[Federal Register Volume 80, Number 48 (Thursday, March 12, 2015)]
[Notices]
[Pages 13058-13069]
[FR Doc No: 2015-05556]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-74452; File No. SR-OCC-2015-02]

Self-Regulatory Organizations; The Options Clearing Corporation;
Order Approving Proposed Rule Change Concerning a Proposed Capital Plan
for Raising Additional Capital That Would Support The Options Clearing
Corporation's Function as a Systemically Important Financial Market
Utility

March 6, 2015.
    On January 14, 2015, The Options Clearing Corporation (``OCC'')
filed with the Securities and Exchange Commission (``Commission'') the
proposed rule change SR-OCC-2015-02 pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4
thereunder.\2\ The proposed rule change was published for comment in
the Federal Register on January 30, 2015.\3\ The Commission received
seventeen comment letters on OCC's proposal from OCC and seven other
commenters or groups.\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. OCC also filed proposals in this proposed
rule change as an advance notice under Section 806(e)(1) of the
Payment, Clearing, and Settlement Supervision Act of 2010
(``Payment, Clearing and Settlement Supervision Act''). 12 U.S.C.
5465(e)(1). On February 26, 2015, the Commission issued a notice of
no objection to the advance notice filing. See Exchange Act Release
No. 74387 (February 26, 2015) (SR-OCC-2014-813).
    \3\ Securities Exchange Act Release No. 74136 (January 26,
2015), 80 FR 5171 (January 30, 2015) (SR-OCC-2015-02). As the
Commission noted in the notice of filing of the proposed rule
change, OCC stated that the purpose of this proposal is, in part, to
facilitate compliance with proposed Commission rules and address
Principle 15 of the Principles for Financial Market Infrastructures
(``PFMIs''). The proposed Commission rules are pending. See
Securities Exchange Act Release No. 71699 (March 12, 2014), 79 FR
29508 (May 22, 2014) (S7-03-14). Therefore, the Commission has
evaluated this proposed rule change under the Act and the rules
currently in force thereunder. See Securities Exchange Act Release
No. 74136 (January 26, 2015), 80 FR 5171 (January 30, 2015) (SR-OCC-
2015-02).
    \4\ See Letter from Eric Swanson, General Counsel & Secretary,
BATS Global Markets, Inc., (February 19, 2015) (``BATS Letter I'');
Letter from Tony McCormick, Chief Executive Officer, BOX Options
Exchange, (February 19, 2015) (``BOX Letter I''); Letter from Howard
L. Kramer on behalf of Belvedere Trading, CTC Trading Group, IMC
Financial Markets, Integral Derivatives, Susquehanna Investment
Group, and Wolverine Trading, (February 20, 2015) (``MM Letter'');
Letter from Ellen Greene, Managing Director, Financial Services
Operations, SIFMA, (February 20, 2015) (``SIFMA Letter''); Letter
from James E. Brown, General Counsel, OCC, (February 23, 2015)
(responding to BATS Letter and BOX Letter) (``OCC Letter I'');
Letter from James E. Brown, General Counsel, OCC, (February 23,
2015) (responding to MM Letter) (``OCC Letter II''); Letter from
Barbara J. Comly, Executive Vice President, General Counsel &
Corporate Secretary, Miami International Securities Exchange, LLC
(February 24, 2015) (``MIAX Letter I''); Letter from James E. Brown,
General Counsel, OCC, (February 24, 2015) (responding to SIFMA
Letter) (``OCC Letter III''); Letter from John A. McCarthy, General
Counsel, KCG Holdings, Inc., (February 26, 2015) (``KCG Letter I'');
Letter from Eric Swanson, General Counsel and Secretary, BATS Global
Markets, Inc., (February 27, 2015) (``BATS Letter II''); Letter from
John A. McCarthy, General Counsel, KCG Holdings, Inc., (February 27,
2015) (``KCG Letter II''); Letter from Richard J. McDonald, Chief
Regulatory Counsel, Susquehanna International Group, LLP, (February
27, 2015), (``SIG Letter I''); Letter from Barbara J. Comly,
Executive Vice President, General Counsel & Corporate Secretary,
Miami International Securities Exchange, LLC (March 1, 2015) (``MIAX
Letter II''); Letter from James E. Brown, General Counsel, OCC,
(March 2, 2015) (``OCC Letter IV''); Letter from Eric Swanson,
General Counsel and Secretary, BATS Global Markets, Inc. (March 3,
2015)(``BATS Letter III''); and Letter from Tony McCormick, Chief
Executive Officer, BOX Options Exchange, (March 3, 2015) (``BOX
Letter II''); Letter from Brian Sopinsky, General Counsel,
Susquehanna International Group, LLP, (March 4, 2015) (``SIG Letter
II''). Since the proposal was filed as both an advance notice and
proposed rule change, the Commission considered all comments
received on the proposal, regardless of whether the comments were
submitted to the proposed rule change or advance notice. See
comments on the advance notice (File No. SR-OCC-2014-813), http://www.sec.gov/comments/sr-occ-2014-813/occ2014813.shtml and comments
on the proposed rule change (File No. SR-OCC-2015-02), http://www.sec.gov/comments/sr-occ-2015-02/occ201502.shtml. In its
evaluation of the proposed rule change, the Commission assessed
whether the proposal was consistent with the requirements of the Act
and the applicable rules and regulations thereunder.
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I. Description

    OCC is amending its By-Laws and other governing documents, and
adopting certain policies, for the purpose of implementing a plan for
raising additional capital (``Capital Plan'') under which the options
exchanges that own equity in OCC (``Stockholder Exchanges'' or
``Stockholders'') will make an additional capital contribution and
commit to replenishment capital (``Replenishment Capital'') in
circumstances discussed below, and will receive, among other things,
the right to receive dividends from OCC. In addition to the new capital
contribution and Replenishment Capital commitment, the main features of
the Capital Plan include: (i) A policy establishing OCC's clearing fees
at a level that would be sufficient to cover OCC's estimated operating
expenses

plus a ``Business Risk Buffer'' as described below (``Fee Policy''),
(ii) a policy establishing the amount of the annual refund to clearing
members of OCC's fees (``Refund Policy''), and (iii) a policy for
calculating the amount of dividends to be paid to the Stockholder
Exchanges (``Dividend Policy''). OCC states that it intends to
implement the Capital Plan on or after February 27, 2015, subject to
all necessary regulatory approvals.
    OCC states that it is implementing this Capital Plan, in part, to
increase significantly its capital in connection with being designated
systemically important by the Financial Stability Oversight Council
pursuant to the Payment, Clearing and Settlement Supervision Act. The
Capital Plan calls for an infusion of substantial additional equity
capital by the Stockholder Exchanges to be made on or about February
27, 2015, subject to regulatory approval, that when added to retained
earnings accumulated by OCC in 2014 will significantly increase OCC's
capital levels as compared to historical levels. Additionally, the
Capital Plan includes the Replenishment Capital commitment, which will
provide OCC with access to additional equity contributions by the
Stockholder Exchanges should OCC's equity fall close to or below the
amount that OCC determines to be appropriate to support its business
and manage business risk.

A. Background

    OCC is a clearing agency registered with the Commission and is also
a derivatives clearing organization (``DCO'') regulated in its capacity
as such by the Commodity Futures Trading Commission. OCC is a Delaware
business corporation and is owned equally by the Stockholder
Exchanges--five national securities exchanges for which OCC provides
clearing services.\5\ In addition, OCC provides clearing services for
seven other national securities exchanges that trade options (``Non-
Stockholder Exchanges''). In its capacity as a DCO, OCC provides
clearing services to four futures exchanges.
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    \5\ The Stockholder Exchanges are: Chicago Board Options
Exchange, Incorporated; International Securities Exchange, LLC;
NASDAQ OMX PHLX LLC; NYSE MKT LLC; and NYSE Arca, Inc.
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    According to OCC, it has devoted substantial efforts during the
past year to: (1) Develop a 5-year forward looking model of expenses;
(2) quantify maximum recovery and wind-down costs under OCC's recovery
and wind-down plan; (3) assess and quantify OCC's operational and
business risks; (4) model projected capital accumulation taking into
account varying assumptions concerning business conditions, fee levels,
buffer margin levels and refunds; and (5) develop an effective
mechanism that provides OCC access to replenishment capital in the
event of losses. Incorporating the results of those efforts, the
amendments to its By-Laws and other governing documents are intended to
allow OCC to implement the Capital Plan and thereby provide OCC with
the means to increase its shareholders' equity.

