingly,
based on the foregoing, the Commission
believes that the proposed changes
pertaining to the assignment of
responsibility for risk oversight are
71 17
CFR 240.17Ad–22(e)(3).
Exchange Act Release No. 78961
(September 28, 2016), 81 FR 70786, 70801 (Oct. 13,
2016.
73 In making this statement, the Commission is
not expressing a view as to the comprehensiveness
of OCC’s overall risk management framework,
which was not the subject of the Proposed Rule
Change.
72 Securities
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generally are consistent with Exchange
Act Rule 17Ad–22(e)(3).74
Further, Rule 17Ad&22(e)(3)(iv) under
the Exchange Act requires, in part, that
the risk management framework
required under Rule 17Ad–22(e)(3)
provides internal audit personnel with
oversight by an independent audit
committee of the board of directors.75
As described above in section II.F., the
Proposed Rule Change includes
revisions designed to strengthen the
AC’s oversight of OCC’s internal audit
department. The Proposed Rule Change
addresses the independence of OCC’s
internal audit personnel by charging the
AC with oversight of the independence
and objectivity as well as the
effectiveness of OCC’s internal audit
department. Such changes also provide
for oversight of audit personnel by the
AC. Similarly, the Proposed Rule
Change strengthens the AC’s oversight
by providing authority to approve or
replace the CAE and to oversee the
timing and process for implementing a
rotation of the engagement partner of
the external auditor, and is authorized
to discuss certain significant issues with
the external auditor. The Commission
believes that these aspects of the
Proposed Rule Change should provide
an appropriate framework for the AC’s
oversight of the internal audit function.
Accordingly, based on the foregoing, the
Commission believes that the proposed
changes pertaining to the oversight of
internal audit personnel are consistent
with Exchange Act Rules 17Ad–
22(e)(3)(iii) and (iv).76
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 77 and
the rules and regulations thereunder.
It is therefore ordered, pursuant to
Section 19(b)(2) of the Exchange Act,78
that the Proposed Rule Change (SR–
OCC–2018–012) be, and hereby is,
approved.
74 17
CFR 240.17Ad–22(e)(3).
CFR 240.17Ad–22(e)(3)(iv).
76 17 CFR 240.17Ad–22(e)(3)(iii) and (iv).
77 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).
78 15 U.S.C. 78s(b)(2).
75 17
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For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.79
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018–23506 Filed 10–26–18; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–84470; File No. SR–CBOE–
2018–066]
Self-Regulatory Organizations; Cboe
Exchange, Inc.; Notice of Filing and
Immediate Effectiveness of a Proposed
Rule Change To Permit the Exchange
To List Options on the Cboe Volatility
Index (‘‘VIX options’’) on a Group Basis
and Make Conforming Changes
Throughout the Rules, Change the
Minimum Increment for VIX Options
Listed Under the Nonstandard
Expirations Pilot Program (if the
Exchange Lists VIX on a Group Basis),
and Make Nonsubstantive Changes
October 23, 2018.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
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2 17
1 15
3 15
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*
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U.S.C. 78s(b)(3)(A)(iii).
Frm 00088
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*
*
Rule 6.42. Minimum Increments for
Bids and Offers
[The Board of Directors may establish
minimum increments for options traded
on the Exchange. When the Board of
Directors determines to change the
minimum increments, the Exchange
will designate such change as a stated
policy, practice, or interpretation with
respect to the administration of Rule
6.42 within the meaning of
subparagraph (3)(A) of subsection 19(b)
of the Exchange Act and will file a rule
change for effectiveness upon filing
with the Commission. Until such time
as the Board of Directors makes a
change to the minimum increments,
t](a) Simple Orders. The [following]
minimum increments [shall apply to]for
bids and offers on simple orders for
options traded on the Exchange are as
follows:
Series Trading Price
$0.05
0.10
Lower than $3.00.
$3.00 and higher.
0.01
0.05
0.01
Lower than $3.00.
$3.00 and higher.
All prices
0.01
All prices.
0.01
0.05
........................
quoted below $3 (including LEAPS),
and $0.05 for all option series $3 and
above (including LEAPS). For QQQQs,
IWM, and SPY, the minimum increment
is $0.01 for all option series. The
Exchange may replace any option class
participating in the Penny Pilot Program
that has been delisted with the next
most actively-traded, multiply-listed
option class, based on national average
daily volume in the preceding six
calendar months, that is not yet
included in the Pilot Program. Any
replacement class would be added on
the second trading day following July 1,
79 17
17:48 Oct 26, 2018
*
Increment
QQQs, IWM, and SPY, and Mini-SPX Index Options (XSP) (as long as SPDR options (SPY) participate in the Penny Pilot Program)
Series of VIX Options listed under the Nonstandard Expirations Pilot Program (if
the Exchange lists VIX on a group basis pursuant to Rule 8.14).
Options on the Dow Jones Industrial Average (DJX), as long as Diamonds options
(DIA) participate in the Penny Pilot Program
Mini-Options .................................................................................................................
VerDate Sep<11>2014
*
Cboe Exchange, Inc. (the ‘‘Exchange’’
or ‘‘Cboe Options’’) proposes to amend
its rules to permit the Exchange to list
options on the Cboe Volatility Index
(‘‘VIX options’’) on a group basis and
make conforming changes throughout
the Rules, change the minimum
increment for VIX options listed under
the Nonstandard Expirations Pilot
Program (if the Exchange lists VIX on a
Class Not Participating in Penny Pilot Program (including all series of VIX options if
the Exchange does not list VIX on a group basis pursuant to Rule 8.14) and series of VIX Options not listed under the Nonstandard Expirations Pilot Program (if
the Exchange lists VIX on a group basis pursuant to Rule 8.14)
Class Participating in Penny Pilot Program .................................................................
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
Rules of Cboe Exchange, Inc.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
Class
[(1) Subject to paragraphs (2) and (3)
below, bids and offers shall be
expressed in decimal increments no
smaller than $0.10, unless a different
increment is approved by the Exchange
for an option contract of a particular
series.
(2) Subject to paragraph (3) below,
bids and offers for all option series
quoted below $3 a contract shall be
expressed in decimal increments no
smaller than $0.05
(3) The decimal increments for bids
and offers for all series of the option
classes participating in the Penny Pilot
Program are: $0.01 for all option series
group basis), and make nonsubstantive
changes.
(additions are italicized; deletions are
[bracketed])
*
*
*
*
*
(‘‘Act’’),1 and Rule 19b–4 thereunder,2
notice is hereby given that on October
12, 2018, Cboe Exchange, Inc.
(‘‘Exchange’’ or ‘‘Cboe Options’’) filed
with the Securities and Exchange
Commission (‘‘Commission’’) the
proposed rule change as described in
Items I, II, and III below, which Items
have been prepared by the Exchange.
The Exchange filed the proposal as a
‘‘non-controversial’’ proposed rule
change pursuant to Section
19(b)(3)(A)(iii) of the Act 3 and Rule
19b–4(f)(6) thereunder.4 The
Commission is publishing this notice to
solicit comments on the proposed rule
change from interested persons.
Lower than $3.00.
$3.00 and higher.
Same as permitted for standard options
on the same security.
2018. The Penny Pilot shall expire on
December 31, 2018.]
([4]b) Complex Orders. Except as
provided in Rule 6.53C, the minimum
increment for bids and offers on
complex orders, as defined in
Interpretation and Policy .01 below,
[may be expressed in any net price
increment (that may not be less than] is
$0.01[)] or greater, [that]which may be
determined by the Exchange on a classby-class basis and announced to [the]
Trading Permit Holders via Regulatory
Circular[, regardless of the minimum
increments otherwise appropriate to the
individual legs of the order].
4 17
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29OCN1
]]>Agencies
[Federal Register Volume 83, Number 209 (Monday, October 29, 2018)]
[Notices]
[Pages 54385-54395]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-23506]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-84473; File No. SR-OCC-2018-012]
Self-Regulatory Organizations; The Options Clearing Corporation;
Order Approving Proposed Rule Change Related to The Options Clearing
Corporation's Board of Directors and Board Committee Charters
October 23, 2018.
