[Federal Register Volume 81, Number 184 (Thursday, September 22, 2016)]
[Notices]
[Pages 65415-65431]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-22792]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-78862; File No. SR-OCC-2016-002]
Self-Regulatory Organizations; The Options Clearing Corporation;
Order Approving Proposed Rule Change, as Modified by Amendment No. 1,
Concerning Enhancements to The Options Clearing Corporation's
Governance Arrangements
September 16, 2016.
On July 15, 2016, The Options Clearing Corporation (``OCC'') filed
with the Securities and Exchange Commission (``Commission'') the
proposed rule change SR-OCC-2016-002 pursuant to Section 19(b)(1) of
the Securities and Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4
thereunder.\2\ The proposed rule change was published in the Federal
Register on
[[Page 65416]]
August 3, 2016.\3\ The Commission did not receive any comments on the
proposed rule change. On August 24, 2016, OCC filed Amendment No. 1 to
the proposed rule change.\4\ This order approves the proposed rule
change.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ Exchange Act Release 78438 (July 28, 2016), 81 FR 51220
(August 3, 2016) (SR-OCC-2016-002).
\4\ In Amendment No. 1, OCC revised Item 2 of Form 19b-4 to
confirm that holders of all OCC common stock unanimously consented
to the amendments to OCC's Certificate of Incorporation and to
Article III, Sections 1, 10, 12, and 15 of its By-Laws as approved
by OCC's Board at a meeting held on May 4, 2016 and as contained
within the proposed rule change. Amendment No. 1 clarified further
that changes to OCC's Certificate of Incorporation would not take
effect until filed with Delaware Secretary of State. Amendment No. 1
is not subject to notice and comment because it does not materially
alter the substance of the proposed rule change or raise any novel
regulatory issues.
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I. Description of the Proposed Rule Change
OCC is amending its Certificate of Incorporation, By-Laws, and
Board of Directors (``Board'') Charter to require that only one
Management Director serve on OCC's Board (as opposed to the current
requirement of two Management Directors). Moreover, OCC is proposing to
amend its By-Laws and Rules to delete all references to the title and
responsibilities of the Management Vice Chairman. In addition, OCC is
amending its By-Laws to: (i) Provide that the Compensation and
Performance Committee (``CPC'') \5\ and the Audit Committee (``AC'')
each will be chaired by a Public Director; (ii) modify the composition
requirements of the Risk Committee (``RC'') to, among other things,
provide that an Exchange Director be a member of the Risk Committee;
(iii) provide for action by the OCC Board in the nomination process for
Member Directors and Public Directors; (iv) eliminate term limits for
Public Directors; and (v) consolidate By-Law sections that identify the
committees of the Board into a single section of the By-Laws. Finally,
OCC is amending the Charters of the Board and the AC, CPC, Governance
and Nominating Committee (``GNC''), RC, and Technology Committee
(``TC'') (collectively, ``Board Committees'' or ``Committees'' and each
a ``Board Committee'' or ``Committee'') that stem from scheduled
reviews of such documents.
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\5\ As described below, the Performance Committee will be
renamed the Compensation and Performance Committee.
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According to OCC, the amendments to the Board and Committee
Charters are designed, in general, to provide more clarity and
transparency around the oversight functions and responsibilities of the
Board and each of its Committees and provide for a more comprehensive
and robust oversight framework for the financial reporting, audit and
compliance, compensation and performance, governance and nomination,
risk, and technology functions at OCC.
The amendments to OCC's Certificate of Incorporation, By-Laws,
Rules, Board and Committee Charters, and Amended and Restated
Stockholders Agreement are described in detail below.
All capitalized terms not defined herein have the same meaning as
set forth in the OCC By-Laws and Rules.
(1) Amendments to OCC's Certificate of Incorporation
OCC is amending its Certificate of Incorporation to state that the
number of Management Directors serving on OCC's Board shall be such
number as shall be fixed by or pursuant to OCC's By-Laws.\6\ OCC stated
that the purpose of this proposed change is ultimately to require that
only one Management Director shall serve on OCC's Board. OCC will also
amend its By-Laws to state that one Management Director shall serve on
OCC's Board (as discussed in more detail below). The amendments will
also ensure consistency among all of OCC's governing documents
concerning the number of Management Directors on OCC's Board. OCC's
Certificate of Incorporation and By-Laws currently state that OCC's
Board shall be composed of Members Directors, Exchange Directors,
Public Directors, and two Management Directors. Recently, however,
there has been a vacancy for one Management Director position and only
one Management Director is serving on the Board at this time.\7\ OCC's
Board continually evaluates the leadership structure at OCC, including
the appropriate number of Management Directors for OCC's Board, and in
light of recent experience since the vacancy of the second Management
Director position, believes that amending the Board composition to
require only one Management Director on OCC's Board will provide an
appropriate level of management representation in the Board-level
oversight of OCC. OCC stated that the Executive Chairman, as Management
Director, continues to represent management's viewpoint on OCC's Board.
Moreover, the Board has access to OCC's management team, which OCC
believes ensures that the Board has continued access to management's
perspectives on the business and affairs of OCC. Furthermore, OCC notes
that, prior to the addition of a second Management Director seat in
2013, OCC has historically had only one Management Director serving on
its Board.\8\ Accordingly, OCC believes that the proposed amendments
would continue to provide for prudent governance arrangements at OCC.
OCC is also proposing conforming changes to the Board Charter as
described below.
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\6\ The number of Management Directors required to serve on
OCC's Board will be stipulated by Article III, Section 1 of OCC's
By-Laws. Article XI, Section 1 of OCC's By-Laws states that Article
III of the By-Laws may not be amended by action of the Board without
the approval of the holders of all of the outstanding Common Stock
of the Corporation entitled to vote thereon. Accordingly, any
proposed change in the number of Management Directors required to
serve on OCC's Board will continue to be subject to stockholder
approval.
OCC is also making conforming changes to Article III, Sections
10 (Resignations) and 12 (Filling of Vacancies and Newly Created
Directorships) of the By-Laws to reflect that only one Management
Director, the Executive Chairman, will be serving on OCC's Board.
\7\ In 2014, the Commission approved a proposed rule change
providing that OCC's President would not be considered a Management
Director and, therefore, only one Management Director (the Executive
Chairman) currently serves on the Board. See Securities Exchange Act
Release No. 73785 (December 8, 2014), 79 FR 73915 (December 12,
2014) (SR-OCC-2014-18).
\8\ In 2013, the Commission approved a proposed rule change by
OCC to provide for the separation of the powers and duties combined
in the office of OCC's Chairman of the Board of Directors into two
offices, Chairman and President, and to create an additional
directorship to be occupied by the President. See Securities
Exchange Act Release No. 70076 (July 30, 2013), 78 FR 47449 (August
5, 2013) (SR-OCC-2013-09).
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(2) Amendments to OCC's By-Laws and Rules
(a) Number of Management Directors on OCC's Board
Consistent with the amendments to the Certificate of Incorporation,
described above, OCC is amending Article III, Section 1 of its By-Laws
to state that only one Management Director will serve on OCC's Board
(as opposed to the current requirement of two). As noted above, OCC's
Board continually evaluates the leadership structure at OCC, including
the appropriate number of Management Directors for OCC's Board, and
believes that amending the Board composition to require one Management
Director on OCC's Board will continue to provide an appropriate level
of management representation in the Board-level oversight of OCC. OCC
is also making conforming changes to Article III, Sections 10
(Resignations) and 12 (Filling of Vacancies and Newly Created
Directorships) of the By-Laws to reflect that only one Management
Director, the Executive Chairman, would be serving on OCC's Board.
[[Page 65417]]
(b) Elimination of Management Vice Chairman Role
OCC is amending its By-Laws and Rules to eliminate the role of
Management Vice Chairman. The office of Management Vice Chairman has
been vacant for a number of years and has not been included in the
Board's current discussions regarding management succession planning.
During that time, OCC's thought process surrounding leadership roles at
OCC has evolved. OCC believes that any of the responsibilities of the
Management Vice Chairman have been appropriately handled by other
officers of OCC, primarily the Executive Chairman and President (or
where applicable, other officers such as the Secretary or Directors
such as the Member Vice Chairman) \9\ and as a result, this role is
being eliminated from OCC's By-Laws and Rules. OCC believes the
amendments will more accurately reflect the current state of affairs
regarding the office, ensure consistency across all of OCC's governing
documents, and provide more clarity and transparency regarding OCC's
intended governance arrangements.
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\9\ For example, under proposed revisions to Article IV, Section
7, the Member Vice Chairman would preside over Board and stockholder
meetings in the absence of the Executive Chairman.
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In particular, OCC is amending (i) By-Laws Article I.A.(13);
Article II, Section 4; Article III, Section 15; Article IV; Article V,
Sections 1 and 3; Article VI, Section 17; Article VIII, Section 5;
Article IX, Sections 12 and 14 and (ii) Rules 305, 309, 309A, 505,
609A, 801, 804, 805, 901, 903, 1104, 1106, 1309, 1402, 1405, 1604,
1610, 2104, 2110, and 2408 to remove all references to and
responsibilities of the role of Management Vice Chairman.
(c) Committee Descriptions and Other Conforming By-Law Amendments
OCC is amending Article III of its By-Laws to provide descriptions
of the AC, CPC, GNC, RC, and TC in a single section of the By-Laws.
Specifically, OCC is amending its By-Laws to consolidate existing
Article III, Section 4 (which concerns the GNC) and existing Article
III, Section 9 (which concerns the RC,\10\ the TC,\11\ and the Board's
ability to designate persons to serve on Committees, generally), into
Article III, Section 4 and adding descriptions of the CPC and AC to
Article III, Section 4 of its By-Laws in order to provide a more
transparent, centralized, and unified statement describing all of the
Board Committees.
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\10\ The description of the RC in proposed Article III, Section
4(d) of the By-Laws would reflect changes to OCC's existing policy
regarding the composition of the RC in order to conform the By-Law
provision to changes recommended as a result of the annual review of
the RC Charter (as discussed below). See infra note 15, and related
text.
\11\ The Commission recently approved a proposed rule change by
OCC to adopt a Technology Committee of the Board of Directors. See
Securities Exchange Act Release No. 77042 (February 3, 2016), 81 FR
6915 (February 9, 2016) (SR-OCC-2015-018).
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In addition, OCC will make a non-substantive drafting clarification
to existing language being relocated from Article III, Section 9 to the
introductory section of Article III, Section 4 to clarify that the
Board is required to designate persons to serve on the specifically
enumerated Committees therein.
The amended By-Laws description of the AC will reflect existing
requirements in the AC and GNC Charters that, on an annual basis, the
Board of Directors shall appoint an AC selected from among the
directors recommended by the then-constituted GNC after consultation
with the Executive Chairman and shall serve at the pleasure of the
Board, provided that no Management Director may serve on the AC. The
description of the AC will also include a new requirement that the
chairman of the AC shall be designated by the Board from among the
Public Director member(s) of the Committee (as described further
below).
The description of the CPC will reflect the existing requirement
that, on an annual basis, the Board of Directors shall appoint a CPC
and that the CPC generally consists of the Executive Chairman, the
Member Vice Chairman, and at least one Public Director.\12\ Consistent
with the preceding sentence, all of the CPC members will be selected by
the Board from among the directors recommended by the then-constituted
GNC after consultation with the Executive Chairman and shall serve at
the pleasure of the Board. The description will also include a new
requirement that the chairman of the CPC shall be designated by the
Board from among the Public Director member(s) of the Committee (as
described further below). OCC believes that consolidating the
descriptions of all Board Committees into Article III, Section 4 of its
By-Laws will provide more clarity and transparency to OCC's
participants regarding the existence and composition of such
Committees.