B. OCC's Projected Capital Requirement

    As described in detail below, OCC will annually determine a target
capital requirement consisting of (i) a baseline capital requirement
equal to the greatest of (x) six months operating expenses for the
following year, (y) the maximum cost of the recovery scenario from
OCC's recovery and wind-down plan, and (z) the cost to OCC of winding
down operations as set forth in the recovery and wind-down plan
(``Baseline Capital Requirement''), plus (ii) a target capital buffer
linked to plausible loss scenarios from operational risk, business risk
and pension risk (``Target Capital Buffer'') (collectively, ``Target
Capital Requirement''). OCC determined that for 2015, the appropriate
Target Capital Requirement is $247 million, reflecting a Baseline
Capital Requirement of $117 million, which is equal to six months of
projected operating expenses, plus a Target Capital Buffer of $130
million. This Target Capital Buffer is designed to provide a
significant capital cushion to offset potential business losses.
    According to OCC, it had total shareholders' equity of
approximately $25 million as of December 31, 2013.\6\ OCC is adding
additional capital of $222 million to meet its 2015 Target Capital
Requirement. OCC determined that a viable plan for Replenishment
Capital should provide for a replenishment capital amount that would
give OCC access to additional capital as needed up to a maximum of the
Baseline Capital Requirement (``Replenishment Capital Amount'').\7\
Therefore, OCC's Capital Plan will include the following in order to
provide OCC in 2015 with ready access to approximately $364 million in
equity capital:
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    \6\ See OCC 2013 Annual Report, Financial Statements, Statements
of Financial Condition, available on OCC's Web site, http://optionsclearing.com/components/docs/about/annual-reports/occ_2013_annual_report.pdf.
    \7\ The obligation to provide Replenishment Capital will be
capped at $200 million, which OCC projects will sufficiently account
for increases in its capital requirements for the foreseeable
future.

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------------------------------------------------------------------------
Baseline Capital Requirement............................    $117,000,000
Target Capital Buffer...................................     130,000,000
                                                         ---------------
Target Capital Requirement..............................     247,000,000
Replenishment Capital Amount............................     117,000,000
                                                         ---------------
Total OCC Capital Resources.............................     364,000,000
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C. Procedures Followed in Order To Determine Capital Requirement

    According to OCC, various measures were used in determining the
appropriate level of capital. An outside consultant conducted a
``bottom-up'' analysis of OCC's risks and quantified the appropriate
amount of capital to be held against each risk. The analysis was
comprehensive across risk types, including credit, market, pension,
operational, and business risk. Based on internal operational risk
scenarios and loss modeling at the 99% confidence level, OCC's
operational risk was quantified at $226 million and pension risk at $21
million, resulting in the total Target Capital Requirement of $247
million. Business risk was addressed by taking into consideration OCC's
ability to fully offset potential revenue volatility and manage
business risk to zero by adjusting the levels at which fees and refunds
are set and by adopting a Business Risk Buffer of 25% when setting
fees. Other risks, such as counterparty risk and on-balance sheet
credit and market risk, were considered to be immaterial for purposes
of requiring additional capital based on means available to OCC to
address those risks that did not require use of OCC's capital. As
discussed in more detail below in the context of OCC's Fee Policy, the
Business Risk Buffer of 25% can be achieved by setting OCC's fees at a
level intended to achieve target annual revenue that will result in a
25% buffer for the year after paying all operating expenses.
    Additionally, OCC determined that its maximum recovery costs will
be $100 million and projected wind-down costs would be $73 million. OCC
projected its expenses for 2015 will be $234 million, so that six
months projected expenses are $234 million/2 = $117 million. The
greater of recovery or wind-down costs, and six months of operating
expenses is $117 million, and thus serves as OCC's Baseline Capital
Requirement. According to OCC, it then computed the appropriate amount
of a Target Capital Buffer from operational risk, business risk, and
pension risk, resulting in a

determination that the current Target Capital Buffer should be $130
million. Thus, the Target Capital Requirement will be $117 million +
$130 million = $247 million.

D. Overview of, and Basis for, OCC's Proposal To Acquire Additional
Equity Capital

    According to OCC, in order to meet its Target Capital Requirement,
and after consideration of alternatives, OCC's Board of Directors
approved a proposal \8\ from OCC's Stockholder Exchanges pursuant to
which OCC would meet its Target Capital Requirement of $247 million in
early 2015 as follows:
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    \8\ On December 18, 2014, OCC's Board of Directors voted to
approve OCC's Capital Plan. At the time of the vote, OCC's Board of
Directors was comprised of 18 directors--five Stockholder Exchanges,
three public directors, one management director, and nine clearing
member directors.

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------------------------------------------------------------------------
Shareholders' Equity as of 1/1/2014.....................    $ 25,000,000
Shareholders Equity Accumulated Through Retained              72,000,000
 Earnings \9\...........................................
Additional Contribution from Stockholder Exchanges......     150,000,000
                                                         ---------------
Target Capital Requirement..............................     247,000,000
Replenishment Capital Amount............................     117,000,000
                                                         ---------------
Total OCC Capital Resources.............................     364,000,000
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    \9\ According to OCC, ``the $72 million is after giving effect
to the approximately $40 million refund'' expected to be made in
early 2015 for activities in 2014. Securities Exchange Act Release
No. 74136 (January 26, 2015), 80 FR 5171 (January 30, 2015) (SR-OCC-
2015-02).
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    The additional contribution by the Stockholder Exchanges will be
made in respect of their Class B Common Stock on a pro rata basis.\10\
The Stockholder Exchanges also have committed to provide additional
equity capital up to the Replenishment Capital Amount, which is
currently $117 million, in the event Replenishment Capital is needed.
While the Replenishment Capital Amount will increase as the Baseline
Capital Requirement increases, it will be capped at a total of $200
million that could be outstanding at any point in time. OCC estimates
that the Baseline Capital Requirement will not exceed $200 million
before 2022. If the limit is approached, OCC will revise the Capital
Plan as needed to address future needs. In consideration for their
capital contributions and replenishment commitments, the Stockholder
Exchanges will receive dividends as described in the Dividend Policy
discussed below for so long as they remain Stockholders and maintain
their contributed capital and commitment to replenish capital up to the
Replenishment Capital Amount, subject to the previously mentioned $200
million cap.
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    \10\ The pro rata basis is based on the Stockholder Exchanges'
interest in OCC. Currently, each Stockholder Exchange owns 20% of
OCC.
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E. Fee, Refund, and Dividend Policies