I. Introduction
On August 24, 2018, The Options Clearing Corporation (``OCC'')
filed with the Securities and Exchange Commission (``Commission'') the
proposed rule change SR-OCC-2018-012 (``Proposed Rule Change'')
pursuant to Section 19(b) of the Securities Exchange Act of 1934
(``Exchange Act'') \1\ and Rule 19b-4 \2\ thereunder to make changes to
OCC's (1) Audit Committee Charter, (2) Compensation and Performance
Committee Charter, (3) Governance and Nominating Committee Charter, (4)
Risk Committee Charter, (5) Technology Committee Charter and (6) Board
of Directors Charter. The Proposed Rule Change was published for
comment in the Federal Register on September 10, 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\ Securities Exchange Act Release No. 84021 (Sep. 4, 2018), 83
FR 45706 (Sep. 10, 2018) (SR-OCC-2018-012) (``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: https://optionsclearing.com/about/publications/bylaws.jsp.
---------------------------------------------------------------------------
The Proposed Rule Change would make certain changes to OCC's (1)
Audit Committee (``AC'') Charter (``AC Charter''), (2) Compensation and
Performance Committee (``CPC'') Charter (``CPC Charter''), (3)
Governance and Nominating Committee (``GNC'') Charter (``GNC
Charter''), (4) Risk Committee (``RC'') Charter (``RC Charter''), (5)
Technology Committee (``TC'') Charter (``TC Charter''), and (6) Board
of Directors (``Board'') Charter (``Board Charter'').\5\ These changes
are described and broadly categorized below.\6\
---------------------------------------------------------------------------
\5\ See Notice at 45707-08. As discussed below, the changes to
the Board Charter would involve incorporating provisions from OCC's
Corporate Governance Principles (``CGP'') and changing the title of
the resultant document to the Board Charter and Corporate Governance
Principles.
\6\ Many of the components of the Proposed Rule Change may serve
more than one purpose and could, therefore, be discussed in more
than one category herein. The categorization of changes is not
designed to denote otherwise.
---------------------------------------------------------------------------
As a general matter, the Proposed Rule Change would amend the
charters to provide that in carrying out their responsibilities the
Board and the committees would prioritize the safety and efficiency of
OCC, generally support the stability of the broader financial system
and consider the legitimate interests of Clearing Members, customers of
Clearing Members and other relevant stakeholders, including OCC's
shareholders and other participant exchanges, taking into account
prudent risk management standards (including systemic risk mitigation)
and industry best practices.
A. Clarity and Transparency
Several of the changes within the Proposed Rule Change seek to
better describe OCC's current processes. Such changes range from
clarification (e.g., changing ``annually'' to ``each calendar year'')
to removal of redundancies (e.g., where a requirement is found
elsewhere in OCC's rules) to stating the existing functions and
responsibilities of OCC's Board and Board committees. These changes are
described in more detail below.
The Proposed Rule Change would make a number of changes to OCC's
Board committee charters to clarify that, where certain actions were
required to be performed ``annually'' under the charters, those actions
would now be required to occur ``each calendar year.'' OCC believes
that it is appropriate to clarify which actions are required on an
every twelve months-basis, particularly in cases where a regulatory
requirement
[[Page 54386]]
to do so exists.\7\ Such changes include amending the committee
charters to provide that the following activities must occur on a
calendar year basis: (i) Appointment of directors to particular
committees; (ii) committee meetings with certain members of management
in executive sessions conducted regularly (no less than once per
calendar year); (iii) reporting from each committee to the Board
summarizing that committee's activities for the prior year; (iv)
confirmation by each committee to the Board that all responsibilities
outlined in the committee's charter have been carried out; and (v)
provision of each committee's assessment of its and its individual
members' performance to the GNC for review.
---------------------------------------------------------------------------
\7\ See Notice at 45708.
---------------------------------------------------------------------------
The Proposed Rule Change would also make a number of clarifying
changes to each charter. For example, with respect to the AC Charter,
the Proposed Rule Change would replace the current reference to
``financial and senior management'' to OCC's ``Corporate Finance
Department'' in describing the AC's responsibility to facilitate open
communication between external auditors and certain groups within OCC.
Additionally, the AC Charter would be amended to provide that the AC is
authorized to approve the ``issuance of the annual financial''
statements after its review of such statements.
The Proposed Rule Change would also amend certain descriptions of
the AC's responsibilities. For example, the Proposed Rule Change would
revise text describing the role of the AC, along with external
auditors, as responsible for ``planning and carrying out audit work, as
appropriate'' rather than ``planning and carrying out a proper audit.''
The AC Charter's description of the AC's power to delegate to the Chief
Audit Executive (``CAE'') ``within the external audit limits'' would be
changed for accuracy to read ``within the co-sourced audit hour
limits.''
With respect to the CPC Charter, the Proposed Rule Change would
remove a number of specified responsibilities and replace them with a
general statement that the committee is required to perform activities
consistent with the CPC Charter as it deems necessary or appropriate or
as are delegated to the committee by the Board. The specified
responsibilities that would be removed include, for example, a
provision that states that the committee reviews special financial
matters as requested by the Board, and provisions addressing the
committee's review and approval of policies and programs regarding
salary compensation and incentive compensation and its review of
material changes to executive management benefits.
With respect to the GNC Charter, the Proposed Rule Change would
make revisions such that the GNC is no longer responsible for
recommending to the Board candidates for nomination for election or re-
election by the stockholders and any Board vacancies that are to be
filled by the Board.\8\
---------------------------------------------------------------------------
\8\ The requirement that the GNC nominate candidates is provided
explicitly in the By-Laws. See OCC By-Law Article III, Sections 5
and 6A. The GNC Charter would specify that the GNC's role in this
context applies specifically to Public Directors and Member
Directors to promote consistency with the By-Laws.
---------------------------------------------------------------------------
With respect to the RC Charter, the Proposed Rule Change would add
a clarifying statement to state that the RC is required to perform its
responsibilities in accordance with the provisions of the RC Charter
and applicable regulatory requirements. Regarding meetings of the RC,
the RC Charter would specify that joint meetings with other Board
committees count toward the requirement to meet at least six times a
year. The Proposed Rule Change would also clarify that in-person
attendance at meetings is preferred.
With respect to the TC Charter, the Proposed Rule Change would
revise the TC Charter to remove specific references to the committee's
oversight of OCC's physical security and instead describe the
committee's responsibility for overseeing the adequacy of OCC's
management of information security risks, which generally includes:
Oversight of the confidentiality, integrity, and availability of OCC
data; the security of the information systems used to process,
transmit, and store OCC information; and the physical, personnel,
procedural, administrative, and environment security disciplines. The
Proposed Rule Change would replace language stating that the TC will
periodically review and appraise OCC's crisis management plans with
language stating that the TC will oversee and receive a quarterly
report on OCC's Business Continuity and Disaster Recovery Programs
because crisis management plans are incorporated within the Business
Continuity and Disaster Recovery Programs.
The Proposed Rule Change would delete certain general statements
regarding the TC's duty to make recommendations to the Board with
respect to IT-related projects and investments and critically review
the progress of such projects and/or technology architecture decisions.
These general statements would be replaced with more specific
descriptions of the TC's duties. For example, the TC will receive a
report on management's progress in executing on major information
technology (``IT'') initiatives, technology architecture decisions and
IT priorities. The TC will also review and recommend to the Board for
approval material changes to (i) the operational execution and delivery
of core clearing and settlement services, and (ii) written policies
concerning information security risk.
The Proposed Rule Change would make similar changes to the TC
Charter with respect to other TC responsibilities. For example, the
Proposed Rule Change would revise the language describing the TC's
responsibility to monitor and assess OCC's management of IT-related
compliance risks as a responsibility to monitor and oversee the overall
adequacy of OCC's IT and operational control environment, including the
implementation of key controls in response to regulatory requirements.
With respect to the Board Charter, the Proposed Rule Change will
incorporate the existing CGP into the Board Charter and rename the
charter as the ``Board of Directors Charter and Corporate Governance
Principles'' to reflect the change. OCC believes this change is
appropriate to eliminate significant overlap between the contents of
the two existing documents and thereby make the consolidated provisions
in the Board Charter easier for Clearing Members and other OCC
stakeholders to access, use, and understand.\9\ For example, the
existing CGP and Board Charter each address aspects of the Board such
as its size and composition. The Proposed Rule Change would make
changes to the contents of the CGP to conform the existing provisions
to the structure and organization of the Board Charter and related
requirements in the By-Laws and Rules.\10\ However, the majority of the
provisions in the CGP would be incorporated in their existing form, and
these provisions address, for example, the size of the Board and its
[[Page 54387]]
composition, membership criteria, appointment of the GNC, the selection
of Member, Public, Exchange, and Management Directors, conduct matters,
ethics and conflicts of interest, compensation, access to senior
management, and Board and Board committee evaluations.