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\12\ The description of the CPC in the By-Laws will include the
general requirement that CPC shall include the Executive Chairman,
the Member Vice Chairman, and at least one Public Director. The
description is not intended to change the more specific CPC
composition requirements in the CPC Charter that the committee
consist of a Public Director Chair, the Executive Chairman, the
Member Vice Chairman, and three or more other directors appointed
annually by the Board.
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OCC is amending Article IV, Section 1 of the By-Laws to provide
that the Board will elect the Executive Chairman and Vice Chairman of
the Board upon the nomination of the GNC and also elect the President
of OCC (in addition to the Secretary and Treasurer). In addition, OCC
is amending Article IV, Section 7 to delete a requirement that the
Member Vice Chairman preside at the meetings of any Committee of the
Board of Directors charged with the responsibility for evaluating the
performance and compensation of officers as the CPC will now be chaired
by a Public Director. In addition, OCC will make amendments to clarify
that the Member Vice Chairman will preside over meetings of the Board
and stockholders in the absence of the Executive Chairman because the
President cannot preside over meetings of the Board.\13\
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\13\ See OCC's By-Laws Article IV, Section 8.
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(d) Compensation and Performance Committee and Audit Committee
Independence
In addition to the changes described above, OCC will also change
the Board Committee descriptions in proposed Article III, Sections 4(a)
and (b) of the By-Laws to reflect the requirement that a Public
Director \14\ chair the AC and the CPC. The GNC recently performed a
review of governance trends and best practices among self-regulatory
organizations as they relate to board-level compensation
committees.\15\ OCC undertook the review to further the Board's
oversight of employee compensation and benefits, recognizing that the
CPC primarily functions as a compensation committee (although it also
has broad oversight responsibilities for financial and budget matters).
OCC believes that having the CPC chaired by a Public Director (rather
than a Member Director,\16\ which is currently the case) will be more
consistent with governance best practices and practices of other self-
regulatory organizations. OCC believes that such a change will ensure
that compensation and related decisions are undertaken in a way that is
likely to support objective judgment and independence unfettered by
potential conflicts that may exist by having a Member Director chair
the CPC given OCC's self-regulatory responsibilities.
[[Page 65418]]
The Board agreed with the GNC's recommendation.
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\14\ See Article III Section 6A of OCC's By-Laws regarding
Public Directors.
\15\ The GNC Charter provides, in relevant part, that the
purpose of the GNC is to review on a regular basis the overall
corporate governance of OCC and recommend improvements to the Board
when necessary.
\16\ See OCC's By-Laws Article III, Section 3 and Section 5.
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Additionally, the GNC reviewed proposed regulatory standards for
audit committees of self-regulatory organizations that will require
such audit committees to be independent based on facts determined by a
given self-regulatory organization's board of directors. Such review
caused the GNC to recommend to the Board that a Public Director should
be required to chair the AC in order to align with governance best
practices for audit committees and to support the objectivity of the
AC. The Board agreed with the GNC's recommendation. Moreover, and in
furtherance of the goal of AC independence, any currently serving
Management Director(s) will not be eligible to serve on the AC.
(e) Risk Committee Membership
OCC is amending Article III of its By-Laws to modify the
composition requirements of OCC's RC. Existing Article III, Section 9
of OCC's By-Laws currently requires that the RC shall consist of the
Executive Chairman, the Member Vice Chairman, at least three other
Member Directors selected on a basis that shall not discriminate
against any Exchange, and one or more Public Directors. OCC is
replacing this description of the RC with new Article III, Section
4(d), which will modify the RC composition requirements to (i) provide
that an Exchange Director \17\ be a member of the RC and (ii) require
that at least one Member Director serve on the RC (as opposed to the
current minimum requirement of four Member Directors) and (iii) remove
a specific requirement that one of the Member Directors on the RC be
the Member Vice Chairman.
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\17\ See Article III Section 6 of OCC's By-Laws regarding
Exchange Directors.
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The GNC reviewed the membership composition of the RC and
determined that one Exchange Director should be a member of the RC.
Historically, the RC did not include Exchange Directors because Member
Directors were much more directly concerned with the risk management
and membership function of OCC due to the mutualization of risk among
Clearing Members as well as the fact that Clearing Members are
responsible for the contribution of margin and clearing fund deposits.
Given the evolution of the markets for which OCC provides clearance and
settlement services, OCC now believes that an Exchange Director should
be a member of the RC. OCC believes that Exchange Directors have
expertise and unique perspective on matters such as market risk as well
as sophistication as to special risks arising from trading practices,
strategies and new products.
In addition, the GNC recommended, and the Board approved, a
reduction in the minimum composition requirement for Member Directors
on the RC to allow for greater flexibility in the selection of
Directors with the requisite skills and expertise to serve on the RC.
OCC believes that Member Director participation on the RC is vital and
will continue to require that at least one Member Director serves on
the RC. OCC also believes, however, that it is necessary and
appropriate to maintain flexibility to ensure that the RC comprises
those Directors that have the appropriate mix of knowledge and
expertise necessary to provide for the prudent oversight of risk
matters at OCC.
(f) Nomination Process for Member Directors and Public Directors
OCC is amending Article III, Sections 5 and 6A; Article IV, Section
1; and adopting Amendment No. 1 to Amended and Restated Stockholders
Agreement to provide for Board action in the nomination process for
Member Directors, Public Directors, the Executive Chairman, and Member
Vice Chairman in conformance with the process set forth in the GNC
Charter.\18\ Currently, Board action is not a part of the annual
election process for Member Directors and Public Directors as described
in the By-Laws and the Amended and Restated Stockholders Agreement. The
amendments will provide that such persons will be nominated by the GNC
for purposes of the Board's annual election process and then confirmed
by the Board. OCC believes that the rule change will help ensure an
appropriate level of oversight and participation by the full Board in
determining its own composition and that the composition of the Board
fulfils its needs for particular skills and qualifications.
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\18\ The GNC Charter had already been reviewed by OCC in 2014
and approved by the Commission. See Securities Exchange Act Release
No. 72564 (July 8, 2014), 79 FR 40824 (July 14, 2014) (SR-OCC-2014-
09).
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(g) Elimination of Public Director Term Limits
OCC is amending Article III, Section 6A of its By-Laws, Section
IV.1. of the GNC Charter, and Section II.D. of the Board Charter to
remove term limits for Public Directors. OCC believes it is appropriate
to eliminate term limits for Public Directors because the learning
curve for directors of OCC is significant. OCC also believes that it
often takes several years for directors who come from outside the
industry to achieve the particularized degree of knowledge and
understanding about the business that is necessary to provide
significant value. Additionally, the GNC reviewed OCC's term limit
policy for Public Directors in light of benchmark data and governance
trends and determined that the elimination of term limits for Public
Directors is consistent with governance arrangements at large
corporations. Therefore, OCC is proposing to remove its term limits for
Public Directors in the interest of assuring that OCC has access to the
full benefit of a Public Director's understanding and learning, with
respect to OCC and the markets OCC serves, as it develops over time.
(3) Amendments to Board and Board Committee Charters and the Fitness
Standards
OCC represents that its amendments to the Board Charter are
intended to: (i) Harmonize the description of the Board's obligations
in the Board Charter with the description of the Board's obligations in
OCC's By-Laws and Rules; (ii) better align the Board Charter with the
Board's Corporate Governance Principles and By-Laws; (iii) reflect
recent changes involving Board Committee Charters; (iv) in general,
restate the Board's oversight responsibilities in a manner designed to
provide for prudent governance arrangements in light of OCC's role as a
systemically important financial market utility; and (v) make certain
non-substantive administrative changes to the Charter.
(a) Membership and Organization of the Board
OCC is amending Section II of the Board Charter regarding
membership and organization requirements to reflect the elimination of
the role of Management Vice Chairman as described above. As a result,
in the event that the Executive Chairman is absent or disabled, the
Member Vice Chairman shall preside over meetings of the Board. OCC is
also making amendments that will allow for additional meetings of the
Board being called as the Board deems appropriate (such meetings shall
be called by the Executive Chairman or his designee) and that specify
that the Executive Chairman shall consult with the Corporate Secretary
(in addition to other directors or officers) when establishing Board
meeting agendas.
OCC is also making amendments intended to strengthen the Board's
governance framework and practices surrounding meetings in executive
[[Page 65419]]
sessions by providing added structure regarding the convening and
attendance of executive sessions and promoting the enhanced recordation
of important meeting events and discussions. In particular, the
amendments will: (i) Require that the Board meet in executive session
at each regular meeting of the Board; (ii) allow the Board to determine
who will participate in such sessions; (iii) provide for the exclusion
of management, invited guests, and individual directors from executive
sessions where discussions may involve certain sensitive matters or
conflicts of interest; and (iv) require the Board to select a Director
to chair executive sessions in the absence of the Executive Chairman.
The amendments will also require that Board meeting minutes reflect, at
least in summary fashion, the general matters discussed in an executive
session. Specifically, the chair of the executive session will
determine whether separate minutes of the executive sessions are to be
recorded as well as the level of detail to be included in such minutes,
provided that Board meeting minutes must, at a minimum, reflect that an
executive session was convened and broadly describe the topic(s)
discussed.
In addition, OCC is also amending the Board Charter to state that
the Board comprises one Management Director, rather than two Management
Directors, in conformance with the proposed Certificate of
Incorporation and By-Laws changes described above. OCC is also amending
the Board Charter to reflect an increase in the number of Public
Directors serving on the Board from three to five.\19\
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\19\ The Commission approved the increase in the minimum number
of Public Directors on OCC's Board from three to five in July 2014.
See Securities Exchange Act Release No. 72564 (July 8, 2014), 79 FR
40824 (July 14, 2014) (SR-OCC-2014-09).
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To achieve a balanced representation on the Board among Member
Directors, OCC is amending the Board Charter to state that the
considerations involved in determining the nomination of Member
Directors should include the volume of business transacted with OCC
during the prior year and the mix of Member Directors that are
primarily engaged in agency trading on behalf of retail customers or
individual investors. OCC believes that the amendments reinforce the
existing requirement in Article III, Section 5 of OCC's By-Laws that
the GNC shall endeavor to achieve balanced representation among
Clearing Members on the Board of Directors to assure that: (i) Not all
Member Directors are representatives of the largest Clearing Member
Organizations based on the prior year's volume, and (ii) the mix of
Member Directors includes representatives of Clearing Member
Organizations that are primarily engaged in agency trading on behalf of
retail customers or individual investors. OCC is removing geographic
location of Clearing Members as a factor for consideration because OCC
believes that location is no longer a significant consideration given
modern technology and the evolution of the industry. OCC is also adding
language to the Board Charter (as well as the Committee Charters) to
discourage Directors from attending meetings of the Board by telephone
as currently provided in the Code of Conduct for OCC Directors.
Attendance by telephone will be generally discouraged because OCC
believes the Board may be less likely to have the kind of interaction
that leads to fully informed discussions and decisions than if Board
members were to meet in person.
(b) Responsibilities of the Board
OCC is making amendments to the Board Charter that are primarily
intended to: (i) Harmonize the description of the Board's obligations
in the Board Charter with the description of the Board's obligations in
OCC's By-Laws and Rules as well as the Board's Corporate Governance
Principles \20\ and (ii) restate the Board's oversight responsibilities
in a manner designed to provide for prudent governance arrangements in
light of OCC's position as a designated systemically important
financial market utility.
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\20\ OCC stated that the purpose of the Board's Corporate
Governance Principles is to assist OCC's Board in monitoring the
effectiveness of policy and decision making at the Board and
management levels. In particular, OCC meant the Board's Corporate
Governance Principles to address OCC's obligations as a systemically
important financial market utility to have policies and procedures
in place that promote sound governance, including those policies and
procedures identified in the Principles for Financial Market
Infrastructures published by the Committee on Payment and Settlement
Systems and the International Organization of Securities
Commissions.