    Upon reaching the Target Capital Requirement, the Capital Plan and
the proposed Fee Policy will require OCC to set its fees at a level
that utilizes a Business Risk Buffer of 25%. The purpose of this
Business Risk Buffer is to ensure that OCC accumulates sufficient
capital to cover unexpected fluctuations in operating expenses,
business capital needs, and regulatory capital requirements.
Furthermore, the Capital Plan requires OCC to maintain Fee, Refund, and
Dividend Policies, described in more detail below, which are designed
to ensure that OCC's shareholders' equity remains well above the
Baseline Capital Requirement.
    The required Business Risk Buffer target net income margin of 25%
is below OCC's 10-year historical pre-refund average buffer of 31%. The
target will remain 25% so long as OCC's shareholders' equity remains
above the Target Capital Requirement amount. According to OCC, the
projected reduction in net income margin from OCC's actual historical
10-year average of 31% to the new target of 25% reflects OCC's
commitment to continue to operate as an industry utility and ensuring
that market participants benefit from OCC's operational efficiencies in
the future. This reduction will permit OCC to charge lower fees to
market participants rather than maximize refunds to clearing members
and dividend distributions to Stockholder Exchanges. According to OCC,
it will review its fee schedule on a quarterly basis to manage revenue
as closely to this target as possible. For example, if the Business
Risk Buffer is materially above 25% after the first quarter of a
particular year, OCC may decrease fees for the remainder of the year,
and conversely if the Business Risk Buffer realized in practice is
materially below 25% after the first quarter, OCC may increase fees for
the remainder of the year.\11\
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    \11\ If OCC's fee schedule needs to be changed in order to
achieve the 25% Business Risk Buffer, OCC will file a proposed rule
change seeking approval of the revised fee schedule.
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    The Capital Plan will allow OCC to refund approximately $40 million
from 2014 fees to clearing members in 2015 and to reduce fees in an
amount to be determined by OCC's Board of Directors, effective in the
second quarter of 2015. OCC will endeavor to provide clearing members
with no less than 60-day notice in advance of when the changes to fee
levels will become effective, particularly those that result in
increases to fee levels. No dividends will be declared until December
2015, and no dividends will be paid until 2016.
    Changes to the Fee, Refund, or Dividend Policies will require the
affirmative vote of two-thirds of the directors then in office and
approval of the shareholders of all of OCC's outstanding Class B Common
Stock.\12\ The formulas for determining the amount of refunds and
dividends under the Refund and Dividend Policies, respectively, which
are described in more detail below, assume that refunds are tax-
deductible but dividends are not. The Refund and Dividend Policies each
will provide that in the event that refunds payable under the Refund
Policy are not tax deductible, the policies will be amended to restore
the relative economic benefits between the recipients of the refunds
and the Stockholder Exchanges.
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    \12\ Each Stockholder Exchange owns the same amount of Class A
common stock and Class B common stock. Class B common stock is
entitled to receive dividends, whereas Class A common stock is not.
Class A common stock is entitled to vote for Member Directors,
whereas Class B common stock is entitled to vote for the Management
Director and Public Directors. Upon the liquidation of OCC, the
assets available for distribution to shareholders will be
distributed as follows: Holders of Class A common stock and Class B
common stock will be first paid the par value of their shares. Next,
each holder of Class B common stock will receive a distribution of
$1 million. Next, an amount equal to OCC's shareholders' equity at
December 31, 1998 of $22,902,094, minus the distributions described
above, will be distributed to those holders who acquired their Class
B common stock before December 31, 1998. Finally, any remaining
shareholders' equity will be distributed equally to all holders of
Class B common stock. For more information, see OCC's 2014 financial
statements available at http://www.theocc.com/components/docs/about/annual-reports/occ_2014_annual_report.pdf.
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1. Fee Policy
    Under the Fee Policy, in setting fees each year, OCC will calculate
an annual revenue target based on a forward twelve months expense
forecast divided by the difference between one and the Business Risk
Buffer of 25% (i.e., OCC will divide the expense forecast by .75).
Establishing a Business Risk Buffer at 25% will allow OCC to set fees,
and to manage the risk that such fees may generate less revenue than
expected due to lower-than-expected trading volume or other factors, or
that expenses may be higher than projected. The Fee Policy also will
include provisions from

existing Article IX, Section 9 of the By-Laws, which provide that the
fee schedule also may include additional amounts necessary to (i)
maintain such reserves as are deemed reasonably necessary by OCC's
Board of Directors to provide facilities for the conduct of OCC's
business and to conduct development and capital planning activities in
connection with OCC's services to the options exchanges, clearing
members, and the general public, and (ii) accumulate such additional
surplus as the Board may deem advisable to permit OCC to meet its
obligations to clearing members and the general public.
    However, OCC states that these provisions will be invoked only in
extraordinary circumstances and to the extent that the Board of
Directors has determined that the required amount of such additional
reserves or additional surplus will exceed the full amount that is
expected to be accumulated through the Business Risk Buffer (prior to
payment of refunds or dividends) so OCC's fees ordinarily will be based
on its projected expenses and the Business Risk Buffer of 25%.
    Under the Capital Plan, OCC will use the following formula to
calculate its annual revenue target as follows: Annual Revenue Target =
Forward 12 Months Expense Forecast/(1-.25). Because OCC's clearing fee
schedules typically reflect different rates for different categories of
transactions, fee projections will include projections as to relative
volume in each such category. The clearing fee schedule therefore will
be set to achieve a blended or average rate per contract that is
projected to be sufficient, when multiplied by total projected contract
volume, to achieve the Annual Revenue Target. Under extraordinary
circumstances, OCC will add any amount determined to be necessary for
additional reserves or surplus and divide the resulting number by the
projected contract volume to determine the applicable average fee per
cleared contract needed to achieve the additional amounts required. OCC
will notify clearing members of the fees OCC determines it will apply
for any particular period by describing the change in an information
memorandum distributed to all clearing members and will file any change
to its fee schedule with the Commission pursuant to its obligations
under Section 19(b)(1) of the Act.\13\
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    \13\ The Commission notes that future changes to OCC's fee
schedule as well as future changes to the Fee Policy, Refund Policy,
and Dividend Policy, are subject to Section 19(b)(1) of the Act and
Section 806(e) of the Payment, Clearing, and Settlement Supervision
Act, as applicable, both of which require OCC to submit appropriate
regulatory filings with the Commission provide an opportunity for
public comment, and require the Commission to review and ultimately
disapprove, object to, or require modification or rescission, as
applicable, if the changes do not meet regulatory requirements. See
15 U.S.C. 78s(b)(1); 12 U.S.C. 805(e); 17 CFR 240.19b-4(n).
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2. Refund Policy
    Under the Refund Policy, except at a time when Replenishment
Capital is outstanding as described below, OCC will declare a refund to
clearing members in December of each year, beginning in 2015, in an
amount equal to 50% of the excess, if any, of (i) the pre-tax income
for the year in which the refund is declared over (ii) the sum of (x)
the amount of pre-tax income after the refund necessary to produce
after-tax income for such year sufficient to maintain shareholders'
equity at the Target Capital Requirement for the following year plus
(y) the amount of pre-tax income after the refund necessary to fund any
additional reserves or additional surplus not already included in the
Target Capital Requirement. Such refund will be paid in the year
following the declaration after the issuance of OCC's audited financial
statements, provided that (i) the payment does not result in total
shareholders' equity falling below the Target Capital Requirement, and
(ii) such payment is otherwise permitted by applicable Delaware law and
federal laws and regulations. OCC will not be able to pay a refund on a
particular date unless dividends are paid on the same date.
    If Replenishment Capital has been contributed and remains
outstanding, OCC will not pay refunds until such time as the Target
Capital Requirement is restored through the accumulation of retained
earnings. Refunds in accordance with the Refund Policy will resume once
the Target Capital Requirement is restored and all Replenishment
Capital is repaid in full, provided that the restoration of the Target
Capital Requirement and the repayment of Replenishment Capital occurred
within 24 months of the issuance date of the Replenishment Capital. If
any Replenishment Capital has not been repaid in full or shareholders'
equity has not been restored to the Target Capital Requirement within
24 months, OCC will no longer pay refunds to clearing members, even if
the Target Capital Requirement is restored and all Replenishment
Capital is repaid at a later date.
3. Dividend Policy
    The Dividend Policy provides that, except at a time when
Replenishment Capital is outstanding as described below, OCC will
declare a dividend on its Class B Common Stock in December of each year
in an aggregate amount equal to the excess, if any, of (i) after-tax
income for the year, after application of the Refund Policy (unless the
Refund Policy has been eliminated, in which case the refunds shall be
deemed to be $0) over (ii) the sum of (A) the amount required to be
retained in order to maintain total shareholders' equity at the Target
Capital Requirement for the following year, plus (B) the amount of any
additional reserves or additional surplus not already included in the
Target Capital Requirement. Such dividend will be paid in the year
following the declaration after the issuance of OCC's audited financial
statements, provided that (i) the payment does not result in total
shareholders' equity falling below the Target Capital Requirement, and
(ii) such payment is otherwise permitted by applicable Delaware law and
federal laws and regulations. If Replenishment Capital has been
contributed and remains outstanding, OCC will not pay dividends until
such time as the Target Capital Requirement is restored.