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\9\ See Notice at 45713.
\10\ For example, the CGP provides in one instance that all
materials for Board meetings are made available online by the office
of the secretary. This particular provision in the CGP would not be
incorporated into the Board Charter, but the Board Charter would be
amended to provide that OCC operates a portal for the general
dissemination of meeting and other written materials to directors, a
process that is consistent with how OCC distributes such materials
today. In addition, the Proposed Rule Change would state in the
Board Charter that Public Directors do not have term limits,
consistent with the requirements in Article III, Section 6 of the
OCC By-Laws.
---------------------------------------------------------------------------
As a further result of incorporation of the CGP into the Board
Charter, the Proposed Rule Change would remove certain existing
provisions in the Board Charter that specifically reference, or are
duplicative of, more comprehensive descriptions from the CGP.
Specifically, sections of the Board Charter would be replaced with more
detailed explanations drawn from the CGP with respect to: (i) Board
composition; (ii) qualification standards for directors; (iii) election
of directors, resignation, and disqualification; (iv) tenure, term, and
age limitations; and (v) calling of Board meetings, selection of agenda
items, and attendance.
Currently, the Board Charter sets forth a number of functions and
responsibilities of the Board. The Proposed Rule Change would
reorganize this list of functions and responsibilities in a new section
regarding the mission of the Board and would make non-substantive
changes to some of the descriptions of the Board's responsibilities.
For example, the Board Charter currently provides that the Board is
responsible for advising, approving, and overseeing OCC's business
strategies, including expansions of clearing and settlement services to
new business lines, as well as monitoring OCC's performance in
delivering clearance and settlement services. The Proposed Rule Change
would amend the Board Charter to provide that the Board is responsible
for overseeing OCC's business strategies, including expansions of
clearance and settlement services to new business lines and product
types, to ensure they reflect the legitimate interests of relevant
stakeholders and are consistent with the public interest. As a further
example, the Proposed Rule Change would revise the Board's
responsibility to oversee ``OCC's information technology strategy,
infrastructure, resources and risks'' to provide that the Board's
responsibility is to oversee ``OCC's technology infrastructure,
resources, and capabilities to ensure resiliency with regard to OCC's
provision of its clearing, settlement, and risk management services.''
The Proposed Rule Change would also remove oversight of human resources
programs from the Board Charter because that responsibility has been
delegated to the CPC under the current CPC Charter. OCC stated that the
changes described above are designed to improve the readability of the
Board Charter as well as to specify additional, specific considerations
of the Board with respect to particular responsibilities.\11\
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\11\ See Notice at 45714.
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In addition to the changes described above, the Proposed Rule
Change would specify that the Board's authority extends to performing
such functions as it believes are appropriate or necessary, or as
otherwise prescribed by rules or regulation, including OCC's By-Laws
and Rules, ``or other policies.'' OCC stated that this change is
intended to clarify that the scope of the Board's authority extends to
all of OCC's policies.\12\
---------------------------------------------------------------------------
\12\ See Notice at 45714, n. 78.
---------------------------------------------------------------------------
The Board Charter would also provide that the Board is responsible
for the business and affairs of OCC, and that the Board will continue
to be responsible for performing such other functions as the Board
believes appropriate or necessary or as otherwise prescribed by rules
or regulations, including OCC's By-Laws and Rules. Pursuant to this
broad responsibility, OCC believes that the functions and
responsibilities of the Board will remain consistent notwithstanding
certain proposed deletions or rephrasing regarding the existing list of
responsibilities.\13\ For example, the Board Charter would no longer
specify that the Board will review committee charters and reports of
committee activities; however, it would nevertheless provide that the
Board is responsible for establishing a written charter for each
committee and that each committee will be responsible for providing an
annual report to the Board regarding its activities.
---------------------------------------------------------------------------
\13\ See Notice at 45714, n. 79.
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The Proposed Rule Change would make certain other changes to the
Board Charter. The Proposed Rule Change would delete the provision
noting that the Member Vice Chairman of the Board has the
responsibilities set forth in the By-Laws. The Proposed Rule Change
would also delete the current footnote one (1) from the Board Charter,
which provides an example of an instance in which certain provisions of
the By-Laws provide that the Board should not take action. The amended
Board Charter will continue to provide that the Board's
responsibilities and duties are subject to any exceptions provided in
OCC's Amended and Restated Certificate of Incorporation or the By-Laws
and Rules. OCC believes that the footnote providing an example of such
an instance is unnecessary, and that its deletion would improve
readability of the Board Charter.\14\
---------------------------------------------------------------------------
\14\ See Notice at 45715.
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Additionally, the Proposed Rule Change includes revisions
(including by removing or relocating existing content and changing word
choices) intended to reduce redundancy and better organize the content
of the charters to more clearly state what a committee is authorized or
obligated to do. OCC stated that such changes will not substantively
alter the responsibilities or activities of the relevant committee.\15\
For example, all of the charters would be amended to state that the
Board or the relevant committee will review the charter ``at least once
every twelve months'' instead of ``annually'' to provide further
clarity around the intended frequency. Further, the statement in the TC
Charter that the TC ``shall also have the authority to perform any
other duties'' consistent with the TC Charter would be revised to
provide that the TC ``is authorized to perform any other duties''
consistent with the TC Charter. In addition, the statement in the AC
Charter that the committee shall ``approve material changes in
accounting principles and practices'' would state that the AC ``is
authorized to approve material changes in accounting principles and
practices.'' Consistent with this change, where a charter currently
states that the Board or a committee ``shall approve'' a particular
matter, the charter would state instead that the Board or a committee
is ``authorized to approve'' the particular matter. OCC believes such
changes properly clarify the oversight role of the Board and the
committees, and that approval of a particular matter is not
mandatory.\16\
---------------------------------------------------------------------------
\15\ See Notice at 45707.
\16\ See Notice at 45707, n. 16.
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The Proposed Rule Change would make amendments acknowledging, where
relevant based on the particular charter, that its Executive Chairman
(``EC'') also serves as its Chief Executive Officer (``CEO''), and that
therefore certain responsibilities and considerations that currently
apply to the EC would also apply to the CEO. All charters would also be
revised to state that a role of the Board or the committee, as
applicable, is to advise management.
B. Public and Stakeholder Interests
The Proposed Rule Change would specify that the GNC shall review
the composition of the Board for consistency with public interest and
regulatory requirements at least every three years rather than
periodically. The
[[Page 54388]]
GNC Charter would further be amended to require yearly GNC review of
the committee charters for consistency with the public interest and
other regulatory requirements.\17\ Lastly, the Proposed Rule Change
would require the GNC annually to review and advise the Board with
regard to director independence.
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\17\ The GNC currently performs such a review of the Board
Charter annually.
---------------------------------------------------------------------------
C. Board and Management Expertise
The Proposed Rule Change would make several changes related to the
experience and skills of the Board and management. With respect to the
CPC Charter, the Proposed Rule Change would clarify the role that the
CPC plays in oversight of succession planning regarding OCC's
Management Committee. A new provision would also provide that the CPC
must review the results of Management Committee succession planning
activities at least once every twelve months.
With respect to the GNC Charter, the Proposed Rule Change would
make two revisions that specifically address the experience and skills
of the Board and management. First, the Proposed Rule Change would
amend the GNC Charter to establish new responsibilities for the GNC to
advise the Board on matters pertaining to director leadership
development and succession planning. Second, the Proposed Rule Change
would revise the language regarding the GNC's responsibilities with
respect to ensuring that directors are appropriately qualified. For
example, rather than providing that the GNC will work toward developing
a Board with a broad spectrum of experience and expertise, the GNC
Charter would provide that the GNC shall identify, for purposes of
making recommendations to the Board, the criteria, skills, experience,
expertise, attributes, and professional backgrounds (collectively, the
``Standards'') desirable in directors to ensure the Board is able to
discharge its duties and responsibilities. Relatedly, the GNC Charter
would no longer include language providing that the GNC is responsible
for recommending to the Board for approval and overseeing the
implementation and effectiveness of OCC's policies and procedures for
identifying and reviewing Board nominee candidates, including the
criteria for Board nominees.