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In cases when an obligation of the Board is expressed in both the
Board Charter and OCC's By-Laws and Rules, OCC is will remove the
obligation from the Board Charter. OCC will replace these charter
provisions with a general statement that the Board will perform those
functions as the Board believes appropriate or necessary, or as
otherwise prescribed by rule or regulation, including OCC's By-Laws and
Rules.\21\
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\21\ The change will remove from the Board Charter some of the
more specific obligations of the Board as already set forth in the
By-Laws and Rules in favor of a more general statement intended to
reflect that the Board would perform such functions as necessary or
appropriate under OCC's Rules, By-Laws and other rules or
regulations. The Board Charter provisions in question can generally
be identified by footnote citations to By-Law provisions included in
the Board Charter in Exhibit 5C.
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OCC is also making amendments to Section IV of the Board Charter
designed to provide for prudent governance arrangements emphasizing
that the Board's oversight role should operate in a manner consistent
with its responsibilities as a designated systemically important
financial market utility. Specifically, OCC is amending the Charter to
state that the responsibilities of the Board include: (i) Overseeing
management's activities in managing, operating and developing OCC and
evaluating OCC management's performance in executing its
responsibilities; (ii) selecting, overseeing and, where appropriate,
replacing the Executive Chairman of the Board and the President,
providing counsel and advice to the Executive Chairman and the
President as well as oversight of the performance of each such officer
and of OCC in order to evaluate whether the business is being
appropriately managed; (iii) setting expectations about the tone and
ethical culture of OCC, and reviewing management's efforts to instill
an appropriate tone and culture throughout OCC; (iv) providing
oversight of risk assessment and risk management monitoring processes,
including with respect to systemic risk and reviewing risk tolerances
submitted to the Board for approval by its Risk Committee; (v)
performing an annual self-evaluation of its performance, the
performance of its Committees, the performance of individual directors
and Committee members; and evaluating the Corporate Governance
Principles and Fitness Standards; (vi) reviewing the amount of
compensation for the Board's Public Directors (i.e., directors who are
not affiliated with any national securities exchange or national
securities association or with any broker or dealer) as well as
reviewing the annual study and evaluation of OCC's system of internal
accounting controls; (vii) providing oversight of internal and external
audit processes and financial reporting, including approving major
changes in auditing and accounting principles and practices; and (viii)
oversight of OCC's information technology strategy, infrastructure,
resources and risks.
In addition, OCC is modifying certain existing Board Charter
provisions related to the responsibilities of the Board. Specifically,
OCC is making amendments that will specify that, in
[[Page 65420]]
addition to overseeing major capital expenditures and approving the
annual budget and corporate plan, the Board is responsible for
reviewing and approving OCC's financial objectives and strategies,
capital plan and capital structure, OCC's fee structure, and major
corporate plans and actions, as well as periodically reviewing the
types and amounts of insurance coverage available in light of OCC's
clearing operations. OCC is also making amendments to specify that the
Board's responsibility for fostering OCC's compliance with applicable
laws and regulations includes compliance with banking, securities and
corporation laws and other applicable regulatory guidance and
standards. Additionally, OCC is amending provisions related to the
oversight of succession planning and executive compensation to state
more specifically that the Board is responsible for evaluating and
fixing the compensation of the Executive Chairman and President;
overseeing succession planning, human resource programs, and talent
management processes; and overseeing the development and design of
employee compensation, incentive and benefit programs.\22\ The
amendments will also remove a statement that OCC's Board is responsible
for overseeing OCC's processes and framework for assessing, managing
and monitoring strategic, financial and operational risk as this
function is performed by the RC (as reflected in its Charter) with
oversight from the Board.
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\22\ OCC noted that a deleted reference to the evaluation of
senior management is now covered by point (i) described in the
paragraph above.
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OCC is also making non-substantive organizational changes in
Section IV of the Board Charter. Specifically, OCC will combine
provisions related to the Board's responsibilities for approving and
overseeing OCC's business strategies and monitoring OCC's performance
of clearance and settlement services.
(c) Other Administrative Changes
In addition to the changes described above, OCC meant certain of
the amendments to the Board Charter to address non-substantive,
administrative issues. For example, certain amendments are being
proposed to Section III of the Board Charter to reflect the adoption of
the TC the GNC, and renaming of the Performance Committee to the CPC,
as described herein. In addition, OCC is also amending Section I of the
Board Charter to more accurately state that the Board is responsible
for providing direction to and overseeing the conduct of the affairs of
OCC (as opposed to just managing the business and affairs) and to
remove an unnecessarily specific list of OCC stakeholders. OCC is also
making amendments to require an annual (as opposed to the less specific
``periodic'') review of the Board Charter, including the Corporate
Governance Principles and Fitness Standards.
(d) Fitness Standards for Directors, Clearing Members and Others
OCC is also amending the Fitness Standards to remove descriptions
of the categories of directors represented on the Board and the process
by which they are nominated for Board service as these descriptions are
already maintained in Article III of OCC's By-Laws and the relevant
Committee Charters. Eliminating these redundant descriptions in the
Fitness Standards will promote efficiency and clarity by eliminating
the need to ensure consistency of the same information across multiple
documents. OCC believes that the amendments will underscore that the
Fitness Standards are intended to facilitate the performance of OCC's
role as a systemically important financial market utility.
(e) Common Amendments to Each Committee Charter
OCC is making conforming amendments to the Committee Charters as a
result of the Commission approving certain changes to the GNC Charter.
Specifically, OCC is amending each Committee Charter to confirm that
each Board Committee has access to all books, records, facilities and
personnel of OCC in carrying out the respective Board Committee's
purpose and responsibilities. OCC stated that this amendment to the
Committee Charters will make explicit a longstanding principle under
which each Committee has operated. Additionally, references to the
``Governance Committee'' in each Committee Charter will be changed to
the ``Governance and Nominating Committee'' to reflect the formation of
the GNC.
Furthermore, OCC will delete a provision from each Committee
Charter that grants the Chair of each Board Committee the authority to
act on behalf of the respective Board Committee in situations in which
immediate action is required and convening a Board Committee meeting is
impractical. Although this provision also requires each Chair to report
such actions to the respective Board Committee for ratification as soon
as practicable, OCC believes that removing this provision is
appropriate from a governance perspective because it supports
deliberation and action by a Board Committee as a whole rather than
action by a Chair. In addition, OCC represented that, historically,
each Board Committee has been able to convene when necessary.
OCC is changing each Committee Charter to strengthen OCC's Board
Committee governance framework and practices surrounding meetings in
executive sessions by providing added structure regarding the convening
and attendance of executive sessions and promoting the enhanced
recordation of important meeting events and discussions. Specifically,
each Committee Charter will be amended to: (i) Require that each
Committee meet in executive session at each regular meeting of the
Committee; (ii) allow the Committee to determine who will participate
in such sessions; and (iii) provide for the exclusion of management,
invited guests, and individual directors from executive sessions where
discussions may involve certain sensitive matters or conflicts of
interest. The amendments will also require that each Committee's
meeting minutes reflect, at least in summary fashion, the general
matters discussed in an executive session. In particular, the Chair (or
Acting Chair) will determine whether separate minutes of the executive
sessions are to be recorded as well as the level of detail to be
included in such minutes, provided that Committee meeting minutes must,
at a minimum, reflect that an executive session was convened and
broadly describe the topic(s) discussed.
Additionally, the Committee Charters will be amended to permit any
Board Committee to engage specialists or advisors to assist it in
carrying out its delegated responsibilities without prior Board
approval. Generally speaking, Committees must obtain pre-approval from
the Board to hire advisors. OCC's understanding is that public company
board committees frequently are authorized to engage advisors without
board pre-approval at the company's expense to preserve autonomy and
independence and to assist them in the execution of their
responsibilities as deemed necessary. Under the amended charters, each
Committee's engagement of an advisor, including fees and expenses, will
be referenced in its annual report to the Board. OCC intends these
amendments to foster Committee independence as well as timely Committee
access to expertise relevant to the discharge of its delegated
responsibilities while preserving Board
[[Page 65421]]
oversight via the application of existing reporting mechanisms.
OCC is also amending its Committee Charters to specify that each
Committee should evaluate its own and its individual members'
performances on an annual basis (as opposed to regularly) to provide
more clarity and specificity regarding the timing of each Committee's
self-assessment process.
(4) Amendments to the Audit Committee Charter
OCC is making amendments to the AC Charter intended to, among other
things: (i) Reinforce the independence of the AC; (ii) more accurately
memorialize and expand upon the activities of the AC with respect to
the oversight of OCC's financial reporting processes and enhance the
independence and objectivity in connection therewith; and (iii) in
general, provide more explicit descriptions of the AC's functions and
responsibilities.
(a) Purpose, Membership and Authority
OCC is changing Sections I, II and III of the AC Charter related to
the purpose, membership and organization, and authority of the AC. In
Section I of the AC Charter, OCC is making organizational changes to
certain statements regarding the AC's responsibility to serve as an
independent and objective party to oversee OCC's system of internal
control, compliance environment and processes. OCC stated that these
changes are non-substantive in nature. OCC is also making various
textual clarifications, which OCC believes are non-substantive, in
Section I, including, for example, replacing the term ``independent
accountants'' with ``external auditors'' and replacing ``Corporation''
with ``OCC,'' which will extend throughout the entire AC Charter. OCC
does not intend for the amendments to change the term ``independent
accountants'' to ``external auditors'' to signify a change in roles or
responsibilities.
OCC is also amending Section II of the AC Charter to reinforce the
independence of the AC. Specifically, the amendments provide that all
members of the AC be independent from OCC's management, as determined
by the Board from time to time, and that the Chair of the AC be a
Public Director.\23\ Additionally OCC is making amendments to clarify
that the Management Director, as described in Section 7 of Article III
of OCC's By-Laws, is ineligible to serve on the AC.\24\ OCC is also
revising the AC Charter to state that the AC will meet regularly, and
no less than once annually (as opposed to ``at least annually''), with
management, OCC's Chief Financial Officer, Chief Audit Executive
(``CAE'') and Chief Compliance Officer (``CCO'') in executive sessions
to discuss certain private matters. According to OCC, the purpose of
this change is to signify that these meetings and interactions occur
more than once per year. Section II of the AC Charter is amended to
explicitly provide the authority for the CAE and CCO to communicate
directly with the Chair of the AC, with respect to any of the
responsibilities of the AC, outside of regular meetings to further
underscore their independence. Further, OCC is amending Section II of
the AC Charter to state that attendance at an AC meeting by telephone
is discouraged because OCC believes the Committee may be less likely to
have the kind of interaction that leads to fully informed discussions
and decisions than if Committee members were to meet in person.
---------------------------------------------------------------------------
\23\ The change concerning the AC Chair will conform the AC
Charter to proposed Article III, Section 4(a) of OCC's By-Laws, as
described above.
\24\ In the event OCC has a Non-Executive Chairman, such
individual will not be considered a Management Director.
---------------------------------------------------------------------------
OCC is also amending the AC Charter to provide that the AC shall
make such reports to the Board as deemed necessary or advisable for the
purpose of promoting effective communication between the AC and the
Board, in line with requirements in other Committee Charters.
OCC is amending Section III of the AC Charter to confirm that the
AC's authority to hire advisors includes the authority to approve the
related fee and retention terms \25\ In addition to more accurately
reflecting current Committee practice, it would conform the AC charter
to OCC's other Committee Charters (i.e., the CPC, GNC, RC and TC
Charters) with respect their authority to hire advisors and approve
related fees and retention terms. As noted above, each of OCC's
Committee Charters will be amended to permit any Board Committee to
engage specialists or advisors to assist it in carrying out its
delegated responsibilities without prior Board approval in order to
foster Committee independence as well as timely access to relevant
expertise from outside specialists or advisors. The amendments will
clarify that this authority also extends to the approval of related fee
and retention terms.