F. Replenishment Capital Plan

    OCC also is establishing a Replenishment Capital Plan whereby OCC's
Stockholder Exchanges are obligated to provide on a pro rata basis \14\
a committed amount of Replenishment Capital should OCC's total
shareholders' equity fall below the ``hard trigger,'' described below.
The aggregate committed amount for all five Stockholder Exchanges in
the form of Replenishment Capital that could be accessed at any time
will be capped at the excess of (i) the lesser of (A) the Baseline
Capital Requirement, which is currently $117 million, at the time of
the relevant funding or (B) $200 million, over (ii) amounts of
outstanding Replenishment Capital (``Cap Formula''). The $200 million
figure in the Cap Formula accounts for projected growth in the Baseline
Capital Requirement for the foreseeable future.
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    \14\ The pro rata basis is based on the Stockholder Exchanges'
interest in OCC. Currently, each Stockholder Exchange owns 20% of
OCC.
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    The commitment to provide Replenishment Capital will not be limited
by time, but rather only by the Cap Formula. Replenishment Capital will
be called in whole or in part after the occurrence of a ``hard
trigger'' event described below. If the Baseline Capital

Requirement approaches or exceeds $200 million, OCC's Board of
Directors may consider, as part of its regular, periodic review of the
Replenishment Capital Plan, alternative arrangements to obtain
replenishment capital in excess of the $200 million committed under the
Replenishment Capital Plan. In addition, the Refund Policy and the
Dividend Policy provide that, in the absence of obtaining any such
alternative arrangements, the amount of the difference will be
subtracted from amounts that would otherwise be available for the
payment of refunds and dividends. Replenishment Capital contributed to
OCC under the Replenishment Capital Plan will take the form of a new
class of common stock (``Class C Common Stock'') of OCC to be issued to
the Stockholder Exchanges solely in exchange for Replenishment Capital
contributions.
    The Replenishment Capital Plan is a component of OCC's overall
Capital Plan. In implementing the Replenishment Capital Plan, OCC's
management will monitor OCC's levels of shareholders' equity to
identify certain triggers, or reduced capital levels, that might
require action. OCC has identified two key triggers--a ``soft trigger''
and a ``hard trigger''--and proposes that OCC will take certain steps
upon the occurrence of either.
    The ``soft trigger'' for re-evaluating OCC's capital will occur if
OCC's shareholders' equity falls below the sum of (i) the Baseline
Capital Requirement and (ii) 75% of the Target Capital Buffer. The soft
trigger will be a warning sign that OCC's capital has fallen to a level
that requires attention and responsive action to prevent it from
falling to unacceptable levels. Upon a breach of the soft trigger,
OCC's senior management and OCC's Board of Directors will review
alternatives to increasing capital, and take appropriate action as
necessary, including increasing fees or decreasing expenses, to restore
shareholders' equity to the Target Capital Requirement.
    The ``hard trigger'' for making a mandatory Replenishment Capital
call will occur if shareholders' equity falls below 125% of the
Baseline Capital Requirement (``Hard Trigger Threshold''). OCC
considers that a breach of the Hard Trigger Threshold is a sign that
significant corrective action, with a more immediate impact than
increasing fees or decreasing expenses, should be taken to increase
OCC's capital, either as part of a recovery plan or a wind down plan
for OCC's business. Based on current numbers, OCC's shareholders'
equity will have to fall more than $100 million below the fully funded
capital amount described above in order to breach the Hard Trigger
Threshold. As a result, OCC views the breach of the Hard Trigger
Threshold as unlikely and occurring only as a result of a significant,
unexpected event. In the event of such breach, OCC's Board of Directors
must determine whether to attempt a recovery, a wind-down of OCC's
operations, or a sale or similar transaction, subject in each case to
any necessary Stockholder consent. If the Board of Directors decides to
wind-down OCC's operations, OCC will access the Replenishment Capital
in an amount sufficient to fund the wind-down, as determined by the
Board of Directors, and subject to the Cap Formula. If the Board of
Directors decides to attempt a recovery of OCC's capital and business,
OCC will access the Replenishment Capital in an amount sufficient to
return shareholders' equity to an amount equal to $20 million above the
Hard Trigger Threshold subject to the Cap Formula described above.
    While Replenishment Capital is outstanding, no refunds or dividends
will be paid and, if any Replenishment Capital remains outstanding for
more than 24 months or the Target Capital Requirement is not restored
during that period, changes to how OCC calculates refunds and dividends
may be necessary (as described in more detail above in OCC's Refund
Policy and Dividend Policy). In addition, while Replenishment Capital
is outstanding, OCC first will utilize the entire amount of available
funds to repurchase, on a pro rata basis from each Stockholder
Exchange, to the extent permitted by applicable Delaware and federal
law and regulations, outstanding shares of Class C Common Stock as soon
as practicable after completion of the financial statements following
the end of each calendar quarter at a price equal to the original
amount paid for such shares, plus an additional ``gross up'' amount to
compensate the Stockholder Exchanges for taxes on dividend income (if
any) that they may have to recognize as a result of such
repurchase.\15\ For this purpose, ``Available Funds'' will equal, as of
the end of any calendar quarter, the excess, if any, of (x)
shareholders' equity over (y) the Minimum Replenishment Level. The
``Minimum Replenishment Level'' will mean $20 million above the Hard
Trigger Threshold, so that OCC's shareholders' equity will remain at or
above the Minimum Replenishment Level after giving effect to the
repurchase. Furthermore, under the Dividend and Refund Policies,
refunds and dividends will be suspended until such time as the Target
Capital Requirement is restored.
---------------------------------------------------------------------------

    \15\ According to OCC, based on current federal tax rates, if
the full amount of the payment is classified as a dividend and the
recipient is entitled to a dividends received deduction, this gross
up is estimated to be approximately 12% of the payment.
---------------------------------------------------------------------------

G. Amendments to Governing Documents

    In order to implement the Capital Plan, OCC is amending its By-Laws
and Restated Certificate of Incorporation and amending and restating
its Stockholders Agreement.
1. Amendments to By-Laws
    OCC is amending its By-Laws in order to implement the Capital Plan.
Specifically, OCC is amending the definition of Equity Exchange in
Article I, Section 1 to take into account the potential ownership of
Class C Common Stock by the Stockholder Exchanges.
    Article II, Section 3 is being amended to change the definition of
quorum such that a majority of outstanding common stock entitled to
vote at a meeting of Stockholders either in person or by proxy will
constitute a quorum for any such meeting of the Stockholders. In
addition, OCC is amending Article II, Section 5 to allow for the
potential issuance of Class C Common Stock, which will not have voting
rights except as required by applicable law.
    Article VIIA, Section 2, is being amended to (i) provide for the
potential issuance of Class C Common Stock in consideration for
Replenishment Capital provided by Stockholder Exchanges, (ii) permit,
consistent with the amendments to the Stockholders Agreement, the
transfer of shares of common stock to another Stockholder, and (iii)
reflect the right of other Stockholders, consistent with the amendments
to the Stockholders Agreement, to purchase the shares of common stock
of another Stockholder. Article VIIA, Section 3, is amended to conform
to the changes to Article VIIA, Section 2.
    OCC is amending Article VIII, Section 5(d), to require that a Board
decision to utilize OCC's retained earnings to compensate for a loss or
deficiency to the Clearing Fund will require unanimous consent from the
holders of Class A Common Stock and Class B Common Stock.\16\ This
amendment is intended to protect Stockholder Exchanges from an action
taken without their consent that could increase their likelihood of
being required to provide Replenishment Capital. Similarly, Article XI,
Section 1 is amended to account for the possible issuance of the

non-voting Class C Common Stock consistent with the Restated
Certificate of Incorporation as discussed below, and to require
unanimous Stockholder approval for any future amendments to the new
provision of Article VIII, Section 5(d) described above.
---------------------------------------------------------------------------

    \16\ See supra note 12.
---------------------------------------------------------------------------