With respect to the Board Charter, the Proposed Rule Change would
provide that the Board is responsible for overseeing OCC's activities
through regular assessments of Board and individual director
performance. Because the Board has delegated responsibility to the GNC
for the annual evaluation of the Board and its committees, OCC believes
that it is no longer necessary to specify that the Board would have an
annual self-evaluation obligation, as provided in the current
charter.\18\ The Proposed Rule Change would further amend the Board
Charter to provide that the regular assessments will no longer include
a focus on individual director performance, but will instead focus
primarily on the performance of the Board and each committee as a
whole. OCC stated that focusing the annual self-evaluation on
individual director performance is less effective than focusing on the
performance of each committee as a whole because not every director has
the opportunity to work with each other director.\19\
---------------------------------------------------------------------------
\18\ See Notice at 45715.
\19\ See id.
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D. Clear and Direct Lines of Responsibility
The Proposed Rule Change would amend the charters to provide
clearer information regarding the functions and responsibilities of the
Board and committees and reporting requirements. The Proposed Rule
Change would amend all of the charters to specify that the Board and
each committee may delegate authority to one or more designated
officers of OCC or may refer a risk under its oversight to another
committee or the Board as advisable or appropriate. The proposed
revisions would provide, however, that the delegating body will retain
the obligation to oversee any such delegation or referral and assure
itself that delegation and reliance on the work of any delegate is
reasonable.
The Proposed Rule Change would further clarify that, where the
Board or a committee has authority to approve reports or other
proposals in its business judgment, such as materials provided by
management, it is not obligated to approve such reports or other
proposals, and related modifications would articulate a clear means of
recourse for the committee or the Board if it does not approve. OCC
stated that the purpose of these changes would be to promote governance
arrangements that clearly prioritize the safety and efficiency of OCC
and specify clear and direct lines of responsibility in its governance
arrangements.\20\ The Proposed Rule Change would amend certain
committee charters to address committee member vacancies to provide
that in the event of a vacancy, the applicable committee would continue
to undertake its responsibilities, so long as the remaining committee
members are capable of satisfying the quorum requirement.\21\
---------------------------------------------------------------------------
\20\ See Notice at 45708, n. 23.
\21\ No such change would be added to the GNC Charter because
the matter is already addressed therein.
---------------------------------------------------------------------------
The AC Charter would describe new responsibilities for the AC that
include reviewing the impact of litigation and other legal matters that
may have a material impact on OCC's financial statements and overseeing
the structure, independence and objectivity, staffing, resources, and
budget of OCC's compliance and audit departments. The Proposed Rule
Change would amend the AC Charter and the RC Charter to transfer
responsibility for reviewing the investigation and enforcement outcomes
of disciplinary actions taken by OCC against Clearing Members from the
AC to the RC. OCC believes that the RC is appropriately situated to
review disciplinary actions against Clearing Members given the
committee's broader role in overseeing OCC's management of third party
risks, which includes OCC counterparties such as Clearing Members.\22\
---------------------------------------------------------------------------
\22\ See Notice at 45712.
---------------------------------------------------------------------------
The Proposed Rule Change would revise the description of the AC's
responsibility with respect to OCC's compliance department by providing
more generally that the AC will review ongoing compliance monitoring
activities by reviewing reports and other communications prepared by
the Chief Compliance Officer (``CCO'') and inquire of management
regarding steps taken to deal with items raised. As a result of this
change, the AC Charter would no longer specify that the AC is
responsible for approving the annual Compliance Testing Plan,
monitoring progress against the annual Compliance Testing Plan, and
approving any recommendations by the CCO relating to that plan. OCC
stated that the purpose of this change is to shift OCC's compliance
department to a monitoring role and away from its historic role of
creating a specific plan to follow, as well as to facilitate the
transition of validation responsibilities to OCC's internal audit
department, over which the compliance department would have monitoring
responsibilities.\23\ The AC would also be authorized to approve
management's recommendations regarding approval or replacement of the
CCO.
---------------------------------------------------------------------------
\23\ See Notice at 45709.
---------------------------------------------------------------------------
Under the Proposed Rule Change, the AC charter would no longer
expressly require annual Board approval regarding audit services.
However, the AC would
[[Page 54389]]
be required to confirm annually to the Board that all of the AC's
responsibilities have been carried out and provide an annual report to
the Board summarizing the AC's activities during the previous year.
The Proposed Rule Change would amend the AC Charter to provide
that, in addition to the CAE and CCO, the Chief Financial Officer
(``CFO'') also will be authorized to communicate directly with the
Chair of the AC with respect to any of the responsibilities of the AC
between meetings of the AC given the CFO's role as part of OCC's
executive team and his/her responsibility for OCC finances.
The Proposed Rule Change would revise the CPC Charter to provide
that the CPC will oversee and monitor the activities of OCC's
Administrative Committee, including the approval of the Administrative
Committee's charter and changes thereto and of the members of the
Administrative Committee. OCC believes that these allocations of
responsibility are appropriate given the CPC's current oversight of the
Administrative Committee, whereby the CPC is responsible for, among
other things, appointing members of the Administrative Committee and
overseeing and monitoring the activities of the Administrative
Committee with respect to retirement and retirement savings plans.\24\
---------------------------------------------------------------------------
\24\ See Notice at 45710.
---------------------------------------------------------------------------
The Proposed Rule Change would amend the CPC Charter to state that
the CPC assists the Board in overseeing risks related to OCC's general
business, regulatory capital, investments, corporate planning,
compensation, and human capital in addition to assisting the Board in
executive management succession planning and performance assessments;
however, OCC management will continue to identify, manage, monitor, and
report the associated risks to the Board. The Proposed Rule Change
would clarify that the corporate plan and budget are annual
arrangements, and that the CPC oversees their alignment with OCC's
business strategy.
The Proposed Rule Change would also address the CPC's oversight of
OCC's capital plan. The CPC Charter would clarify that oversight of
OCC's capital plan includes the written policies adopted thereunder,
which include OCC's fee, dividend, and refund policies. Revisions to
the CPC Charter would also clarify that the CPC must review the capital
plan at least once every twelve months, and that the committee makes
recommendations to the Board concerning capital requirements, refund
payments, and dividend payments. In addition, the Proposed Rule Change
would add a provision to the CPC Charter requiring management to
provide a quarterly performance report to the committee against the
capital plan.
Regarding the CPC's review of Public Director compensation and the
recommendations that it provides to the Board related thereto, a
requirement would be added to the CPC Charter for the committee to
engage in these activities not less than once every two years. OCC
believes that a two-year period is appropriate for such a review
because the overall trends in industry compensation generally do not
change dramatically from year-to-year.\25\ The CPC would no longer be
required to perform a full review of each component of Public Director
compensation packages and recommend adjustments to the Board on a
yearly basis. The Proposed Rule Change would also clarify that the CPC
is not authorized to adopt or amend compensation, retirement, or
welfare benefit plans that require Board approval. The Proposed Rule
Change would also add a new requirement that the CPC must review OCC's
insurance program at least once every twelve months.
---------------------------------------------------------------------------
\25\ See id.
---------------------------------------------------------------------------
The Proposed Rule Change would amend the GNC Charter to establish
new responsibilities for the GNC to approve all material changes to
written policies concerning related-party transactions and recommend
such changes to the Board for approval. The GNC Charter would also be
amended to provide that the GNC shall review and, if appropriate,
approve or ratify, any related-party transactions involving OCC in
accordance with the written policy governing such transactions. Because
the GNC is already responsible for the review of conflicts of interests
of directors and the manner in which such conflicts will be monitored
and resolved, OCC believes that it is appropriate for the GNC to assume
the additional responsibility of reviewing related-party
transactions.\26\ Additionally, the Proposed Rule Change would remove
the ability for a designee of the chair of the GNC to call an
additional meeting beyond the four times per year that the GNC must
meet. OCC believes this change would help ensure that the committee's
time and resources would be utilized appropriately.\27\
---------------------------------------------------------------------------
\26\ See Notice at 45710-11.