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\25\ OCC will also remove a statement concerning the AC's
authority to obtain advice from independent counsel, accountants or
others as such statement would be replaced by a broader expression
of the AC's authority to hire advisors.
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(b) Functions and Responsibilities
OCC is also making a number of amendments to Section IV of the AC
Charter intended to reinforce and expand upon the activities of the AC
with respect to the oversight of OCC's financial reporting processes,
to enhance the independence and objectivity in connection therewith,
and to more explicitly describe the AC's functions and
responsibilities.
Oversight of External Auditor and Financial Reporting
OCC is amending the AC Charter regarding the AC's oversight of
financial reporting and external auditors. OCC intends the amendments
to the AC Charter to more accurately memorialize and expand upon the
AC's role with respect to financial reporting at OCC. With respect to
financial statements and financial reporting, the amendments state that
the AC is responsible for: (i) Discussing with management and external
auditors OCC's audited and unaudited financial statements; (ii) upon
management's recommendation, approving OCC's financial statements after
reviewing with management and external auditors prior to issuance; \26\
(iii) reviewing with management, external auditors and OCC's Internal
Audit Department significant financial reporting issues and judgments
made in connection with the preparation of financial statements,
critical accounting policies and estimates, any major issues regarding
accounting principles and financial statement presentation and the
effect of regulatory and accounting initiatives; (iv) approving
material changes to OCC's accounting policies; (v) resolving
disagreements between management and external auditors regarding
financial reporting; and (vi) reviewing and discussing with external
auditors any audit problems or difficulties, and management's response
thereto.
---------------------------------------------------------------------------
\26\ OCC intends the amendment to restate, clarify, and expand
on an existing statement in the AC Charter regarding the AC's review
of annual audited financial statements, which OCC will delete.
---------------------------------------------------------------------------
Additionally, to improve the AC's oversight and evaluation of
external auditors, OCC is amending the AC Charter to require the AC to:
(i) Discuss with management the timing and process for implementing a
rotation of the engagement partner of the external auditor and any
other active audit engagement team partner; (ii) monitor and evaluate
the qualifications of both the external auditor and engagement partner;
(iii) consider whether there
[[Page 65422]]
should be a regular rotation of the audit firm itself; and (iv) pre-
approve all services provided by the external auditor (as opposed to
only non-audit services).
Oversight of Internal Audit, Compliance and Compliance-Related Matters
OCC is amending Section IV of the AC Charter in order to more
clearly articulate the AC's responsibility for the oversight of
Internal Audit. Specifically, OCC is making amendments stating that the
AC's responsibilities include reviewing and approving the Internal
Audit Policy on an annual basis and monitoring ongoing internal audit
activities. OCC is also making amendments stating that the AC is
responsible for approving OCC's annual internal audit plan and
approving any CAE recommendations for removing or deferring any audits
from a previously approved internal audit plan to explicitly codify
these existing AC practices in the AC Charter. OCC believes that the
AC, which serves as an independent and objective party tasked with the
oversight of OCC's system of internal control, auditing, accounting,
and compliance processes, is the appropriate body to approve OCC's
internal audit plan and any CAE recommendations for removing or
deferring any audits from a previously approved internal audit plan.
OCC believes that the amendments will provide more clarity and
transparency regarding OCC's governance arrangements by codifying these
responsibilities found in the AC Charter.
OCC is also amending to Section IV of the Charter to more clearly
articulate the AC's responsibility for oversight of compliance and
compliance-related matters, including: (i) Annually reviewing and
approving OCC's Compliance Policy and employee Code of Conduct; (ii)
reviewing and approving the Compliance Department's process for
establishing the risk-based annual Compliance Testing Plan, monitoring
progress against the annual Compliance Testing Plan, and approving
changes to the Compliance Testing Plan recommend by the CCO; and (iii)
monitoring ongoing compliance activities by reviewing reports and other
communications prepared by the Compliance Department, including updates
from the CCO, and inquiring of management regarding steps taken to
address items raised.
In addition, OCC is clarifying the AC's responsibilities with
respect to: (i) Reviewing on a regular basis the significant
deficiencies and material weaknesses in the design or operation of
OCC's internal controls (as such issues are identified by or presented
to the AC); (ii) reviewing fraud involving OCC's management or other
employees; and (iii) reviewing and approving (as opposed to just
establishing) OCC's ``whistleblower'' procedures that govern reporting
of illegal or unethical conduct, accounting irregularities and similar
matters and discussing any substantive issues identified through such
procedures with relevant parties.
Oversight of OCC's Chief Audit Executive and Chief Compliance Officer
OCC is amending Section IV of the AC Charter to provide that the
CAE and CCO will each report functionally to the AC and
administratively to the Executive Chairman.\27\ According to OCC, the
amendments will make more explicit the reporting lines for these
functions and underscore the independence of the CAE and CCO. In
addition, OCC is eliminating provisions of the AC Charter that relate
to the AC's assessment of the performance of the CAE and Internal Audit
Department, the AC's approval of the compensation of the CAE, and the
AC's assessment of the Compliance function and replace them with
provisions that take into account the involvement of the Executive
Chairman in those functions. As amended, the AC Charter will state that
the AC, in consultation with the Executive Chairman, will review the
performance of the Internal Audit function and the CAE, the Compliance
function and the CCO, and determine whether to accept or modify the
Executive Chairman's recommendations with respect to the performance
assessment and annual compensation for each. OCC intends the changes
related to the performance and compensation setting regime for the CAE
and CCO to reflect the fact that the CAE and CCO report
administratively to the Executive Chairman while reporting functionally
to the AC.
---------------------------------------------------------------------------
\27\ This change explicitly notes existing reporting lines in
the AC Charter, but does not revise those reporting lines. These
provisions mirror a comparable provision in the RC Charter with
respect to the Chief Risk Officer.
---------------------------------------------------------------------------
(5) Amendments to the Compensation and Performance Committee Charter
OCC is changing its CPC Charter to explicitly describe the
Committee's functions and responsibilities with respect to OCC's human
resources, compensation and employee benefit programs, and insurance
programs. The amendments will also provide for CPC oversight of OCC's
Capital Plan in recognition of the importance of providing for Board-
level oversight to ensure OCC's capital and Capital Plan meet or exceed
minimum regulatory standards.
(a) Purpose, Membership, and Authority
OCC is renaming the Performance Committee to the CPC to reflect its
role more accurately. OCC is also amending Section I of the CPC Charter
to articulate that the CPC is tasked with assisting the Board in the
oversight of OCC's overall performance in promptly and accurately
delivering clearance, settlement and other designated industry services
and in the accomplishment of other periodically-established corporate
goals and objectives in light of OCC's systemically important status.
The CPC Charter will further delineate that the CPC is tasked with (i)
recommending the compensation of OCC's Executive Chairman and President
and approving the compensation of certain other officers, as
appropriate; (ii) overseeing OCC's Capital Plan and financial
performance; (iii) overseeing OCC's Human Resources program; (iv)
overseeing the structure and design of the employee compensation,
incentive and benefit programs; and (v) assisting the Board in
reviewing OCC's leadership development and succession planning.
Additionally, OCC is amending Section II of the CPC Charter related
to the membership and organization of the CPC to conform the CPC
Charter to proposed Article III, Section 4(b) of OCC's By-Laws to state
that the Chair of the CPC shall be a Public Director. In addition, OCC
is changing Section II of the CPC Charter to elaborate on the CPC's
responsibility to discuss and review the performance and compensation
levels (including benefits and perquisites such as sign-on bonuses,
retention arrangements, relocation arrangements and other financial
commitments of OCC) of members of the Management Committee and certain
other key officers, as appropriate.
OCC is also amending Section II to clarify that the CPC will meet
at least four times per year, which reflects the minimum number of
regular meetings in a year in a manner consistent with the charters of
other Board Committees, and to delete a provision of the CPC Charter
that requires the CPC Chair to meet in private session with the GNC
Chair to discuss performance of key officers as well as a provision
stating that the Chairs of the AC and RC will be invited to attend the
annual meeting to discuss compensation of key officers, including the
Chief Risk Officer (``CRO'') and CAE.\28\ The CPC Charter is amended to
[[Page 65423]]
require that minutes of Committee meetings be circulated to the Board
in conformance with general requirements applicable to all Board
Committees.\29\
---------------------------------------------------------------------------
\28\ These changes are being made to reflect a consultative
process as between the Executive Chairman and, as applicable, the RC
and Board to discuss the performance of key officers including the
CRO and CAE.
\29\ This requirement is already included in the AC, GNC, RC,
and TC Charters.
---------------------------------------------------------------------------
OCC is also amending the CPC Charter to discourage attendance at a
CPC meeting by telephone because OCC believes the Committee may be less
likely to have the kind of interaction that leads to fully informed
discussions and decisions than if Committee members were to meet in
person. In addition, other clarifying and textual changes will be made
including, for the reasons stated above, removal of references to the
Management Vice Chairman.
Additionally, OCC will make organizational changes in Section III
regarding the delegation of authority to the Administrative Committee
that do not change the meaning of the rule text.
(b) Functions and Responsibilities
OCC is amending Section IV of the CPC Charter to explicitly
describe the Committee's responsibilities with respect to OCC's capital
structure, financial planning and corporate goals and objectives; human
resources and compensation programs; and employee benefits programs in
order to provide a more robust framework for the CPC's oversight
functions. Additionally, OCC will remove explicit requirements in
Section IV that the CPC review the Corporate Plan and Budget and OCC's
performance under the Corporate Plan at each regularly scheduled
meeting in favor of more general descriptions regarding the CPC's
responsibilities for the oversight of the corporate financial planning
process, including the corporate budget, and corporate goals and
objectives. OCC intends the amendments to accommodate CPC review of
annual Corporate Plans and Budgets and performance thereunder (as
currently contemplated by the CPC Charter) as well as consideration of
longer-term horizons and implications in the strategic planning
process.
Oversight of OCC's Capital Plan
OCC is amending Section IV of the CPC Charter to explicitly provide
for the CPC's responsibilities in connection with overseeing OCC's
capital structure, financial planning, and corporate goals and
objectives. Specifically, the amendments will state that the CPC's
responsibilities include oversight of management's processes for
determining, monitoring and evaluating OCC's Capital Plan,\30\
including maintenance of required regulatory capital, and recommending
approval of such plan to the Board. These amendments will also specify
that the CPC is responsible for the annual review of OCC's Fee, Refund
and Dividend Policies and making recommendations to the Board for
changes to such policies and payments, if any, under the Refund and
Dividend Policies. In addition, OCC is making amendments to provide
that the CPC's responsibilities include the review and approval of fee
changes pursuant to the Capital Plan, review and recommendation to the
Board of changes to OCC's fee structure, and oversight of OCC's
corporate financial planning process (including reviewing the corporate
budget). Moreover, the amendments will provide for the CPC's
responsibility to review OCC's annual corporate goals and objectives
and recommend approval thereof to the Board and routinely receive
reports regarding progress in achieving such goals and objectives. The
amendments will also provide that the CPC is responsible for the
periodic review of OCC's insurance program.
---------------------------------------------------------------------------
\30\ See Securities Exchange Act Release No. 74387 (February 26,
2015), 80 FR 12215 (March 6, 2015) (SR-OCC-2014-813). See also
Securities Exchange Act Release No. 74452 (March 6, 2015), 80 FR
13058 (March 12, 2015) (SR-OCC-2015-02).
---------------------------------------------------------------------------
Oversight of Human Resources and Compensation Programs
OCC is amending Section IV of the CPC Charter to explicitly state
that the CPC's responsibilities include review of OCC's Human Resources
programs and policies, including OCC's talent acquisition, performance
management, training, benefits and succession planning processes and
review and approval of the structure, design, and funding as
applicable, of employee compensation, incentive and benefit programs.