    Article IX, Section 9, is being amended in three ways. First, the
concept of the Business Risk Buffer will be incorporated into Article
IX, Section 9(a). Second, Article IX, Section 9, is amended to provide
that OCC only will add amounts for reserves and surpluses in addition
to the Business Risk Buffer in extraordinary circumstances and only to
the extent that the Board of Directors has determined that the required
amount of additional reserves and surplus is expected to exceed the
full amount that is anticipated to be accumulated through the Business
Risk Buffer prior to payment of refunds and dividends. Third, Article
IX, Section 9, is being amended to expressly reference the potential
payment of dividends in accordance with the Dividend Policy.
2. Amendments to Restated Certificate of Incorporation
    OCC is amending its Restated Certificate of Incorporation in order
to implement the Capital Plan. Article IV is amended in multiple
locations to (i) reduce the number of authorized shares of Class A
Common Stock and Class B Common Stock to the number of shares currently
outstanding, and the number of series of Class B Common Stock, to
reflect the fact that there are only five Stockholder Exchanges, (ii)
eliminate a provision under which additional shares of Class A Common
Stock and Class B Common Stock could be authorized in certain
circumstances without a separate vote of each series of Class B Common
Stock, (iii) create Class C Common Stock as non-voting stock, (iv) set
a par value for Class C Common Stock of $1,000 per share, (v) provide
for distribution upon a liquidation or dissolution of OCC to holders of
Class A, Class B, and Class C Common Stock, pro rata on a pari passu
basis, the amount of the par value of their shares, and (vi) remove
restrictions on the transfer of shares of Class B Common Stock to more
than one entity in order to address the possible exercise by another
Stockholder of its right of first refusal under the Amended and
Restated Stockholders Agreement. Additionally, Article IV is amended to
make clear that the prohibition on OCC's creating or issuing rights or
options to purchase OCC stock set forth in Article IV will not restrict
the ability of OCC to enter into the Replenishment Capital Plan.
Finally, technical changes will be made to Article VI in connection
with the creation of Class C Common Stock as non-voting stock.
3. Amendments to Stockholders Agreement
    OCC is amending its Stockholders Agreement to make technical
changes relating to the additional contributions of capital to be made
by the Stockholder Exchanges under the Capital Plan and the potential
issuance of Class C Common Shares. In part, the amendments to the
Stockholders Agreement will provide Stockholders with a secondary right
of refusal to be exercised if a Stockholder wished to sell its shares
and OCC chose not to exercise its existing right of first refusal to
purchase those shares. OCC considers this change necessary because
after the additional contributions of capital by the Stockholder
Exchanges under the Capital Plan, shares of Class B Common Stock will
be significantly more valuable, making it less likely that OCC will be
able to exercise its right of first refusal. OCC believes that
providing the non-selling Stockholder Exchanges with a secondary right
of first refusal will increase the chances that a selling Stockholder
Exchange will find a purchaser for its shares from among OCC's existing
owners. Because OCC's Stockholders Agreement already has been amended
several other times, for convenience OCC is proposing to amend and
restate the Stockholders Agreement to incorporate all previous
amendments and the new amendments into a single comprehensive
agreement.
    Each of the amendments to the Stockholders Agreement is described
below, in the order they appear in the agreement. OCC is making a
technical amendment to Section 1 of the Stockholders Agreement to refer
to the definitions of Class A Common Stock, Class B Common Stock, and
Class C Common Stock in the Restated Certificate of Incorporation and
By-Laws. OCC is amending Section 3 to delete an obsolete reference to a
plan relating to OCC's original reorganization into a common clearing
facility for all options exchanges.
    OCC is amending Section 5(a) to add a reference to the procedures
for Stockholder Exchanges to acquire shares pursuant to their secondary
rights of first refusal in certain situations that will be set out in
amended Section 10(e). OCC is amending Section 5(b) providing that the
Stockholder Exchanges may not sell or transfer less than all of their
shares without the consent of OCC. OCC seeks to prevent a partial sale
by a Stockholder Exchange of a portion of its shares of Class A Common
Stock, Class B Common Stock, or Class C Common Stock to avoid
difficulties that could arise for OCC if, as a result of a partial
sale, voting rights, dividend rights, and replenishment capital were
spread across Stockholder Exchanges on a non pro rata basis. Section
5(b) will further clarify that if OCC consented to a partial sale, the
Stockholder Exchanges' rights of first refusal still will apply, and
that a Stockholder Exchange could sell shares of Class C Common Stock
to OCC without selling its shares of Class A Common Stock and Class B
Common Stock.
    OCC is amending Section 6(a) to provide Stockholders, upon the non-
exercise of OCC's right of first refusal, a secondary right of first
refusal to purchase shares of other Stockholders in certain
circumstances discussed above, and to establish procedures governing
the exercise of this right. Section 6(b) is amended to explicitly state
that OCC can assign its rights under the Stockholders Agreement to
purchase shares of a Stockholder Exchange in the event of such
Stockholder Exchange's bankruptcy or insolvency, and to create an
exception from the right of first refusal for transfers to certain
affiliates of a Stockholder that meet the exchange eligibility
requirements set forth in the By-Laws. Section 6(c) is amended to make
any transfer or encumbrance of shares in violation of the Stockholders
Agreement, either voluntarily or by operation of law, void. Section
6(d) is amended to explicitly state that OCC can assign its rights
under the Stockholders Agreement to repurchase shares of any
Stockholder that ceases to be qualified to participate in OCC pursuant
to the By-Laws. The revised Section 6(c) takes the place of current
Section 6(e), which is deleted. Section 6(e) currently provides that
such a pledge or transfer will automatically be deemed to create a
transfer of the shares to OCC.
    OCC is making conforming amendments to Section 6(f), Section 6(g),
Section 7, and Section 8 to provide for the new Stockholder Exchange
right of first refusal. OCC is deleting Section 9 to remove the right
of Stockholders to require OCC to purchase their shares of stock.
    OCC is amending Section 10(a) of the Stockholders Agreement to
provide that the purchase price paid upon exercise of purchase rights
by OCC or the Stockholder Exchanges will be equal to the lowest of (i)
the book value of the shares to be purchased, (ii) the total capital
contribution of the selling Stockholder and (iii) in the case of
exercise of a right of first refusal, the

price originally offered for such shares. OCC is making other technical
amendments to Sections 10(a), 10(b) and 10(c) of the Stockholders
Agreement concerning the purchase price formula, procedures, and timing
for OCC's repurchase rights of shares (or, if applicable, the purchase
of a Stockholder's shares by another Stockholder) pursuant to the terms
of the Stockholders Agreement. Section 10(d) is amended such that any
consideration to be paid by OCC upon the exercise of a right of first
refusal will be subordinated to all other claims of all other creditors
of OCC, and to prohibit OCC from declaring or paying any dividends,
acquiring for value any shares of stock or distributing assets to any
Stockholder Exchange, except with regard to required purchases or
redemptions of shares of Class C Common Stock or payments of dividends
in accordance with the Dividend Policy. OCC is amending current Section
10(e) by moving its provisions addressing the subordination of payments
by OCC and non-payment of dividends under certain circumstances into
Section 10(d) as discussed above. OCC proposes technical amendments to
current Section 10(g) concerning the process under which OCC would
acquire shares upon exercise of its right of first refusal and will
redesignate Section 10(g) as Section 10(e). OCC also is moving
technical provisions of the current Section 10(f) concerning the
payment of such shares into Section 10(e). Section 10(f) will then be
amended to address procedures for Stockholders that exercise their
right of first refusal.
    Section 11 of the Stockholders Agreement is being amended in order
to make a Stockholder's right to transfer shares dependent upon the
non-exercise of OCC's and other Stockholders' right of first refusal to
the purchase of such Stockholder's shares. Additionally, Section 11
will be amended to provide that the transfer of a Stockholder's shares
under that section will not be effective without the transferee's
assuming the rights and obligations under the Stockholders Agreement,
certain joinders to the Stockholders Agreement and other agreements
between OCC and Stockholders.
    Section 14(a) is being amended to make reference to the
Stockholders Agreement. Section 14(b) will be amended to make a
technical change relating to the legend on OCC's stock certificates.
OCC is amending Section 15 to update the mailing addresses of the
Stockholder Exchanges for written notices and formal communications.
Section 16(c) is being amended to clarify that a Stockholder Exchange
will be able to assign its rights under the Stockholders Agreement only
to a party to whom it will be permitted to transfer its shares.
    In addition, Section 16(c) is being amended to provide that OCC may
only assign its repurchase rights under Section 6(b) or Section 6(d) of
the Stockholders Agreement. OCC will be able to assign such rights with
respect to all or a portion of the shares of stock owned by a
Stockholder Exchange, and will be required to provide the non-selling
Stockholder Exchanges with a right of first refusal in connection with
any such contemplated assignment comparable to the secondary right of
first refusal applicable with respect to a voluntary sale by a
Stockholder Exchange and described above. Sections 16(f) and 16(g) is
being amended to effectuate the amendment and restatement of the
existing Stockholders Agreement.