\27\ See Notice at 45711, n. 47.
---------------------------------------------------------------------------
The RC Charter currently provides that the RC assists the Board in
overseeing OCC's policies and processes for identifying and addressing
strategic, operational, and financial (e.g., credit, market, liquidity,
and systemic) risks. The Proposed Rule Change would amend the RC
Charter to state more specifically that the RC will have responsibility
for assisting the Board in its oversight of OCC's financial,
collateral, risk model, and third party risk management processes.\28\
Corresponding changes would also be made to clarify that the RC has an
oversight role regarding these responsibilities, and that it remains
OCC management's responsibility to identify, manage, monitor, and
report risks in these areas. The RC would continue to be responsible
for functions delegated to it under the By-Laws and Rules and as may be
delegated to it by the Board.
---------------------------------------------------------------------------
\28\ As described below, the RC would no longer be responsible
for oversight of strategic or operational risks because those
matters would be overseen by the Board as they relate to enterprise
risk management.
---------------------------------------------------------------------------
The current provisions of the RC Charter dealing with the oversight
of credit, collateral, liquidity, and third party risks would be
replaced with more specific provisions. At least once every twelve
months, the RC would be required to review the adequacy of OCC's
management of credit, collateral, liquidity, and third party risks. In
connection with these responsibilities, the RC would receive monthly
reports from OCC management regarding the effectiveness of OCC's
management of credit exposures and liquidity risks.\29\ The RC would
also be required to review the adequacy of OCC's secured committed
liquidity facilities at least once every twelve months and recommend
the size and composition of such facilities to the Board for approval.
The RC would also be responsible for approval of all material changes
to written policies regarding risk management in these areas and
recommending such changes to the Board.
---------------------------------------------------------------------------
\29\ For example, the report regarding the effectiveness of the
management of credit exposures would include the results of: (i) A
comprehensive analysis of OCC's existing stress testing scenarios,
models and underlying parameters and assumptions, and (ii) a
sensitivity analysis of OCC's margin models and a review of the
associated parameters and assumptions for back testing.
---------------------------------------------------------------------------
The Proposed Rule Change would make explicit the RC's
responsibilities in connection with the review and approval of any new
products that materially impact OCC's established risk profile or
introduce novel or unique financial, risk model, and third party risks.
The RC would refer any such new
[[Page 54390]]
products that it approves to the Board for its potential approval.
The Proposed Rule Change would amend the RC Charter to codify the
RC's responsibility to oversee OCC's Recovery and Orderly Wind-down
Plan (``RWD Plan''). This responsibility would include reviewing the
adequacy of the RWD Plan at least once every twelve months. If the
committee approves the RWD Plan, it would next recommend the RWD Plan
to the Board for potential Board approval. The RC would also have
responsibility for reviewing and approving any material changes to the
RWD Plan. In the event the RC approves any such changes, it would, in
turn, recommend the changes to the Board for its potential approval.
The Proposed Rule Change would amend the RC Charter to detail the
RC's responsibility regarding the structure and staffing of OCC's
corporate risk management functions in addition to OCC's financial risk
management group. The RC must review structure and staffing in these
areas at least once every twelve months. A provision would also be
added requiring that the RC review and approve the Chief Risk Officer's
goals and objectives, and any material changes thereto, at least once
every twelve months.
Further, the Proposed Rule Change would add a statement to the RC
Charter to clarify that the RC is responsible for reviewing third-party
assessment reports as to financial, collateral, risk model, and third-
party risk management processes and for reviewing OCC management's
remediation efforts pertaining to any such reports.
The Proposed Rule Change would amend the TC Charter to clarify that
the TC's role is one of oversight, and that it remains the
responsibility of OCC management to identify, manage, monitor, and
report on IT and other operational risks arising from OCC's business
activities. The Proposed Rule Change would also amend the TC Charter
such that the TC would have responsibility for OCC's operational
initiatives, including approving major IT and operational initiatives,
recommending major capital expenditures to the Board, and approving the
IT and operational budget for each calendar year.\30\
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\30\ Relatedly, the Proposed Rule Change would amend the TC
Charter so that it would no longer require that the TC work with, or
report to, the AC and RC to monitor the quality and effectiveness of
IT systems and processes that relate to or affect OCC's internal
control systems and risk management systems.
---------------------------------------------------------------------------
The Proposed Rule Change would amend the Board Charter to set forth
certain key considerations and responsibilities. These include
providing that the Board will exercise its authority to provide for
governance arrangements that, among other things, support applicable
public interest requirements and the objectives of owners and
participants, establish that the Board and senior management have
appropriate experience and skills to discharge their duties and
responsibilities, specify clear and direct lines of responsibility, and
consider the interests of Clearing Members' customers.\31\ The Proposed
Rule Change would also revise the Board Charter to note that the Board
has explicitly delegated management of specific risks to the Board
committees, and that to the extent a specific risk is not retained by
the Board or otherwise assigned to a Board committee, such risk shall
be overseen by the RC.\32\ Similarly, the Proposed Rule Change would
amend the Board Charter to state that the Board is responsible for
approving the compensation of the EC and certain other officers because
the Board has delegated responsibility to the CPC to evaluate and fix
such compensation.
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\31\ The Board Charter would also provide as a guiding principle
that the Board is, among other things, mindful of the public
interest as it fulfills its duties by complying with the obligations
imposed on it under relevant law, and that it discloses major
decisions to relevant stakeholders and the public.
\32\ The amended Board Charter would further specify that the
Board may form and delegate authority to committees and may delegate
authority to one or more of its members and to one or more
designated officers of OCC, but would note that the Board retains
the obligation to oversee any such delegation or referral and assure
itself that delegation and reliance on the work of any delegate is
reasonable.
---------------------------------------------------------------------------
Finally, the Proposed Rule Change would amend the Board Charter to
provide that a number of different activities related to the conduct
and functioning of the Board would involve participation by or input
from certain other officers of OCC that serve functions relevant to the
topic at issue. For example, the Board Charter would state that the EC
and CEO, in consultation with the Chief Operating Officer (``COO'') and
Chief Administrative Officer (``CAO''), other directors or officers of
OCC, and the Corporate Secretary shall establish the agenda for Board
meetings.\33\ OCC stated that these changes are designed to make clear
the roles and authority of certain officers and to ensure that input
from additional officers is included where appropriate.\34\
---------------------------------------------------------------------------
\33\ Similarly, the Proposed Rule Change would amend the Board
Charter to provide that the CEO, COO and CAO would have the
authority to invite employees to Board meetings, that such officers
encourage members of senior management to respond to questions posed
by directors relating to their areas of expertise, and that
directors shall coordinate access to members of senior management
and outside advisors through such officers. The criteria for Board
member eligibility would also be expanded to ensure that candidates'
experience and expertise are not only adequate to offer advice and
guidance to the Executive Chairman, but also to the CEO, COO, and
CAO.
\34\ See Notice at 45715.
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The Proposed Rule Change would also amend the charters to provide
for clear reporting requirements. The Proposed Rule Change would amend
the AC Charter to provide that certain mandatory reports be sent to the
AC for review, including quarterly reports from the CAE regarding the
internal audit plan and from the General Counsel regarding existing,
pending, or threatened litigation.\35\ OCC believes that such quarterly
reports would help provide the AC with the necessary information to
appropriately discharge its duties and responsibilities.\36\ OCC also
believes that these quarterly reports to the AC would help specify
clear and direct lines of responsibility in OCC's governance
arrangements by ensuring that these officers keep the AC apprised of
OCC's ongoing performance or handling of these matters, which in turn
would allow the AC to more effectively carry out its oversight
functions and the responsibilities associated therewith.\37\
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\35\ The Proposed Rule change would also include certain other
descriptive changes to the AC Charter, such as providing that the AC
will review OCC's Reporting Concerns and Whistleblower Policy (and
specifying that such review will occur each calendar year), rather
than providing a more detailed description of what the reporting
concerns and whistleblower procedures under the relevant policy
entail.
\36\ See Notice at 45709.
\37\ See Notice at 45709, n. 33.