OCC believes that this amendment will ensure that Board Committee
oversight for management's processes for hiring, retaining and
developing qualified staff and is consistent with the CPC's oversight
of overall succession planning processes. Additionally, OCC is amending
the CPC Charter to clarify that the CPC annually reviews and approves
the goals and objectives of the Executive Chairman and President.
Further, OCC is making amendments to the CPC Charter that will
require the CPC to periodically (not less than annually) review and
approve the general strategy, policies and programs with respect to
salary compensation (including management compensation) and incentive
compensation and seek to ensure compensation policies meet evolving
compensation practices so that such policies remain effective to
attract, motivate and retain executive officers and other key
personnel. The amendments will also require the CPC to review and
approve the performance and compensation of key employees, such as
members of OCC's Management Committee, at the end of each year and to
make recommendations to the Board regarding the compensation of the
Executive Chairman and the President. Additionally the amendments will
require the CPC to review proposed material changes to executive
management benefits and to periodically review the compensation of
Public Directors and make recommendations to the Board with respect
thereto.
OCC is amending the CPC Charter to remove certain statements
regarding the review of OCC's performance under the Corporate Plan and
the oversight of the administration of OCC's compensation plans as
these responsibilities will be covered under the amended descriptions
contained therein. OCC believes that it is prudent and appropriate to
provide for CPC oversight in the areas of human resources, performance,
and compensation and that the amendments will enhance OCC's overall
governance arrangements with respect to the oversight and review of
performance and compensation at OCC.
Oversight of Employee Benefit Programs and Other Responsibilities
OCC is also making amendments to Section IV of the CPC Charter
related to the CPC's oversight responsibilities for employee benefit
programs. Specifically, OCC is amending the CPC Charter to specify the
CPC's responsibilities for oversight, administration, and operation of
employee benefit, retiree and welfare benefit plans, including the
review of funding plan obligations. The amendments will also specify
the scope of employee welfare plans that the CPC reviews and the CPC's
right to adopt new compensation, retirement and welfare benefit plans
or to terminate existing plans other than such plans that require Board
action to amend or terminate. In addition, the amendments will provide
more clarity regarding the CPC's responsibilities for monitoring the
Administrative Committee's duties in connection with retirement and
retirement savings plans, investment strategy and performance, plan
design and compliance, prudent selection of investment managers and
compensation and benefits consultants, and
[[Page 65424]]
performing such other oversight duties as called for in retirement,
retirement and savings, and welfare plan documents.
OCC is making further amendments that state that the CPC is
responsible for providing updates to the Board periodically regarding:
(i) Actions taken by the CPC with respect to its review of OCC's
compensation, retirement and employee welfare plans; (ii) the financial
position and performance of these plans; and (iii) adherence to
investment guidelines, in each case, where applicable.
(6) Amendments to the Risk Committee Charter
OCC is amending its RC Charter primarily to enhance OCC's
governance arrangements with respect to the RC's oversight functions
and responsibilities. OCC is also making amendments to better align the
RC Charter with the OCC By-Laws, including changes in the composition
requirements of the RC (as described above) and to reflect the adoption
of the TC.
(a) Purpose, Membership and Authority
OCC is amending Section I of the RC Charter to provide that the RC
will be responsible for coordinating risk oversight with other Board
Committees tasked with overseeing certain risks (e.g., the TC, which
assists the Board in overseeing OCC's information technology risks) to
achieve comprehensive and holistic oversight of OCC's risk-related
matters. The amendments will also provide that the RC is responsible
for the review of material policies and processes associated with risks
related to new initiatives.
OCC is amending Section II of the RC Charter to provide that
attendance at a RC meeting by telephone is discouraged because OCC
believes the Committee may be less likely to have the kind of
interaction that leads to fully informed discussions and decisions than
if Committee members were to meet in person. OCC is also removing from
the RC Charter, and by extension its rules, a requirement that a RC
member shall recuse himself from any matter in which his firm has an
interest, other than a common interest shared with Clearing Members
generally or a particular class of Clearing Members. Currently, none of
the Committee Charters, other than the RC Charter, contain a such
recusal provision.\31\ OCC believes that the identification and
handling of conflicts of interest are already appropriately addressed
in its Code of Conduct for OCC Directors, which governs the conduct of
all directors regardless of category or committee assignment. OCC noted
that, as a corporation incorporated in the state of Delaware, OCC's
Directors have a fiduciary duty to protect the interests of the
corporation and to act in the best interests of its shareholders \32\
and are bound by a duty of loyalty to OCC, which demands that there be
no conflict between duty and self-interest and that the best interest
of the corporation and its shareholders takes precedence over any
interest possessed by a director.\33\
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\31\ The current CPC Charter includes a narrower provision
regarding recusal of the Executive Chairman from discussions of his
individual compensation, benefits, and prerequisites.
\32\ See Cede & Co. v. Technicolor, 634 A.2d 345, 360-361 (Del.
1993)
\33\ See Guth v. Loft, Inc., 5 A.2d 503, 510 (Del. 1939).
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With respect to RC meetings, OCC is amending the RC Charter to
state that the RC shall meet regularly, and no less than once annually,
(rather than ``at least annually'') with the CRO and members of
management (as opposed to other appropriate corporate officers) in
separate executive sessions to discuss certain private matters. OCC
stated that the purpose of the change is to signify that these meetings
occur more frequently than once per year. The changes will also
specifically require that the RC meet in executive session regularly
with members of management. The RC will continue to have the discretion
to invite any other officers it deems appropriate to meetings in
executive session pursuant to the common charter amendments described
above. Moreover, and in order to enhance the independence and
functional reporting relationship of the CRO to the RC, OCC will make
revisions to explicitly state that the CRO is authorized to communicate
with the RC Chair outside of regular meetings. OCC is also amending the
RC composition requirements in Section II to conform to the By-Law
changes discussed above. Specifically, the RC Charter will be revised
to state that the RC shall consist of the Executive Chairman, at least
one Exchange Director, at least one Member Director, and at least one
Public Director. OCC is also amending Section II to require that the RC
meet at least six times a year (as opposed to seven) in recognition of
the fact that the time allotted for each individual RC meeting has been
expanded. Furthermore, OCC is amending Section II of the RC Charter to
state that, unless a Chair is elected by the full Board, the members of
the RC shall designate a Chair by majority vote. OCC stated that this
amendment is in conformance with OCC's current practices for electing
Committee Chairs and as described in other Committee Charters.
OCC is also amending Section III of the RC Charter to provide that,
in addition to RC subcommittees, the RC may also delegate authority to
OCC's Management Committee or Enterprise Risk Management Committee. As
described herein, the RC is responsible for assisting the Board in
overseeing OCC's policies and processes for identifying and addressing
strategic, operational, and financial risks and for overseeing the
overall enterprise risk management framework implemented by management.
The amendment will allow the RC to delegate authority to the Management
Committee and Enterprise Risk Management Committee to carry out certain
tasks and responsibilities in the day-to-day risk management of OCC and
to implement proposals that the RC has approved in concept where the RC
deems such delegation of authority to be appropriate.
(b) Functions and Responsibilities
OCC is amending Section IV of the RC Charter to enhance its
governance arrangements in connection with the oversight of membership
requirements, margin requirements, the Enterprise Risk Management
Program, and a number of other responsibilities.
Oversight of Membership and Margin Requirements
OCC is amending the RC Charter to provide a broader description of
the RC's oversight of the adequacy and effectiveness of OCC's framework
for clearing membership. OCC stated that, in general, these changes are
not intended to substantively change or eliminate any of the RC's
existing responsibilities with respect to its oversight of OCC's
clearing membership framework and will continue to encompass the
responsibilities currently enumerated in the charter.\34\ Specifically,
the RC Charter provisions related to the RC's oversight role with
respect to clearing membership issues will be replaced with a more
general statement that the RC is responsible for the oversight of OCC's
framework for clearing membership, including: (i) Periodically
reviewing and revising, as appropriate, OCC's initial and ongoing
requirements for clearing
[[Page 65425]]
membership; \35\ (ii) overseeing the processes established for
reviewing and monitoring clearing membership (including in respect of
the continuance of potentially problematic members); \36\ and (iii)
making recommendations to the Board, as applicable, for final
determination in respect the foregoing.
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\34\ For example, individual provisions related to specific
types of membership categories and requirements will be replaced by
a broader restatement of the RC's responsibilities, which is
intended to capture all of the responsibilities enumerated in the
delete provisions.
\35\ The provision is a restatement of an existing RC
responsibility for periodically reviewing and recommending changes
to the initial and ongoing requirements for membership and will also
replace and encompass the responsibilities in an existing provision
of the RC Charter stating that the RC is responsible for
recommending to the Board membership requirements for non-broker-
dealers.
\36\ The provision this amendment will replace and encompass the
RC's responsibilities contained in existing RC Charter provisions
related to the conducting of hearings for applicants proposed to be
disapproved by the RC, the review and approval/disapproval of
requests to participate in the Stock Loan Programs, and the
approval/disapproval of the continued membership of managed Clearing
Members.
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In addition, OCC is modifying certain provisions related to the
surveillance of Clearing Members and contingency planning for Clearing
Member failures. Specifically, OCC will consolidate these provisions to
restate that the RC is responsible for the oversight of the adequacy
and effectiveness of OCC's contingency plan for Clearing Member
failures, including: (i) Reviewing Clearing Member surveillance
criteria; (ii) overseeing the management processes for managing
Clearing Members that are subject to closer than normal surveillance or
are otherwise in or approaching financial or operational difficulty;
(iii) imposing and modifying restrictions and requirements already
imposed on Clearing Members in a manner consistent with the By-Laws and
Rules; \37\ and (iv) making recommendations to the Board in respect of
the foregoing.
---------------------------------------------------------------------------
\37\ The provision will replace and encompass the
responsibilities in an existing RC Charter provision related to the
RC's responsibility for reviewing and modifying or reversing
restrictions or additional requirements imposed on Clearing Members
pursuant to OCC Rule 305.
---------------------------------------------------------------------------
OCC is making similar amendments to the RC Charter to restate the
RC's responsibilities in connection with its oversight of margin and
clearing fund requirements. OCC will remove certain existing provisions
related to the oversight of margin and clearing fund requirements and
replace them with a more high level description that will provide that
the RC oversees OCC's processes for establishing, monitoring and
adjusting margin consistent with the protection of OCC, Clearing
Members, or the general public, including: (i) Reviewing and modifying
OCC's margin formula, the methodologies used for determining margin and
clearing fund requirements, and making recommendations to the Board, as
applicable, in respect thereof; \38\ (ii) evaluating (including
increasing) the amount of margin required in respect of any contract or
position; (iii) establishing and reviewing guidelines for requiring the
deposit of additional margin; and (iv) reviewing and approving
determinations about assets eligible for deposit as margin or clearing
fund as provided in the By-Laws and Rules.\39\ OCC stated that, in
general, the amendments are not intended to substantively change the
RC's responsibilities in the deleted provisions but will instead
replace them with a broader description intended to encompass those
responsibilities. OCC will, however, delete an existing RC Charter
provision specifically requiring the RC to periodically review the
inputs to OCC's margin formula and modify them to the extent it deems
such action to be consistent with the protection of OCC, Clearing
Members, or the general public. While this specific requirement is
being removed from the Charter, OCC believes that the Charter continues
to provide an adequate and appropriate oversight framework for the
monitoring and development of OCC's margin formula and would provide
the RC with continued authority to modify margin formula inputs if it
deems such modification to be appropriate.\40\
---------------------------------------------------------------------------
\38\ This provision will include language from an existing
Charter provision stating that the RC will review methodologies used
for calculating margin and clearing fund requirements.