II. Summary of Comment Letters

    The Commission received seventeen comment letters in total.\17\
Thirteen comment letters were received from seven commenters on OCC's
proposal.\18\ OCC submitted four letters responding to the issues
raised by the commenters.\19\ Four of the commenters generally
supported OCC's need to raise additional capital \20\ though all seven
commenters opposed how the Capital Plan proposed to raise the
additional capital.\21\
---------------------------------------------------------------------------

    \17\ See supra note 4.
    \18\ Id.
    \19\ Id.
    \20\ See BOX Letter I; SIFMA Letter; MM Letter; and KCG Letter
I.
    \21\ See BOX Letter I; SIFMA Letter; BATS Letter I and II; MM
Letter; MIAX Letter I and II; KCG Letter I and II; and SIG Letters I
and II.
---------------------------------------------------------------------------

    Four of the commenters set forth arguments that the OCC proposal is
inconsistent with Section 17A(b)(3)(I) of the Act because it imposes a
burden on competition that is not necessary or appropriate in
furtherance of the purpose of the Act.\22\ These commenters stated that
the OCC proposal places the Stockholder Exchanges at a competitive
advantage because they would be able to use dividend payments to offset
operating costs, which would enable them to provide trading and
execution services at lower prices than their non-Stockholder
counterparts.\23\ One commenter highlighted that, of the seven non-
Stockholder Exchanges, only MIAX, BATS, and BOX are not affiliates of
the Stockholder Exchanges.\24\ Further, the same commenter offered
that, should the subsidized fees be reduced to a level that could not
be sustained by non-affiliated exchanges, the ability of such non-
affiliated exchanges to provide services to investors and the public
could be affected.\25\ Additionally, two of the commenters stated that
the extent of this competitive advantage was unknown, because the
dollar amounts associated with dividend payments were redacted from the
publicly-available filing.\26\ One commenter argued that the
Stockholder Exchanges would be able to subsidize the costs they provide
to their members through an excessive rate of return (estimated at 16%
to 18% or more).\27\ This commenter noted that this rate is far above
market rates, especially considering the commenter's view that the risk
associated with the investment is low.\28\ The commenter further argued
that dividends are unlikely to be changed or discontinued because to do
so would require the unanimous vote of the Stockholder Exchanges.\29\
---------------------------------------------------------------------------

    \22\ See BATS Letter I and II; BOX Letter I; MIAX Letter I and
II; and MM Letter.
    \23\ Id.
    \24\ See MIAX Letter II.
    \25\ Id.
    \26\ See BATS Letter I and MIAX Letter I.
    \27\ See BATS Letter II.
    \28\ Id.
    \29\ Id.
---------------------------------------------------------------------------

    In response, OCC expressly stated that the proposal would not
impose any burden on competition.\30\ OCC further stated that the
dividend payments--if any are declared--should not be viewed simply as
additional revenue for subsidizing the costs of services provided, but
as fair compensation to the Stockholder Exchanges for their substantial
capital contributions, limited ``upside'' and future risks under the
Capital Plan.\31\ OCC also stated that the Stockholder Exchanges are
receiving only what the Board of Directors--with the assistance of
financial advisors and in the exercise of its business judgment--
considered to be fair and in the best interests of OCC, in light of the
nature of the Stockholder Exchanges' capital investments and the risks
inherent in their funded and unfunded capital commitments.\32\
Additionally, OCC noted that its proposal sufficiently describe the
considerations that went into setting the specific terms of the Capital
Plan, including the Fee, Refund, and Dividend Policies.\33\
---------------------------------------------------------------------------

    \30\ See OCC Letter I and IV.
    \31\ Id.
    \32\ Id.
    \33\ See OCC Letter I.
---------------------------------------------------------------------------

    One commenter raised the issue that the OCC proposal is
inconsistent with Section 17A(b)(3)(D) of the Act because the fees and
charges under the proposal

are neither equitable nor reasonable.\34\ The commenter expressed
concern that: (i) The Dividend Policy creates a conflict of interest
for the Stockholder Exchanges that could influence future fees; \35\
and (ii) OCC should not increase its budget ``without the ability of
market participants, who ultimately finance OCC through transaction
fees, to be assured that OCC (as the only clearing agency for U.S.
listed options) continues to operate with the public marketplace
foremost in mind.'' \36\
---------------------------------------------------------------------------

    \34\ See MM Letter.
    \35\ ``If the SEC allows the five owners to monetize OCC in this
fashion, the conflicts of interest will diminish the prospect that
OCC will perform efficiently to keep transaction fees low and
operating expense under control. [. . .] Given the potential of the
dividend to increase with the size of OCC's budget, we are concerned
where transaction fees may go in the future.'' MM Letter at 13.
    \36\ See MM Letter at 5.
---------------------------------------------------------------------------

    In response, OCC noted that any changes to its fee schedule require
a rule filing with the Commission, subject to the applicable standards
of the Act.\37\ Further, OCC noted that change to the Refund, Dividend,
and Fee Policies are all subject to Commission review and approval, and
this process affords clearing members the opportunity to object to any
changes in those policies.\38\ Additionally, the annual budget is
established by vote of a simple majority, which requires broad support
of public and/or clearing member directors.\39\
---------------------------------------------------------------------------

    \37\ See OCC Letter II. The Commission notes that future changes
to OCC's fee schedule as well as future changes to the Fee Policy,
Refund Policy, and Dividend Policy, are subject to Section 19(b)(1)
of the Act and Section 806(e) of the Payment, Clearing, and
Settlement Supervision Act, as applicable, both of which require OCC
to submit appropriate regulatory filings with the Commission provide
an opportunity for public comment, and require the Commission to
review and ultimately disapprove, object to, or require modification
or rescission, as applicable, if the changes do not meet regulatory
requirements. See 15 U.S.C. 78s(b)(1); 12 U.S.C. 805(e); 17 CFR
240.19b-4(n).
    \38\ Id.
    \39\ Id. Five of the current 20 director positions on OCC's
Board of Directors are held by representatives of the five
Stockholder Exchanges: Chicago Board Options Exchange, Inc.;
International Securities Exchange, LLC; NASDAQ OMX PHLX LLC; NYSE
MKT LLC; and NYSE Arca, Inc.
---------------------------------------------------------------------------

    Four commenters took issue with OCC's request for accelerated
effectiveness.\40\ One reason these commenters argued this request
should be denied is because the Commission's proposed Regulation 17Ad-
22(e)(15) is still under consideration and has yet to be adopted.\41\
One letter stated that OCC already has the capital on hand to comply
with the proposed regulation, so there is no urgency as portrayed in
the OCC proposal and in OCC's responses to prior comments.\42\ Further,
the Capital Plan, they argue, presents several important policy issues
that require additional time for debate and further details.\43\ On
March 2, 2015, OCC responded that this point was moot because an
approval no longer requires acceleration given that the minimum period
of 30 days from the date of the filing without acceleration has
passed.\44\
---------------------------------------------------------------------------

    \40\ See BATS Letter I; MIAX Letter I and II; KCG Letter I; and
SIG Letter I.
    \41\ See BATS Letter I; MIAX Letter I and II; KCG Letter I; and
SIG Letter I. As the Commission noted in the notice of filing of the
proposed rule change, OCC stated that the purpose of this proposal
is, in part, to facilitate compliance with proposed Commission rules
and address Principle 15 of the PFMIs. The proposed Commission rules
are pending. See Securities Exchange Act Release No. 71699 (March
12, 2014), 79 FR 29508 (May 22, 2014) (S7-03-14). Therefore, the
Commission has evaluated this proposed rule change under the Act and
the rules currently in force thereunder. See Securities Exchange Act
Release No. 74136 (January 26, 2015), 80 FR 5171 (January 30, 2015)
(SR-OCC-2015-02). See also supra note 3.
    \42\ See SIG Letter I. See also supra note 3.
    \43\ See MIAX Letter I and MM Letter. See also supra note 3.
    \44\ See OCC Letter IV. Pursuant to Section 19(b)(2)(C)(iii),
the Commission may not approve a proposed rule change earlier than
30 days after the date of publication unless the Commission finds
good cause for doing so and publishes the reason for the finding
(referred to as ``accelerated'' approval). The Commission notes that
the statutory time period for approval prior to the thirtieth day
has passed. See 15 U.S.C. 78s(b)(2)(C)(iii).
---------------------------------------------------------------------------

    Six commenters expressed concern that the Capital Plan converts OCC
from a so-called traditional industry utility model to a for-profit
model that maximizes returns for the Stockholder Exchanges.\45\ Under
this model, OCC set transaction fees to cover its operational costs
plus some reasonable excess for unforeseen expenses or drops in
revenue, and refunded the excess back to its members through
rebates.\46\ Under the proposal, refunds to members and their customers
will be limited to 50% of the excess fees, with the remainder of after-
tax income being designated as dividend payments for the Stockholder
Exchanges.\47\ In calculating the excess fees available for a refund,
the proposal further reduces the amount available by deducting amounts
needed to fund increases in OCC's capital requirements.\48\ The
commenters asserted that the approach thus abandons the industry
utility model in favor of a profit-maximizing structure that
prioritizes dividends and enhances the future returns of the
Stockholder Exchanges at the expense of members and participants.\49\
---------------------------------------------------------------------------