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A new provision of the CPC Charter would require management to
provide a quarterly report to the committee that contains information
on OCC's performance against the corporate plan and the budget. OCC
believes that quarterly reporting by management to the CPC would help
specify clear and direct lines of responsibility in OCC's governance
arrangements by ensuring that management keeps the CPC apprised of
OCC's ongoing performance on these matters, which, in turn, would allow
the CPC to more effectively carry out its oversight functions and the
responsibilities associated therewith.\38\
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\38\ See Notice at 45710, n. 42.
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The Proposed Rule Change would also require OCC management to
provide the RC with quarterly reports regarding the effectiveness of
OCC's management of collateral and third-party risks. OCC believes that
this quarterly reporting would help specify clear and direct lines of
responsibility in OCC's governance arrangements by
[[Page 54391]]
ensuring that management keeps the RC apprised of OCC's ongoing
performance on these matters, which, in turn, would allow the RC to
more effectively carry out its oversight functions and the
responsibilities associated therewith.\39\ A new provision in the RC
Charter would provide that, from time to time, the RC may receive
reports and guidance relating to financial risk issues from, among
others, OCC's Financial Risk Advisory Council, and that the RC would
consider and discuss such reports and consider how such financial risk
issues may impact the options and futures industries. The RC would take
such guidance into account in the exercise of its fiduciary judgment
and the performance of its functions and responsibilities.
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\39\ See Notice at 45712, n. 55.
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The Proposed Rule Change would amend the TC Charter to introduce
mandatory periodic reporting from management on major IT initiatives.
The TC would oversee and receive quarterly reports from management that
provide information on: (i) Executing on major IT initiatives,
technology architecture decisions (as applicable) and IT priorities as
well as overall IT performance; (ii) the effectiveness of the
management of information security risks; (iii) OCC's Business
Continuity and Disaster Recovery Programs, including the progress on
executing the annual test plan and achieving recovery time objectives;
and (iv) major operational initiatives and metrics on the effectiveness
of OCC's operations with reference to key indicators. OCC believes that
such reports would provide the TC with the necessary information to
discharge its oversight duties and responsibilities appropriately and
would facilitate dialogue between the TC and OCC's senior IT management
team. OCC believes that this reporting would also help specify clear
and direct lines of responsibility in OCC's governance arrangements by
ensuring that management keeps the TC apprised of OCC's ongoing
performance on these matters, which, in turn, would allow the TC to
more effectively carry out its oversight functions and the associated
responsibilities.\40\
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\40\ See Notice at 45713, n. 63.
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E. Risk Management
The Proposed Rule Change would amend the committee charters to
provide that each committee would perform, and is authorized to
perform, such other responsibilities and functions as may, from time to
time, be assigned to it under the By-Laws and Rules, other policies, or
delegated to it by the Board.\41\ The Proposed Rule Change would amend
the committee charters to provide that each committee shall perform any
other duties consistent with their respective charters as the committee
deems necessary or appropriate, or as the Board shall further delegate
to the particular committee.\42\ OCC believes that these changes would
provide for flexibility for each committee to supervise and account for
matters naturally within the scope of their responsibility or that may
be assigned to them by the Board.\43\
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\41\ OCC noted that a comparable provision to this exists in the
RC Charter. See Notice at 45708.
\42\ OCC noted that comparable language currently appears in the
AC Charter, GNC Charter, and TC Charter. See Notice at 45708, n. 25.
\43\ See Notice at 45708.
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The Proposed Rule Change would modify the description of the
Board's functions and responsibilities as part of the description of
the mission of the Board to include: (i) Overseeing OCC's governance
structures and processes, including through regular assessments of
Board and individual director performance, to ensure that the Board is
positioned to fulfill its responsibilities effectively and efficiently,
consistent with applicable requirements; (ii) ensuring that risk
management, compliance, and internal audit personnel have sufficient
authority, resources, independence from management, access to the
Board, and a direct reporting line to, and oversight by, certain
committees; (iii) ensuring that the Audit Committee of the Board is
independent; (iv) transitioning the overall oversight of ERM to the
Board; and (v) assigning responsibility for risk decisions and policies
to address decision-making during a crisis. The Board Charter would
also be amended to codify the Board's existing responsibility for
overseeing and approving OCC's RWD Plan.
As noted above, the Proposed Rule Change would transfer
responsibility for the oversight of the enterprise risk management
(``ERM'') program from the RC to the Board.\44\ This change would allow
the Board to retain responsibility for the comprehensive oversight of
OCC's overall risk management framework, while retaining the ability to
delegate oversight of specific risks to designated committees, which
would then report to and be subject to oversight by the Board. OCC
believes that shifting enterprise risk oversight responsibility from
the RC to the Board would promote further engagement by and attention
from the Board regarding OCC's risk universe and how such risks impact
OCC's strategic direction and priorities, as well as provide for more
meaningful dialogue and discussion at Board meetings.\45\ OCC believes,
moreover, that the change would alleviate the potential for
overburdening the RC and establish clearer lines of oversight
responsibilities for particular risks across the Board's
committees.\46\ Additionally, the collective expertise of the Board
would be available to provide appropriate guidance relative to each key
risk within OCC's risk universe.\47\
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\44\ For example, the Proposed Rule Change would modify the
description of the Board's functions and responsibilities as part of
the description of the mission of the Board to include transitioning
the overall oversight of ERM to the Board. The RC Charter currently
provides that the committee is responsible for overseeing OCC's
overall ERM framework, including ``reviewing material policies and
processes relating to (i) membership criteria and financial
safeguards, (ii) member and other counterparty risk exposure
assessments, (iii) liquidity requirements and maintenance of
financial resources, (iv) risk modeling and assessments, (v) default
management planning, and (vi) risks related to new initiatives.''
The revised descriptions in the RC Charter regarding its oversight
of these areas would continue to involve responsibilities related to
credit, market, liquidity and systemic risk, but would no longer
include responsibility for overseeing those aspects related to the
ERM program.
\45\ See Notice at 45714.
\46\ See id.
\47\ See Notice at 45715.
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Consistent with changes to the RC Charter that provide that the RC
would no longer have responsibilities related to the ERM program, the
Proposed Rule Change would remove the RC's responsibility for strategic
and operational risks. OCC believes that these changes are appropriate
because issues regarding ERM are central to OCC's comprehensive
management of risk and would therefore benefit from the experience and
attention of the full Board.\48\
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\48\ See Notice at 45711.
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In connection with the RC no longer having responsibilities
regarding the ERM program, several related provisions would be removed
from the RC Charter. For example, the RC would no longer have
responsibility to oversee the structure, staffing, and resources of the
ERM program or approve its goals and objectives on an annual basis.
Additionally, the RC would no longer be responsible for reviewing OCC's
risk appetite statements and risk tolerances because the Board would
assume responsibility for approval of these matters.
The Proposed Rule Change would require that the TC review, at least
every twelve months, the adequacy of OCC's management of information
security risks, approve all material changes to written polices related
to the managing information security risks, and recommend such changes
to the Board.
[[Page 54392]]
Additionally, the Proposed Rule Change would address the
identification and escalation of risks. The AC Charter, the RC Charter,
and the TC Charter would each be amended to require the respective
committees to identify risk issues relating to their areas of oversight
that should be escalated to the Board for its review and consideration.
F. Internal Audit
The AC Charter would be amended to clarify that the AC shall
oversee the independence and objectivity of the internal audit
department. Further, the Proposed Rule Change would amend the AC
Charter to provide that the AC must review the effectiveness of the
internal audit function, including conformance with the Institute of
Internal Auditor's Code of Ethics and the International Standards for
Professional Practice of Internal Auditing. The AC Charter would also
be amended to authorize the AC to approve deviations to the audit plan
that may arise over the course of an audit. OCC believes that these
changes would be a natural extension of the AC's role and
responsibilities.\49\ Additionally, the Proposed Rule Change would
amend the AC charter to authorize the AC to approve management's
recommendation to appoint or replace the CAE.
---------------------------------------------------------------------------
\49\ See Notice at 45709.
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The Proposed Rule Change would also amend the AC charter to
authorize the AC to approve OCC's audited financial statements after
review, to oversee the timing and process for implementing a rotation
of the engagement partner of the external auditor, and to discuss
certain significant issues with the external auditor. OCC believes that
framing the AC's responsibilities in this manner would provide
appropriate flexibility for the committee to carry out its oversight
and advisory responsibilities using its business judgment.\50\
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\50\ See id.