\39\ This provision will replace and encompass the RC's
responsibilities contained in existing Charter provisions related to
the oversight of acceptable margin and clearing fund assets,
including the approval of classes of GSE securities for deposit as
margin, prescribing intervals for revaluing debt securities
deposited as margin of clearing fund, and specifying haircuts for
securities provided as margin.
\40\ As noted above, the amendments to the RC Charter will
provide that the RC is responsible for overseeing the processes
established for establishing, monitoring and adjusting margin
consistent with the protection of OCC, Clearing Members, or the
general public, including reviewing and modifying OCC's margin
formula.
---------------------------------------------------------------------------
OCC is also deleting a provision stating that the RC is responsible
for making determinations regarding approval of non-U.S. institutions
to issue letters of credit as a form of margin asset because this
provision does not accurately reflect the RC's responsibilities. While
the RC is responsible for overseeing standards used to admit non-U.S.
institutions, OCC's President and Executive Chairman have general
responsibility for approving financial institutions seeking to become
non-U.S. letter of credit banks and that meet the requirements of OCC
Rule 604, Interpretation and Policy .01 (with the exception of certain
``equivalent country'' and ``equivalent institution'' determinations
that are required to be made by the RC pursuant to OCC Rule 604,
Interpretations and Policies .01(b)(3) and .01(b)(4)(b)).
Oversight of OCC's Enterprise Risk Management Program and Risk
Tolerances
OCC is making amendments to restate and expand upon the RC's
responsibility for overseeing OCC's Enterprise Risk Management program.
Currently, the RC is responsible for overseeing the structure, staffing
and resources of the Enterprise Risk Management program, reviewing
periodic reports regarding the Enterprise Risk Management program, and
annually reviewing and assessing the overall program. OCC is amending
the RC Charter to restate these existing responsibilities and add new
responsibilities designed to enhance the risk oversight framework for
the Enterprise Risk Management program. Specifically, the amendments
will state that the RC is responsible for overseeing OCC's Enterprise
Risk Management program, including (in addition to the existing
responsibilities noted above), reviewing the systems and procedures
that management has developed to manage the risks to OCC's business
operations and regularly discussing these systems and procedures with
management, reviewing with management the interrelated nature of OCC's
risks, and annually approving the Enterprise Risk Management program's
goals and objectives. OCC believes that explicitly incorporating these
responsibilities into the RC Charter will provide for a more
comprehensive oversight framework for the Enterprise Risk Management
program.
OCC is also making amendments to restate and expand upon the RC's
responsibility for the oversight of OCC's risk appetite and risk
tolerances. Currently, the RC Charter provides that the RC is
responsible for reviewing and recommending for Board approval the OCC
Risk Appetite Statement and reviewing and monitoring OCC's risk profile
for consistency with OCC's Risk Appetite Statement. The amendments to
the RC Charter will state that, in addition to these responsibilities,
the RC will be responsible for reviewing and monitoring determinations
regarding appropriate risk tolerances, including reviewing with
management on a regular basis management's view of appropriate risk
tolerances and assessing whether this view is appropriate, and
recommending risk
[[Page 65426]]
tolerance parameters to the Board. OCC believes that explicitly
incorporating these responsibilities into the RC Charter will provide
for a more comprehensive oversight framework for OCC's risk appetite
and risk tolerances.
Other Oversight Responsibilities
Section I of the RC Charter currently provides that the RC is
responsible for the oversight and review of material policies and
processes relating to member and other counterparty risk exposure
assessments. OCC is amending Section IV to further specify that the RC
oversees the adequacy and effectiveness of OCC's processes for setting,
monitoring and acting on risk exposures to OCC presented by banks,
depositories, financial market utilities and trade sources. OCC
believes that the oversight of such risk exposures is critical to
ensuring the safety and soundness of OCC and that specifically
including this responsibility in the RC Charter will provide for
greater clarity and transparency regarding the RC's role in overseeing
these risks. Section I of the RC Charter also currently provides that
the RC is responsible for the oversight and review of material policies
and processes (i) for identifying liquidity risks and (ii) relating to
liquidity requirements and the maintenance of financial resources. The
amendments to Section IV will further specify that the RC oversees the
processes established by OCC for setting, monitoring and managing
liquidity needs necessary for OCC to perform its obligations as a
systemically important financial market utility. OCC believes that
comprehensive oversight of liquidity risks and liquidity risk
management is critical to ensuring the safety, soundness, and
resilience of OCC and that providing more specificity regarding the
RC's responsibilities with respect to liquidity risk will provide for
greater clarity and transparency regarding the RC's role in such
oversight. In addition, OCC is amending the RC Charter to provide that
the RC and management discuss, on a regular basis, the impact on
systemic stability that may arise as a result of OCC's actions in
responding to an extraordinary market event, including the impending or
actual failure of a Clearing Member, and the development of strategies
to mitigate these effects. OCC believes it is prudent for management
and the RC to engage in regular discussions concerning OCC's actions in
extreme market events and the potential impacts on systemic stability
given OCC's role as a systemically important financial market utility.
OCC will also elaborate on the statement that the RC will perform
the responsibilities delegated to it by the Board under OCC's By-Laws
and Rules by specifying that this will include the authorization of the
filing of regulatory submissions pursuant to such delegation.
Additionally, OCC is making amendments to state that the RC will
oversee management's responsibility for handling financial (i.e.,
credit, market, liquidity and systemic) risks, including the structure,
staffing and resources of OCC's Financial Risk Management department.
In addition, OCC is making amendments to state that the RC's oversight
responsibilities include: (i) Identifying issues relating to strategic,
credit, market, operational, liquidity and systemic risks that should
be escalated to the Board for final action and (ii) reviewing,
approving and reassessing reporting metrics reflecting the risks for
which the RC has oversight.
Further, the amendments will specify that the RC oversees OCC's
model risk management process, policies and controls, including: (i)
Overseeing model risk governance; (ii) reviewing the findings of any
third party engaged by management to evaluate OCC's risk models; and
(iii) annually reviewing and approving the Model Validation Plan and
receiving periodic reports thereunder. Moreover, the amendments provide
that the RC is responsible for reviewing the results of any audits
(internal and external), regulatory examinations and supervisory
examination reports as to significant risk items or any other matter
relating to the areas that the RC oversees, as well as management's
responses pertaining to matters that are subject to the oversight of
the RC.
(c) Administrative Changes
Consistent with the GNC Charter and AC Charter, OCC is amending the
RC Charter to eliminate provisions under which the RC Chair attends the
year-end CPC meeting to discuss the performance and compensation levels
of the CRO. Rather, the RC, in consultation with the Executive
Chairman, will review the performance of the Enterprise Risk Management
and Model Validation programs as well as the CRO and determine whether
to accept or modify the Executive Chairman's recommendations with
respect to the performance assessment and annual compensation for the
CRO.\41\ This change reflects the reporting of the CRO to the Executive
Chairman for administrative purposes, while preserving functional
reporting to the Committee.
---------------------------------------------------------------------------
\41\ This change is consistent with comparable changes to the AC
Charter with respect to the annual compensation of the CAE and CCO,
respectively.
---------------------------------------------------------------------------
Further, the amendments will confirm that the RC has the
responsibility for ratifying, modifying, or reversing action taken by
OCC officers that have been delegated authority to consider requests by
Clearing Members to expand clearing activities to include additional
account types and/or products. Moreover, OCC is amending the RC Charter
to clarify that the RC has the authority to authorize the filing of a
regulatory submission pursuant to authority delegated to it by the
Board.
(7) Amendments to the Governance and Nominating Committee Charter
OCC is amending the GNC Charter to reflect the elimination of term
limits for Public Directors as discussed above and to state that
attendance of GNC meetings by telephone is discouraged because OCC
believes the Committee may be less likely to have the kind of
interaction that leads to fully informed discussions and decisions than
if Committee members were to meet in person. OCC will also delete a
provision stating that a designated officer of management shall serve
to assist the Committee and act as a liaison between staff and the
Committee because OCC believes based on its experience that designating
a formal role for a liaison was unnecessary. Deleting this requirement
will also maintain uniformity across all Committee Charters, as no
other Committee has a formally designated liaison.
OCC is also amending the GNC Charter to specify that the Chair (or
the Chair's designee) shall consult with the Corporate Secretary, in
addition to management, to prepare an agenda in advance of each GNC
meeting as the Corporate Secretary is responsible for coordinating the
preparation and distribution of Board and Board Committee meeting
agendas. In addition, OCC is making non-substantive drafting changes
regarding: (i) The numbering of certain provisions in Section I of the
GNC Charter and (ii) the requirements for GNC Committee reports to the
Board in Section II of the Charter.
(8) Amendments to the Technology Committee Charter
OCC is amending its TC Charter to require that the TC meet
regularly, and no less than once annually, with OCC's Chief Security
Officer (``CSO'') and to provide that the CSO is authorized to
communicate directly with the Chair of the TC in between meetings of
the
[[Page 65427]]
Committee in order to strengthen the autonomy and independence of the
CSO role at OCC. OCC is also amending the TC Charter to provide that
the TC shall make such reports to the Board as deemed necessary or
advisable. This change promotes effective communication between the TC
and the Board is in line with requirements in other Committee Charters.
OCC is also making non-substantive amendments to Section III of the
TC Charter to eliminate a provision that referenced approval of non-
audit services, which appeared to be an inadvertent carry-over from the
Audit Committee Charter and to Section IV of the Charter to change the
term ``the Company'' to ``OCC'' and ``Board of Directors'' to
``Board.''
II. Discussion
Section 19(b)(2)(C) of the Act \42\ directs the Commission to
approve a proposed rule change of a self-regulatory organization if it
finds that the rule change, as proposed, is consistent with the
requirements of the Act and the rules and regulations thereunder
applicable to such organization.
---------------------------------------------------------------------------
\42\ 15 U.S.C. 78s(b)(2)(C).
---------------------------------------------------------------------------
Section 17A(b)(3)(F) of the Act requires, inter alia, that the
rules of a clearing agency be designed, in general, to protect
investors and the public interest.\43\ Further, Rule 17Ad-22(d)(8) of
the Act requires that a clearing agency establish, implement, maintain,
and enforce written policies and procedures reasonably designed to, as
applicable, have governance arrangements that are clear and transparent
to fulfill the public interest requirements in Section 17A of the Act
applicable to clearing agencies, to support the objectives of owners
and participants, and to promote the effectiveness of the clearing
agency's risk management procedures.\44\
---------------------------------------------------------------------------
\43\ 15 U.S.C. 78q-1(b)(3)(F).
\44\ 17 CFR 240.17Ad-22(d)(8).
---------------------------------------------------------------------------
OCC's proposal relates to OCC's governance arrangements. The
proposal comprises changes to OCC's Certificate of Incorporation, By-
Laws and Rules, Amended and Restated Stockholders Agreement, Board
Charter, AC Charter, CPC Charter, RC Charter, GNC Charter, TC Charter,
and Fitness Standards (collectively, ``Governing Documents''), as
described in greater detail above in section I, Description of the
Proposed Rule Change. These changes fall broadly into the following
categories: (1) Board and Committee composition; (2) Committee
authority and procedures; (3) Board and Committee meeting management;
(4) Board and Committee responsibilities and functions; and (5)
administrative textual changes.
(1) Board and Committee Composition
OCC will revise its By-Laws, Amended and Restated Stockholders
Agreement, and Board Charter to reduce the number of Management
Directors on its Board from two to one and remove references to the
Management Vice Chairman. OCC stated that the position of the second
Management Director, which is meant to be filled by the Management Vice
Chairman, recently has been vacant. According to OCC, all of the
Management Vice Chairman's obligations have been appropriately managed
in the absence of a Management Vice Chairman. Further, OCC historically
operated with only one Management Director until 2013.
OCC will also amend its By-Laws, AC Charter, and CPC Charter to
require that the AC and the CPC each be chaired by Public Directors.