    \45\ See SIFMA Letter; BATS Letter I; BOX Letter I; MM Letter;
SIG Letter II; and KCG Letter I.
    \46\ See SIFMA Letter; BATS Letter I; MM Letter; and KCG Letter
I.
    \47\ See SIFMA Letter and KCG Letter I.
    \48\ Id.
    \49\ Id.; BATS Letter I.
---------------------------------------------------------------------------

    In its response, OCC disagreed and contended that the proposal is
consistent with the industry utility model because it effectively
refunds 100% of the excess funds not paid to fund capital requirements
or replenishment commitments of the Stockholder Exchanges.\50\
Additionally, OCC asserted that it is a mischaracterization to describe
the proposal as a departure from the industry utility model because the
proposal allows for the Board of Directors to make adjustments to fees
based on expenses, volumes, and revenues if projections for the
remainder of the calendar year show that either: (i) Fee levels will be
higher than projected or (ii) operating expenses are lower than
budgeted, thereby allowing market participants to take advantage of
lower fees.\51\
---------------------------------------------------------------------------

    \50\ See OCC Letter I.
    \51\ See OCC Letter II.
---------------------------------------------------------------------------

    Six commenters stated that the OCC proposal failed to adequately
discuss the viability of alternative means of raising capital,\52\ such
as raising capital from third-party investors, or from clearing
members, which would offer non-equity owner exchanges the opportunity
to become Stockholders so that they may also participate with respect
to dividends.\53\ Two commenters specified that they were not invited
to participate in the proposal process, nor were they aware of the
proposal until it was filed with the Commission.\54\ One commenter
stated that it would have offered to provide equity capital to the OCC
at a rate of return significantly less than what the existing
Stockholder Exchanges would receive under the proposed plan.\55\
Another commenter suggested a specific alternative known as a ``Payer-
Asset'' account, whereby excess fee revenue would be escrowed to a
payer asset account that would not be an asset of the Stockholder
Exchanges, but rather would be property of the market participants.\56\
Excess fees from the account would be returned to market participants
through rebates, and, in the event of the dissolution of OCC, the
account would be distributed to the investors as opposed to the
Stockholder

Exchanges.\57\ Because of disputes regarding the process, one commenter
suggested a 60-day hold on the approval, so that any party with a
superior financial proposal may be given the opportunity to present
such plan to OCC.\58\
---------------------------------------------------------------------------

    \52\ See BATS Letter I and II; MIAX Letter I and II; MM Letter;
SIFMA Letter; SIG Letter II; and KCG Letter I.
    \53\ See BATS Letter I and II; MIAX Letter I and II; MM Letter;
SIFMA Letter; and KCG Letter I.
    \54\ See BATS Letter II and III; and BOX Letter II.
    \55\ See BATS Letter II.
    \56\ See MM Letter.
    \57\ Id.
    \58\ See MIAX Letter II.
---------------------------------------------------------------------------

    OCC responded to these commenters by stating that the Board of
Directors considered potential alternatives, engaging in a nearly year-
long process in which it analyzed a wide range of alternative methods
to increase capital before determining that the Capital Plan was the
most viable and in the best interests of OCC.\59\ OCC also stated that
an escrow fund would not be an asset of OCC, and therefore may not
constitute liquid net assets funded by equity.\60\
---------------------------------------------------------------------------

    \59\ See OCC Letter I.
    \60\ See OCC Letter II.
---------------------------------------------------------------------------

    One commenter argued that the Replenishment Capital Plan is more of
a loan than equity capital and that the Replenishment Capital Plan is
structured such that the likelihood of it ever being called is very
low.\61\ That commenter also argued that the new reserve capital
structure creates a conflict of interest in OCC's budget because it
would unjustly enrich the five Stockholder Exchanges and create a
conflict in the performance of their positions on OCC's Board of
Directors.\62\
---------------------------------------------------------------------------

    \61\ See MM Letter.
    \62\ Id.
---------------------------------------------------------------------------

    OCC countered the first contention by stating that the
Replenishment Capital will be equity capital because: (i) It will be
listed on the balance sheet as stockholders' equity; (ii) it will be
funded in exchange for the issuance of Class C common stock; (iii) it
will be treated as equity for tax purposes; and, most importantly, (iv)
the holders of the Class C common stock will be subordinated to those
creditors of OCC in the event of any bankruptcy or liquidation.\63\ In
addition, OCC stated that even though the Replenishment Capital is not
intended to remain outstanding indefinitely, there is no legal
requirement that it be repurchased and it is far from assured, given
the circumstances under which it would be funded, that it ever would be
repurchased.\64\
---------------------------------------------------------------------------

    \63\ See OCC Letter II.
    \64\ Id.
---------------------------------------------------------------------------

    As to the assertion regarding conflicts, OCC responded that the
proposal's terms require the ongoing participation and assent of the
industry representatives on the Board of Directors.\65\ Additionally,
changes to each of the OCC Fee, Dividend, and Refund Policies all
require an affirmative vote of two-thirds of the Board of Directors as
well as the approval of each of the Stockholder Exchanges.\66\ OCC
further noted that in order to adopt an annual budget, there must be a
majority vote of the Board of Directors, thus requiring support and
approval from both public directors and member directors.\67\
---------------------------------------------------------------------------

    \65\ Id.
    \66\ Id.
    \67\ Id.
---------------------------------------------------------------------------

    Four commenters suggested that there were multiple governance
issues involved with the Board of Directors' approval of the OCC
proposal, including that OCC failed to follow its own By-Laws or
internal policies.\68\ For example, two commenters stated that, at the
time of the vote, OCC only had three public directors instead of five
as required by OCC By-Laws, and that the vacancies for these positions
were not filled until after the vote on the Capital Plan.\69\ Further,
these same commenters took issue with whether the Capital Plan was
approved by a ``majority,'' because of the nine clearing members, one
did not attend, one abstained, four voted in favor, and three voted
against.\70\ These commenters argued that an abstention should be
counted as a ``no'' vote, which would mean that a vote of the member
directors was evenly split.\71\ Two commenters contended that because
this Capital Plan is a matter of competitive significance, OCC failed
to follow its By-Laws as well as representations it made to the
Commission in adopting those By-Laws, by not promptly informing non-
Stockholder Exchanges of the Capital Plan.\72\ These commenters raised
the concern that had non-Stockholder Exchanges been promptly informed
of this matter, they would have had a right by request to make
presentations regarding the Capital Plan to the OCC Board of Directors
or appropriate committee of the board.\73\
---------------------------------------------------------------------------

    \68\ See MIAX Letter II; BATS Letter II and III; BOX Letter II;
and SIG Letter I.
    \69\ See MIAX Letter II and BATS Letter II.
    \70\ Id.
    \71\ Id.
    \72\ See BATS Letter III and BOX Letter II.
    \73\ Id.
---------------------------------------------------------------------------

    OCC responded that the proposed Capital Plan was properly approved
in accordance with OCC's By-Laws.\74\ Specifically, OCC articulated
that its Capital Plan received the affirmative vote of two-thirds of
the directors ``then in office,'' which is the relevant standard under
OCC's By-Laws.\75\
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    \74\ See OCC Letter IV.
    \75\ Id.
---------------------------------------------------------------------------

    Commenters further took issue with the vote approving the Capital
Plan because interested directors generally recuse themselves from
interested party transactions, and the five Stockholder Exchanges
failed to recuse themselves from either the deliberations or the vote,
despite having a significant economic interest in the outcome of the
vote.\76\ One commenter stated that the Stockholder Exchanges also
should have recused themselves under OCC's own conflict of interest
policy, and that their failure to do so should invalidate the vote
approving the proposal.\77\
---------------------------------------------------------------------------