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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 Act and the rules and regulations thereunder
applicable to such organization.\51\ 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)(F) of the
Exchange Act \52\ and Rules 17Ad-22(e)(2) and (3) thereunder.\53\
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\51\ 15 U.S.C. 78s(b)(2)(C).
\52\ 15 U.S.C. 78q-1(b)(3)(F).
\53\ 17 CFR 240.17Ad-22(e)(2) and (3).
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A. Consistency With Section 17A(b)(3)(F) of the Exchange Act
Section 17A(b)(3)(F) of the Act requires, among other things, that
the rules of a clearing agency be designed to promote the prompt and
accurate clearance and settlement of securities transaction and, in
general, to protect investors and the public interest.\54\
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\54\ 15 U.S.C. 78q-1(b)(3)(F).
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As described above, the Proposed Rule Change would make numerous
changes to OCC's rules. The changes address a number of areas,
including providing clarification and transparency to the committees'
processes and responsibilities, reducing redundancy and improving
readability of the charters, addressing the consistency of the charters
with the public interest, providing further detail and specificity
regarding the Board and management expertise, specifying clear and
direct lines of responsibility, including the responsibilities of the
Board and the committees and the responsibilities of management to
provide particular information to the Board and the committees, and
ensuring that the Board is responsible for OCC's overall risk
management.
The Commission believes that, as a general matter, the Proposed
Rule Change should help ensure that OCC has governance arrangements
that support its ability to promptly and accurately offer clearance and
settlement services to its Clearing Members and the markets OCC serves,
and effectively manage the range of risks that arise in the course of
providing such services. Moreover, the Commission believes that the
Proposed Rule Change should provide greater accessibility, transparency
and clarity to market participants to better understand OCC's
governance arrangements. For both of these reasons, the Commission
believes that the Proposed Rule Change is consistent with the prompt
and accurate clearance and settlement of securities transaction, and,
accordingly, with Section 17A(b)(3)(F) of the Exchange Act.\55\
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\55\ Id.
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The Proposed Rule Change is also designed, in part, to reallocate
responsibilities across OCC's governing bodies. For example, the
Proposed Rule Change would shift responsibility for investigations and
enforcement outcomes from the AC to the RC, which OCC has stated is
appropriate because the RC is better situated to review such matters
given its oversight the OCC's Clearing Membership framework.\56\
Similarly, the Proposed Rule Change would shift responsibility for ERM
from the RC to the Board, which OCC has stated would promote engagement
by and attention from the Board regarding OCC's risk universe and how
risks impact OCC's strategic direction and priorities.\57\ The
Commission believes that these aspects of the Proposed Rule Change
should better align these particular responsibilities with the relevant
expertise within OCC's Board and promote Board engagement in a manner
that should provide for a more effective framework for comprehensive
risk management, which, in turn, should help protect the public
interest. The Commission believes, therefore, that the Proposed Rule
Change is consistent, in general, with the protection of investors and
the public interest, and, accordingly, with Section 17A(b)(3)(F) of the
Exchange Act.\58\
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\56\ See Notice at 45709.
\57\ See Notice at 45712.
\58\ 15 U.S.C. 78q-1(b)(3)(F).
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B. Consistency With Rule 17Ad-22(e)(2) Under the Exchange Act
Rule 17Ad-22(e)(2) under the Exchange Act requires, among other
things, that a covered clearing agency establish, implement, maintain,
and enforce written policies and procedures reasonably designed to
provide for governance arrangements that meet certain criteria.\59\
---------------------------------------------------------------------------
\59\ 17 CFR 240.17Ad-22(e)(2).
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As described above in section II., the Proposed Rule Change would
amend the charters to provide that, in carrying out their
responsibilities, the Board and the committees would prioritize the
safety and efficiency of OCC, generally support the stability of the
broader financial system and consider legitimate interests of Clearing
Members, customers of Clearing Members and other relevant stakeholders,
including OCC's shareholders and other participant exchanges, taking
into account prudent risk management standards (including systemic risk
mitigation) and industry best practices. Such amended charter language
would be, at least in part, aligned with the provisions of Exchange Act
Rule 17Ad-22(e)(2), such as prioritizing the safety and efficiency of a
covered clearing agency and considering the interests of participants'
customers, securities issuers and holders, and other relevant
stakeholders
[[Page 54393]]
of the covered clearing agency.\60\ The Commission believes that these
amendments should provide for governance arrangements that allow the
Board and the committees to consider whether their actions are
consistent with such considerations. Accordingly, the Commission
believes that the proposed change providing for the inclusion of such a
statement is consistent with Exchange Act Rule 17Ad-22(e)(2).\61\
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\60\ See 17 CFR 240.17Ad-22(e)(2)(ii) and (vi).
\61\ See 17 CFR 240.17Ad-22(e)(2).
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Rule 17Ad-22(e)(2)(i) under the Exchange Act requires that such
governance arrangements are clear and transparent.\62\ As described
above in section II.A., the Proposed Rule Change includes changes that
should better clarify and assign certain responsibilities for the
governance and oversight of OCC among the Board and its respective
committees. Certain aspects of the Proposed Rule Change would amend
OCC's rules to provide clear and transparent descriptions of existing
operating procedures and lines of responsibility throughout OCC. For
example, the RC Charter would clarify that joint meetings of the RC
with other Board committees count toward the requirement to meet at
least six times a year. The Board Charter would remove the language
stating that the Board oversees ``OCC's information technology
strategy, infrastructure, resources and risks'' and replace it with
language stating that the Board oversees ``OCC's technology
infrastructure, resources, and capabilities to ensure resiliency with
regard to OCC's provision of its clearing, settlement, and risk
management services.'' Additionally, such statements include the
replacement of general statements in the TC Charter with specific
duties such as the review material changes to the operational execution
and delivery of core clearing and settlement services. The Commission
believes that these aspects of the Proposed Rule Change should improve
the clarity and transparency of OCC's governance arrangements by
clearly identifying the current responsibilities of the Board, its
committees, and management.
---------------------------------------------------------------------------
\62\ 17 CFR 240.17Ad-22(e)(2)(i).
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The Proposed Rule Change also includes changes ranging from
clarification (e.g., changing ``annually'' to ``each calendar year'')
to removal of redundancies (e.g., where a requirement is found
elsewhere in OCC's rules). Delineating between those tasks that must be
completed once each calendar year and those that must be completed
annually provides more specificity and clarity around the requirements
of OCC's rules. Similarly, the removal of redundant language, such as
the removal of statements in the GNC Charter are regarding candidate
nominations, which is in OCC's by-Laws, reduces the likelihood of later
interpretive conflicts arising. In addition, the consolidation of
documents, such as the Board Charter and CGP, along with the removal of
redundancies between such documents would improve the accessibility and
clarity of OCC's rules. The Commission believes that such consolidation
and removal of redundancies would make OCC's rules more readable for
the public and reduce the potential for internal inconsistencies in
OCC's rules. Accordingly, based on the foregoing, the Commission
believes that the proposed changes pertaining to the clarity and
transparency of OCC's rules are consistent with Exchange Act Rule 17Ad-
22(e)(2)(i).\63\
---------------------------------------------------------------------------
\63\ Id.
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Rule 17Ad-22(e)(2)(iii) under the Exchange Act requires that the
governance arrangements required under Rule 17Ad-22(e)(2) support the
public interest requirements of Section 17A of the Exchange Act
applicable to clearing agencies, and the objectives of owners and
participants.\64\ Further, Rule 17Ad-22(e)(2)(vi) under the Exchange
Act requires that the governance arrangements required under Rule 17Ad-
22(e)(2) consider the interests of participants' customers, securities
issuers and holders, and other relevant stakeholders of the covered
clearing agency.\65\ As described above in section II.B., the Proposed
Rule Change includes changes relevant to the consideration of the
interests of OCC's various stakeholders. The GNC would review the
composition of the Board at least once every three years and the Board
and committee charters at least annually for consistency with public
interest and regulatory requirements. Further, the GNC would annually
review and advise the Board with regard to whether directors are
independent as defined by the Board. The Commission believes that these
requirements should help ensure the protection of the public interest.
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\64\ 17 CFR 240.17Ad-22(e)(2)(iii).
\65\ 17 CFR 240.17Ad-22(e)(2)(vi).