The role of Public Director Chairs is to contribute to the objectivity
and independence of the AC and CPC. The Commission believes that the
changes to OCC's governing documents facilitating inclusion of the
perspectives provided by OCC's Public Directors should support the
protection of the public interest because such Public Directors are not
affiliated with and therefore should not have conflicts obligating them
to represent the views of any national securities exchange,
association, broker, or dealer. Further, OCC is revising certain
Governing Documents, as described in section I above, to remove term
limits for Public Directors in recognition of the time necessary to
develop the knowledge and understanding of OCC's business and because
OCC believes that such directors provide significant value in the
governance process. Therefore, the Commission finds that the changes
described in section I above relating to the removal of the second
Management Director, requiring that the AC and CPC each be chaired by
Public Directors, and the removal of term limits for Public Directors,
are consistent with the requirement under Section 17A(b)(3)(F) of the
Act that the rules of a clearing agency be designed, among other
things, to protect the public interest.\45\
---------------------------------------------------------------------------
\45\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------
To enhance the independence of the oversight of OCC's control
functions, OCC will revise the By-Laws and the AC Charter to provide
that no Management Director may serve on the AC. Additionally, OCC will
revise the By-Laws and RC Charter to require that at least one Exchange
Director serve on the RC and to reduce the minimum number of Member
Directors on the RC. These changes to the RC composition are intended
to incorporate the expertise and perspective of OCC's owner Exchanges
while allowing for greater flexibility in the selection of directors
with the requisite skill and expertise to serve on the RC. The
Commission believes that independence and expertise are important in
the composition of the committees responsible for overseeing OCC's
control and risk management functions. Therefore, the Commission finds
that the changes to OCC's governing documents described above providing
that no Management Director may serve on the AC, requiring at least one
Exchange Director to serve on the RC, and reducing the minimum number
of Member Directors on the RC, are consistent with the requirement in
Rule 17Ad-22(d)(8) \46\ that each registered clearing agency establish,
implement, maintain, and enforce written policies and procedures
reasonably designed to have governance arrangements that are clear and
transparent, among other things, to fulfill the public interest
requirements in Section 17A of the Act applicable to clearing agencies
and to promote the effectiveness of the clearing agency's risk
management procedures.
---------------------------------------------------------------------------
\46\ 17 CFR 240.17Ad-22(d)(8).
---------------------------------------------------------------------------
As described in section I above, OCC intends to describe more
clearly in its By-Laws, Amended and Restated Stockholders Agreement,
Board Charter, and Fitness Standards the process for nominating Member
Directors, Public Directors, the Executive Chairman, and the Member
Vice Chairman. These changes are designed to provide for a consistent
description across OCC's Governing Documents, as applicable, of the
nomination process and the Board's participation in the process. The
Commission finds that the changes described above to OCC's Governing
Documents regarding the process for nominating Member Directors, Public
Directors, and Executive Chairman, and the Member Vice Chairman are
consistent with the requirement in Rule 17Ad-22(d)(8) \47\ that each
registered clearing agency establish, implement, maintain, and enforce
written policies and procedures reasonably designed to have governance
arrangements that are clear and transparent to fulfill the public
interest requirements in Section 17A of the Act applicable to clearing
agencies, to support the objectives of owners and participants, and to
promote
[[Page 65428]]
the effectiveness of the clearing agency's risk management procedures.
---------------------------------------------------------------------------
\47\ Id.
---------------------------------------------------------------------------
Additionally, OCC will make changes to certain Governing Documents,
as described in section I above, related to the composition of the RC.
Specifically, the changes will provide that the RC shall consist of the
Executive Chairman, at least one Exchange Director, at least one Member
Director, and at least one Public Director. In addition, the changes
will provide for the election of the RC Chair by the RC members in the
event that the Board does not designate a Chair. The Commission finds
that changes to OCC's Governing Documents to clearly provide for the
composition of the RC and for eventualities such as the failure of
OCC's Board to designate the Chair of the RC, are consistent with the
requirement in Rule 17Ad-22(d)(8) \48\ that each registered clearing
agency establish, implement, maintain, and enforce written policies and
procedures reasonably designed to have governance arrangements that are
clear and transparent, among other things, to support the objectives of
owners and participants and to promote the effectiveness of the
clearing agency's risk management procedures.
---------------------------------------------------------------------------
\48\ Id.
---------------------------------------------------------------------------
As described in section I(7) above, OCC will also remove the
requirement for a management liaison to the GNC from its GNC Charter
because OCC believes that no such position is necessary based on its
experience and because no other Board Committee has a formal management
liaison. The Commission finds that revising the design of a clearing
agency's policies and procedures related to its governance arrangements
by removing an unnecessary position from the composition requirements
of its governing bodies is consistent with the requirement in Rule
17Ad-22(d)(8) \49\ that each registered clearing agency establish,
implement, maintain, and enforce written policies and procedures
reasonably designed to have governance arrangements that are clear and
transparent, among other things, to fulfill the public interest
requirements in Section 17A of the Act applicable to clearing agencies
and to support the objectives of owners and participants.
---------------------------------------------------------------------------
\49\ Id.
---------------------------------------------------------------------------
(2) Committee Authority and Procedures
As described in section I(3)(e) above, OCC will remove language
from each Board Committee's Charter regarding the authority of the
Chair of each Board Committee to act on behalf of its respective Board
Committee in situations in which immediate action is required and
convening a Board Committee meeting is impractical. OCC stated that it
has been able to convene committee meetings when necessary and that the
change will promote fully informed, deliberate decision making.
Removing the authority of a Chair to act on behalf of a committee in
this manner should support the incorporation of various stakeholder
perspectives, which may include OCC's owners and participants as well
as the public. The Commission finds the changes to each Board
Committee's Charter to remove the authority of each Chair to act on
behalf of its respective Board Committee, as described in greater
detail in section I(3)(e) above, are consistent with the requirement in
Rule 17Ad-22(d)(8) \50\ that each registered clearing agency establish,
implement, maintain, and enforce written policies and procedures
reasonably designed to have governance arrangements that are clear and
transparent, among other things, to support the objectives of owners
and participants, because such changes should support the incorporation
of stakeholder perspectives that may include OCC's owners and
participants.
---------------------------------------------------------------------------
\50\ Id.
---------------------------------------------------------------------------
OCC will also make changes to certain Governing Documents that are
intended to enhance generally the quality of its governance
arrangements. As described in section I(3)(e) above, changes to each
Committee's Charter will allow each Committee to hire specialists
without prior Board authorization, and have access to all books,
records, facilities and personnel of OCC. As described in greater
detail in sections I(4), I(5), and I(8) above, the charters of the AC,
TC, and GNC will be revised to provide for more reporting to the full
Board, and the CPC Charter will be revised to require the CPC to
provide its full minutes to the Board. The Commission believes that
providing the authority to hire specialists should enhance committee
independence, while enhanced reporting requirements should support
Board oversight. The Commission finds that the changes to the Committee
Charters (i) to provide authority for Board Committees to hire
specialists and access OCC books, records, facilities and personnel,
and (ii) to provide for enhanced reporting requirements to the Board
are consistent with the requirement of Rule 17Ad-22(d)(8) \51\ that
each registered clearing agency establish, implement, maintain, and
enforce written policies and procedures reasonably designed to have
governance arrangements that are clear and transparent, among other
things, to fulfill the public interest requirements of Section 17A of
the Act applicable to clearing agencies.
---------------------------------------------------------------------------
\51\ Id.
---------------------------------------------------------------------------
Revisions to the RC Charter, described in greater detail in section
I(6)(a) above, will permit the RC to delegate authority to the
Management Committee and Enterprise Risk Management Committee while
specifying that the RC is responsible for ratifying the actions taken
under such delegated authority. Additionally, revisions to the RC
Charter, described in section I(6)(c) above, will confirm the RC's
authority to file certain regulatory submissions pursuant to
delegations of authority from the Board. The Commission believes that
the delegation of day-to-day risk management and implementation of RC-
approved proposals may better support the clearing agency's risk
management procedures by allowing the RC to better utilize its time and
expertise. Therefore, the Commission finds that the changes to the RC
Charter to allow the RC to delegate authority while requiring RC
ratification of delegated actions and to confirm the RC's authority to
authorize the filing of certain regulatory submissions pursuant to
delegated authority from the Board, as described in sections I(6)(a)
and (c) above, are consistent with the requirement in Rule 17Ad-
22(d)(8) \52\ that each registered clearing agency establish,
implement, maintain, and enforce written policies and procedures
reasonably designed to have governance arrangements that are clear and
transparent, among other things, to promote the effectiveness of the
clearing agency's risk management procedures.
---------------------------------------------------------------------------
\52\ Id.
---------------------------------------------------------------------------
(3) Board and Committee Meeting Management
OCC will remove from the RC Charter certain mandatory recusal
requirements designed to apply to Member Directors of the RC as
described in section I(6)(a) above. OCC makes available on its Web site
its Code of Conduct for OCC Directors, which addresses the
identification and management of conflicts of interest.\53\ OCC
believes that this specific recusal requirement contained in the RC
charter is unnecessary in light of the existing requirements under
Delaware law and OCC's Code of Conduct for OCC Directors. The
Commission finds that revising OCC's governing documents by
incorporating the identification and
[[Page 65429]]
management of conflicts of interest in a single policy or procedure
related to the governance of a clearing agency is consistent with the
requirement in Rule 17Ad-22(d)(8) \54\ that each registered clearing
agency establish, implement, maintain, and enforce written policies and
procedures reasonably designed to have governance arrangements that are
clear and transparent, among other things, to fulfill the public
interest requirements of Section 17A of the Act applicable to clearing
agencies because such revised documents will continue to include
requirements for the identification and management of director
conflicts of interest.
---------------------------------------------------------------------------
\53\ OCC has not filed its Code of Conduct for OCC Directors
with the Commission as a rule under Section 19 of the Act.
\54\ 17 CFR 240.17Ad-22(d)(8).
---------------------------------------------------------------------------
OCC also will make several revisions the Board Charter and
Committee Charters regarding the meeting structure and frequency of its
Board and Committees. As described in sections I(3)(a) and I(3)(e)
above, OCC will make revisions to the Board Charter and Committee
Charters intended to enhance the framework for holding and recording
executive sessions of the Board and Committees. The amended Board
Charter will require the Executive Chairman, in consultation with the
Corporate Secretary, to establish an agenda in advance of each Board
meeting, and revisions to the GNC Charter will similarly require the
GNC Chair, in consultation with the Corporate Secretary, to establish
an agenda in advance of each GNC meeting. Revisions to the Board
Charter and Committee Charters will discourage attendance by telephone
at Board and Committee meetings to promote fully informed discussions
and decisions. In addition, OCC will amend the Board Charter to
authorize the Board to hold additional meetings, as it deems
appropriate. Finally, as described in sections I(5)(a) and I(6)(a),
respectively, OCC will amend the CPC Charter to specify that the CPC
will meet four times per year, as opposed to in advance of each Board
meeting, and will amend the RC Charter to specify that the RC will meet
six, as opposed to seven, times per year. The Commission finds that
changes to OCC's governing documents to clearly describe Board and
Committee meeting practices and require the Board and Committees to
hold and record executive sessions as described in this paragraph are
consistent with the requirement in Rule 17Ad-22(d)(8) \55\ that each
registered clearing agency establish, implement, maintain, and enforce
written policies and procedures reasonably designed to have governance
arrangements that are clear and transparent, among other things, to
fulfill the public interest requirements of Section 17A of the Act.
---------------------------------------------------------------------------
\55\ Id.
---------------------------------------------------------------------------
(4) Board and Committee Responsibilities and Functions
As described above, OCC is amending the Board Charter and Committee
Charters regarding the functions and responsibilities of the Board and
its Committees. The revised Board Charter will describe the Board's
responsibilities in light of OCC's role as a systemically important
financial market utility, as detailed in section I(3)(b) above. As
described in section I(3)(c) above, amendments to the Board Charter
will require the Board to review its Charter, OCC's Corporate
Governance Principles, and Fitness Standards annually. Additional
revisions to the Board Charter are intended to specify that, in
addition to overseeing major capital expenditures and approving the
annual budget and corporate plan, the Board is responsible for
reviewing and approving OCC's financial objectives and strategies,
capital plan and capital structure, OCC's fee structure, and major
corporate plans and actions, as well as periodically reviewing the
types and amounts of insurance coverage available in light of OCC's
clearing operations. The Commission finds that changes to OCC's Board
Charter designed to document OCC's recognition of its responsibilities
as a systemically important financial market utility, to require the
Board to review certain OCC governing documents annually, and to
specify further the Board's responsibilities are consistent with the
requirement in Rule 17Ad-22(d)(8) \56\ that each registered clearing
agency establish, implement, maintain, and enforce written policies and
procedures reasonably designed to have governance arrangements that are
clear and transparent, among other things, to fulfill the public
interest requirements of Section 17A of the Act applicable to clearing
agencies.
---------------------------------------------------------------------------
\56\ Id.
---------------------------------------------------------------------------
As described in section I(3)(e) above, OCC is amending the Board
Charter and Committee Charters to require the Board and the Committees
to perform annual self-evaluations, and require the Board to evaluate
individual directors annually. The Commission finds that changes to
OCC's Board Charter and Committee Charters to require OCC's governing
bodies to perform such evaluations should support the effectiveness of
OCC's governing bodies and thus are consistent with the requirement in
Rule 17Ad-22(d)(8) \57\ that each registered clearing agency establish,
implement, maintain, and enforce written policies and procedures
reasonably designed to have governance arrangements that are clear and
transparent, among other things, to fulfill the public interest
requirements of Section 17A of the Act applicable to clearing agencies,
to support the objectives of owners and participants, and to promote
the effectiveness of the clearing agency's risk management procedures.
---------------------------------------------------------------------------
\57\ Id.
---------------------------------------------------------------------------
Revisions to the Board Charter are intended to make the RC, as
opposed to the Board, responsible for overseeing OCC's framework for
managing strategic, financial, and operational risk, with continued
oversight from the Board. OCC stated that this function is already
performed by the RC (as reflected in the RC Charter). The Commission
finds that changes to the Board and RC Charters intended to clarify the
RC's responsibility for the oversight of the risk management matters,
as described in section I(3)(b) above, are consistent with the
requirement in Rule 17Ad-22(d)(8) \58\ that each registered clearing
agency establish, implement, maintain, and enforce written policies and
procedures reasonably designed to have governance arrangements that are
clear and transparent, among other things, to promote the effectiveness
of the clearing agency's risk management procedures.
---------------------------------------------------------------------------
\58\ Id.
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OCC will revise the AC, RC, and TC Charters to clarify the
reporting lines of certain officers to their respective Board
Committees. In addition, the revised Committee Charters, among other
things, will require that the AC meets regularly, but no less than
annually with the CFO, CAE, and CCO; that the RC meets regularly, but
no less than annually with the CRO; and that the TC meets regularly,
but no less than annually with the CSO. Additionally, the revised
Committee Charters will authorize the officers listed above, other than
the CFO, to communicate directly with the Chairs of their respective
Board Committees. The Commission finds that these changes to OCC's
Committee Charters to clarify reporting lines of officers responsible
for OCC's control and risk management functions, as described in
sections I(4)(a), I(6)(a), and I(8) above, are consistent with the
requirement in Rule 17Ad-22(d)(8) \59\ that each registered clearing
agency establish, implement, maintain, and enforce written policies and
procedures reasonably designed to have governance arrangements that are
clear and
[[Page 65430]]
transparent, among other things, to promote the effectiveness of the
clearing agency's risk management procedures.
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\59\ Id.
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As noted above, OCC will revise certain Committee Charters
regarding the reporting lines of the CRO, CAE, and CCO. Consistent with
these changes, OCC will also revise the RC and AC Charters such that
the RC will set compensation for the CRO, and the AC will set
compensation for the CAE and CCO. Relatedly, OCC will amend the CPC
Charter to remove a requirement that the CPC meet with the RC Chair or
AC Chair in executive session regarding the compensation of the CRO,
CAE, or CCO. As described above in sections I(4)(b), I(5)(a), and
I(6)(c) above, these changes are intended to underscore the
independence of the CRO, CAE, and CCO. The Commission finds that these
changes are consistent with the requirement in Rule 17Ad-22(d)(8) \60\
that each registered clearing agency establish, implement, maintain,
and enforce written policies and procedures reasonably designed to have
governance arrangements that are clear and transparent, among other
things, to promote the effectiveness of the clearing agency's risk
management procedures.
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\60\ Id.
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OCC is amending the AC Charter regarding the AC's responsibilities.
The amended charter, among other things, will restate and revise the
AC's responsibility for oversight of the external auditor and financial
reporting; the Internal Audit department, Compliance department, and
compliance related matters; and OCC's Chief Audit Executive and Chief
Compliance Officer.
As described in greater detail in section I(4)(b) above, the
amendments are intended to reinforce and expand upon the AC's oversight
responsibilities, which should support OCC's control framework. The
Commission believes that the governance of OCC's control framework is
important to OCC's overall functioning. Therefore, the Commission finds
that the changes to the AC Charter to restate and revise the AC's
responsibility for oversight of OCC's control functions and the
officers responsible for managing such functions, as described above,
are consistent with the requirement in Rule 17Ad-22(d)(8) \61\ that
each registered clearing agency establish, implement, maintain, and
enforce written policies and procedures reasonably designed to have
governance arrangements that are clear and transparent, among other
things, to promote the effectiveness of the clearing agency's risk
management procedures.
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\61\ Id.
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OCC is amending the CPC Charter regarding the CPC's
responsibilities. Under the revised CPC Charter, among other things,
the CPC will be responsible for assisting the Board with oversight of
OCC's overall performance as well as capital and leadership planning,
approving the goals and objectives of the Executive Chairman, and
reviewing the compensation of the Management Committee. The amended CPC
Charter will restate and revise the CPC's responsibility for oversight
of OCC's Capital Plan; human resources and compensation programs; and
employee benefit programs, including the monitoring of the
Administrative Committee.
Under the revised CPC Charter, the CPC will also be responsible for
providing periodic updates to the Board regarding CPC actions with
respect to compensation, retirement, and employee welfare plans,
financial position and performance of such plans, and adherence to
investment guidelines. The Commission finds that changes to OCC's CPC
Charter as described in detail in section I(5)(b) above are consistent
with the requirement in Rule 17Ad-22(d)(8) \62\ that each registered
clearing agency establish, implement, maintain, and enforce written
policies and procedures reasonably designed to have governance
arrangements that are clear and transparent, among other things, to
fulfill the public interest requirements of Section 17A of the Act
applicable to clearing agencies, among other things, to support the
objectives of owners and participants.
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\62\ Id.
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OCC is amending the RC Charter to clarify and expand the RC's
responsibilities. Under the revised RC Charter, the RC will be
responsible for coordinating with the other Committees to achieve
comprehensive oversight of OCC's risk-related matters, among other
things. The amended RC Charter will restate and revise the RC's
responsibility for oversight of membership and margin requirements;
OCC's Enterprise Risk Management program and risk tolerances;
contingency planning and model risk management; the process for
managing exposures to banks, depositories, financial market utilities,
and trade sources as well as the process for managing liquidity needs;
and management's handling of the Financial Risk Management group,
review of OCC's risk reporting metrics, and identification of risk
issues for escalation to the Board.
The amended RC Charter will also restate and revise the RC's
responsibility for discussing, with management, the impact on systemic
stability that could arise out of OCC's responses to extraordinary
market events. The Commission finds that the changes to the RC Charter
as described in detail in section I(5)(b) above clarify and expand the
RC's responsibilities for coordination of risk-related matters,
oversight of membership requirements and risk management, and
discussion of the potential impact of OCC's responses to extraordinary
market events, and are consistent with the requirement in Rule 17Ad-
22(d)(8) \63\ that each registered clearing agency establish,
implement, maintain, and enforce written policies and procedures
reasonably designed to have governance arrangements that are clear and
transparent, among other things, to promote the effectiveness of the
clearing agency's risk management procedures.
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\63\ Id.
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(5) Administrative Textual Changes
OCC will make a number of textual changes to its governing
documents that are not intended to change the meaning of those
documents. Such changes include the following:
As described in section I(2)(c) above, OCC will
consolidate the current By-Law provisions describing its Board
Committees. OCC will also add By-Law provisions to describe those Board
Committees not currently described in the By-Laws.
As described in section I(3)(a) above, OCC will revise the
Board Charter, consistent with existing rules, to reflect an increase
in the number of Public Directors on OCC's Board from three to five. As
described in section I(3)(b) above, OCC will replace language in the
Board Charter concerning the Board's obligations that duplicates
language currently in OCC's By-Laws with a general statement that the
Board will perform functions, as it believes necessary, or as
prescribed by rules or regulation, and will reorganize section IV of
the Board Charter. As described in section I(3)(c) above, OCC will
remove the list of stakeholders from the introductory language of the
Board Charter, and will revise the language throughout the charter to
recognize the TC.
As described in greater detail in section I(3)(d) above,
OCC will remove, from its Fitness Standards, descriptions of the
categories of directors represented on the Board because they are
maintained in Article III of the By-Laws.
[[Page 65431]]
Across all of the charters, OCC will replace references to
the ``Performance Committee'' and the ``Governance Committee'' with
references to the ``Compensation and Performance Committee'' and
``Governance and Nominating Committee,'' respectively.
In certain Committee Charters, OCC will add broad
statements that encompass and replace current language concerning the
respective Committee's functions and responsibilities. The AC Charter
will state that the AC oversees internal controls and compliance. OCC
will remove language regarding review of the Corporate Plan and
administration of compensation plans from the CPC charter. OCC will
broaden the RC Charter description of the RC's oversight of the
clearing membership framework.
As described in section I(4)(a), OCC will replace the term
``independent accountant'' with ``external auditor'' in the AC Charter.
As described in section I(5)(a), OCC will reword the delegation of
authority to the Administrative Committee in the CPC Charter. As
described in section I(7), OCC will renumber sections in the first
paragraph of the GNC Charter.
As described in section I(6)(b), OCC will remove language
from the RC Charter regarding the approval of non-U.S. institutions to
issue letters of credit because this language contradicts OCC's By-
Laws. OCC will remove language from the TC Charter related to audit
because that language was inadvertently carried-over from the AC
Charter.
The Commission believes that the foregoing changes clarify the
language of OCC's governing documents. The Commission finds that
changes designed to clarify the language of a clearing agency's
governing documents are consistent with the requirement in Rule 17Ad-
22(d)(8) \64\ that each registered clearing agency establish,
implement, maintain, and enforce written policies and procedures
reasonably designed to have governance arrangements that are clear and
transparent, among other things, to support the objectives of owners
and participants.
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\64\ Id.
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III. Conclusion
On the basis of the foregoing, the Commission finds that the
proposal is consistent with the requirements of Act, and in particular,
with the requirements of Section 17A of the Act and the rules and
regulations thereunder.\65\
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\65\ In approving this proposed rule change, the Commission has
considered the proposed rule's 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
Act,\66\ that the proposed rule change (SR-OCC-2016-002), as modified
by Amendment No. 1, be, and it hereby is, approved.
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\66\ 15 U.S.C. 78s(b)(2).
\67\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\67\
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-22792 Filed 9-21-16; 8:45 am]
BILLING CODE 8011-01-P