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The Proposed Rule Change would also amend the charters to clarify,
among other things, that the Board and committees will generally
support the stability of the broader financial system and consider
legitimate interests of Clearing Members, customers of Clearing Members
and other relevant stakeholders, including OCC's shareholders and other
participant exchanges. The Commission believes that these amendments
should provide for governance arrangements that allow the Board and the
committees to consider whether their actions support the stability of
the broader financial system and to consider the legitimate interests
of Clearing Members, customers, and other relevant stakeholders.
Accordingly, based on the foregoing, the Commission believes that the
proposed changes pertaining to the composition of the Board, charter
language, and director independence are consistent with Exchange Act
Rules 17Ad-22(e)(2)(iii) and (vi).\66\
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\66\ 17 CFR 240.17Ad-22(e)(2)(iii) and (vi).
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Rule 17Ad-22(e)(2)(iv) under the Exchange Act requires that the
governance arrangements required under Rule 17Ad-22(e)(2) establish
that the board of directors and senior management have appropriate
experience and skills to discharge their duties and
responsibilities.\67\ As described above in section II.C., the Proposed
Rule Change includes revisions relevant to ensuring that the directors
and senior management have appropriate skills and experience. The
Proposed Rule Change would also address the CPC's role in management
succession planning and the GNC's role in director succession planning.
Succession planning is important to ensuring that future members of
OCC's senior management have appropriate experience and skills.
Relatedly, the Proposed Rule Change would revise the language
describing the GNC's role in identifying the Standards for directors on
OCC's Board. The Commission believes that these aspects of the Proposed
Rule Change should provide governance arrangements reasonably designed
to ensure that the board of directors and senior management have
appropriate experience and skills. The Proposed Rule Change would also
directly address the Board and GNC's responsibilities regarding Board
and director assessments. The Commission believes that assessing the
performance of the Board and directors may provide the information
necessary for OCC to identify gaps in the experience and skills
represented on its Board. Accordingly, based on the foregoing, the
Commission believes that the proposed changes pertaining to succession
planning, Standards for directors, and Board assessments are consistent
with Exchange Act Rule 17Ad-22(e)(2)(iv).\68\
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\67\ 17 CFR 240.17Ad-22(e)(2)(iv).
\68\ Id.
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[[Page 54394]]
Rule 17Ad-22(e)(2)(v) under the Exchange Act requires that the
governance arrangements required under Rule 17Ad-22(e)(2) specify clear
and direct lines of responsibility.\69\ As described above in section
II.D., the Proposed Rule Change would amend the charters in numerous
places to clarify the various responsibilities of the Board, the
committees, and OCC management. For example, the Proposed Rule Change
addresses the delegation of authority from the Board and committees and
describes the oversight responsibilities of the delegating body. The
Proposed Rule Change addresses revisions to the specific
responsibilities of the Board and committees, such as the oversight of
ERM by the Board and the review of investigation and enforcement
outcomes of disciplinary actions by the RC. Such changes document which
bodies would be granted various authorities while clarifying where the
ultimate responsibilities would reside. More generally, the Proposed
Rule Change would provide greater specificity and clarity regarding the
responsibilities of particular Board committees and would address how
the committees interact with the Board and also with management. The
Commission believes that these assignments and specifications of
responsibilities among the Board and its committees should provide for
clear and direct lines of responsibility for particular areas and
functions performed by OCC.
---------------------------------------------------------------------------
\69\ 17 CFR 240.17Ad-22(e)(2)(v).
---------------------------------------------------------------------------
The Proposed Rule Change also describes channels of communication
from management to the Board, such as authorization for the CFO to
communicate directly with the chair of the AC, as well as routine
reporting requirements designed to keep OCC's governing bodies apprised
of OCC's ongoing performance in areas relevant to each body.
Additionally, as noted above, the Proposed Rule Change would provide
for quarterly reporting to the RC from management regarding the
effectiveness of OCC's management of collateral and third party risks.
The Commission believes that such changes should clarify reporting
lines and access to OCC's Board and committees. Accordingly, based on
the foregoing, the Commission believes that the proposed changes
pertaining to the assignment of responsibilities and reporting are
consistent with Exchange Act Rule 17Ad-22(e)(2)(v).\70\
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\70\ Id.
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C. Consistency With Rule 17Ad-22(e)(3) Under the Exchange Act
Rule 17Ad-22(e)(3) under the Exchange Act requires, among other
things, that a covered clearing agency establish, implement, maintain,
and enforce written policies and procedures reasonably designed to
maintain a sound risk management framework for comprehensively managing
legal, credit, liquidity, operational, general business, investment,
custody, and other risks that arise in or are borne by the covered
clearing agency, which meet certain criteria.\71\ As described above in
section II.E., a number of the amendments that would be made by the
Proposed Rule Change address Board and committee responsibilities for
risk-related activities. For example, the transfer of oversight of ERM
from the RC to the Board may elevate and strengthen the focus on risk
management at OCC. Additionally, the Proposed Rule Change would provide
clarity regarding the identification and escalation of risk from
committees to the Board. The Commission believes that having in place
clear and transparent arrangements that facilitate risk identification
and escalation is an important component of a sound risk management
framework. Additionally, the Proposed Rule Change is designed, in part,
to provide flexibility in stating that the committees would perform
other duties as necessary or appropriate. The Commission recognizes
that, while a covered clearing agency's risk management framework must
be detailed to be comprehensive, it can also reflect a reasonable
degree of flexibility in order to allow the covered clearing agency to
respond to particular risks or issues arising in its operations in an
effective manner.\72\ Therefore, the Commission believes that including
in the Proposed Rule Change flexibility for the committees to address
such risks or issues, where exercised appropriately, may be a useful
complement to a detailed risk management framework that otherwise is
designed to comprehensively manage foreseeable risks that arise in or
are borne by the covered clearing agency.\73\ Accordingly, based on the
foregoing, the Commission believes that the proposed changes pertaining
to the assignment of responsibility for risk oversight are generally
are consistent with Exchange Act Rule 17Ad-22(e)(3).\74\
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\71\ 17 CFR 240.17Ad-22(e)(3).
\72\ Securities Exchange Act Release No. 78961 (September 28,
2016), 81 FR 70786, 70801 (Oct. 13, 2016.
\73\ In making this statement, the Commission is not expressing
a view as to the comprehensiveness of OCC's overall risk management
framework, which was not the subject of the Proposed Rule Change.
\74\ 17 CFR 240.17Ad-22(e)(3).
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Further, Rule 17Ad&22(e)(3)(iv) under the Exchange Act requires, in
part, that the risk management framework required under Rule 17Ad-
22(e)(3) provides internal audit personnel with oversight by an
independent audit committee of the board of directors.\75\ As described
above in section II.F., the Proposed Rule Change includes revisions
designed to strengthen the AC's oversight of OCC's internal audit
department. The Proposed Rule Change addresses the independence of
OCC's internal audit personnel by charging the AC with oversight of the
independence and objectivity as well as the effectiveness of OCC's
internal audit department. Such changes also provide for oversight of
audit personnel by the AC. Similarly, the Proposed Rule Change
strengthens the AC's oversight by providing authority to approve or
replace the CAE and to oversee the timing and process for implementing
a rotation of the engagement partner of the external auditor, and is
authorized to discuss certain significant issues with the external
auditor. The Commission believes that these aspects of the Proposed
Rule Change should provide an appropriate framework for the AC's
oversight of the internal audit function. Accordingly, based on the
foregoing, the Commission believes that the proposed changes pertaining
to the oversight of internal audit personnel are consistent with
Exchange Act Rules 17Ad-22(e)(3)(iii) and (iv).\76\
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\75\ 17 CFR 240.17Ad-22(e)(3)(iv).
\76\ 17 CFR 240.17Ad-22(e)(3)(iii) and (iv).
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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 \77\ and the rules and regulations thereunder.
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\77\ 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).
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It is therefore ordered, pursuant to Section 19(b)(2) of the
Exchange Act,\78\ that the Proposed Rule Change (SR-OCC-2018-012) be,
and hereby is, approved.
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\78\ 15 U.S.C. 78s(b)(2).
[[Page 54395]]
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For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\79\
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\79\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-23506 Filed 10-26-18; 8:45 am]
BILLING CODE 8011-01-P