    \76\ See MIAX Letter II; BATS Letter II; and SIG Letters I and
II.
    \77\ See SIG Letter I.
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    OCC responded that the approval of the Capital Plan did not require
any of its directors to recuse themselves.\78\ OCC cited to both its
By-Laws and Delaware law to support its position. Specifically, OCC
stated that under Delaware law, a decision is not improper simply
because directors participating in the decision had an interest in the
decision.\79\ OCC noted that, in accordance with Delaware General
Corporation Law, all material facts were disclosed and known to its
Board of Directors prior to its good faith approval of the proposed
Capital Plan.\80\ OCC further stated that its Board of Directors
satisfied OCC's By-Laws in approving the Capital Plan, namely the
requirements set forth in Article XI, Section 1 of its By-Laws, which
requires ``the affirmative vote of two-thirds majority of the directors
then in office (and not less than a majority of the number of directors
fixed by the By-Laws).'' \81\
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    \78\ See OCC Letter IV.
    \79\ See OCC Letter IV (citing to Section 144, Delaware General
Corporation Law).
    \80\ Id.
    \81\ Id.
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    In addition, three commenters suggested that because the Capital
Plan raises significant issues, at a minimum, it should not be subject
to delegation to Commission staff for approval, and instead should be
referred for full review and consideration by the Commissioners.\82\
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    \82\ See BATS Letter II; KCG Letter II; and SIG Letter I.
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III. Discussion and Commission Findings

    Section 19(b)(2)(C) of the Act \83\ directs the Commission to
approve a proposed rule change of a self-regulatory organization if the
Commission finds that the proposed rule change is consistent with the
requirements of the Act and the rules

and regulations thereunder applicable to such organization.
---------------------------------------------------------------------------

    \83\ 15 U.S.C. 78s(b)(2)(C).
---------------------------------------------------------------------------

    After carefully considering OCC's proposal, the comments received,
and OCC's responses thereto, the Commission finds that OCC's proposed
rule change is consistent with the requirements of the Act and the
rules and regulations thereunder applicable to a registered clearing
agency.\84\ In particular, the Commission finds that the Capital Plan
is consistent with the following provisions of the Act: (i) Section
17A(b)(3)(A); \85\ (ii) Section 17A(b)(3)(F); \86\ (iii) Section
17A(b)(3)(D); \87\ and (iv) Section 17A(b)(3)(I),\88\ as described
below.
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    \84\ As the Commission noted in the notice of filing of the
proposed rule change, OCC stated that the purpose of this proposal
is, in part, to facilitate compliance with proposed Commission rules
and address Principle 15 of the PFMIs. The proposed Commission rules
are pending. See Securities Exchange Act Release No. 71699 (March
12, 2014), 79 FR 29508 (May 22, 2014) (S7-03-14). As such, the
possibility of future Commission rulemaking is immaterial to both
OCC's justification for the Capital Plan and to our analysis.
Therefore, the Commission has evaluated this proposed rule change
under the Act and the rules currently in force thereunder. See
Securities Exchange Act Release No. 74136 (January 26, 2015), 80 FR
5171 (January 30, 2015) (SR-OCC-2015-02).
    \85\ 15 U.S.C. 78q-1(b)(3)(A).
    \86\ 15 U.S.C. 78q-1(b)(3)(F).
    \87\ 15 U.S.C. 78q-1(b)(3)(D).
    \88\ 15 U.S.C. 78q-1(b)(3)(I).
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    The Commission recognizes that commenters did not support the
Capital Plan. The Commission, however, must approve a proposed rule
change if it finds that the proposed rule change is consistent with the
requirements of the Act and the applicable rules and regulations
thereunder. Although the commenters raised a number of substantive
points, the Commission was not persuaded that these concerns render
OCC's Capital Plan inconsistent with the Act and the applicable rules
and regulations thereunder.
    In particular, the Commission finds that the Capital Plan is
consistent with Section 17A(b)(3)(A) of the Act,\89\ which requires, in
part, that a registered clearing agency is so organized and has the
capacity to be able to facilitate the prompt and accurate clearance and
settlement of securities transactions, and to safeguard securities and
funds in its custody and control, or for which it is responsible. OCC's
proposed rule change is consistent with these requirements because the
Capital Plan is designed to ensure that OCC can continue to promptly
and accurately clear and settle securities transactions, and assure the
safeguarding of securities and funds which are in the custody or
control of OCC or for which it responsible even if it suffers
significant operational losses. The Capital Plan is designed to provide
OCC with sufficient capital and an ability to replenish capital in the
event such capital falls below certain levels, which in turn further
positions OCC to remain sufficiently capitalized at all times.
---------------------------------------------------------------------------

    \89\ 15 U.S.C. 78q-1(b)(3)(A).
---------------------------------------------------------------------------

    The Commission also finds that the Capital Plan is consistent with
Section 17A(b)(3)(F) of the Act,\90\ which requires, in part, that the
rules of a registered clearing agency are designed to promote the
prompt and accurate clearance and settlement of securities
transactions, and to assure the safeguarding of securities and funds
which are in the custody or control of the clearing agency or for which
it is responsible. OCC's Capital Plan is consistent with these
requirements because OCC is amending its By-Laws and other governing
documents to adopt certain policies for the purpose of implementing the
Capital Plan, which, as described above, is designed to ensure that OCC
can continue to promptly and accurately clear and settle securities
transactions, and assure the safeguarding of securities and funds which
are in the custody or control of OCC or for which it is responsible
even if it suffers significant operational losses.
---------------------------------------------------------------------------

    \90\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

    In addition, the Commission finds that the Capital Plan is
consistent with Section 17A(b)(3)(D) of the Act,\91\ which requires
that the rules of a registered clearing agency provide for the
equitable allocation of reasonable dues, fees, and other charges among
its participants. One commenter contended that the Capital Plan is
inconsistent with this provision.\92\ This commenter's concerns were
focused on possible future fees.\93\ Specifically, the commenter
expressed concern that: (i) The Dividend Policy creates a conflict of
interest for the Stockholder Exchanges that could influence future
fees; \94\ and (ii) OCC should not increase its budget ``without the
ability of market participants, who ultimately finance OCC through
transaction fees, to be assured that OCC (as the only clearing agency
for U.S. listed options) continues to operate with the public
marketplace foremost in mind.'' \95\ Neither of these concerns about
possible future fees convinces the Commission that the Capital Plan is
inconsistent with providing for the equitable allocation of reasonable
dues, fees, and other charges among its participants.\96\
---------------------------------------------------------------------------

    \91\ 15 U.S.C. 78q-1(b)(3)(D).
    \92\ See MM Letter at 13.
    \93\ See MM Letter.
    \94\ ``If the SEC allows the five owners to monetize OCC in this
fashion, the conflict of interest will diminish the prospect that
OCC will perform efficiently to keep transaction fees low and
operating expense under control. [. . .] Given the potential of the
dividend to increase with the size of OCC's budget, we are concerned
where transaction fees may go in the future.'' MM Letter at 13.
    \95\ MM Letter at 5.
    \96\ In order to address the concern that the conflict of
interest will diminish the prospect that OCC will perform
efficiently to keep transaction fees low and operation expenses
under control, OCC stated in response that higher operating expenses
will result in an increased Target Capital Requirement, which will
require additional capital contributions to be withheld from both
dividends and refunds. Thus, OCC argues, an increase in operating
expenses results in larger cumulative capital contributions from the
Stockholder Exchanges. If an increase in the Business Risk Buffer
does result in an increase in dividends, the larger cumulative
capital contributions will have the effect of reducing any increase
in the rate of return that would otherwise result from the increase
in dividends. See OCC Letter II. In addition, OCC also contends that
it would be necessary for the exchange directors to obtain
additional support either from public directors or member directors
or a combination of the two in order to approve a budget with
increased expenses. See OCC Letter I.
---------------------------------------------------------------------------

    Future changes to OCC's fee schedule as well as future changes to
the Fee Policy, Refund Policy, and Dividend Policy, are subject to
Section 19(b)(1) of the Act \97\ and Section 806(e) of the Payment,
Clearing, and Settlement Supervision Act,\98\ as applicable, both of
which require OCC to (i) submit appropriate regulatory filings with the
Commission,\99\ (ii) provide an opportunity for public comment,\100\
and (iii) require the Commission to review and ultimately
disapprove,\101\ object to,\102\ or require modification or
rescission,\103\ as applicable, if these future proposed changes do not
meet regulatory requirements. OCC recognizes this.\104\
---------------------------------------------------------------------------

    \97\ 15 U.S.C. 78s(b)(1).
    \98\ 12 U.S.C. 805(e).
    \99\ See 15 U.S.C. 78s(b)(1); 12 U.S.C. 805(e); and 17 CFR
240.19b-4(n).
    \100\ See 15 U.S.C. 78s(b)(1) and 17 CFR 240.19b-4(n).
    \101\ See 15 U.S.C. 78s(b)(2)(C)(ii).
    \102\ See 12 U.S.C. 5465(e)(1)(F).
    \103\ See 12 U.S.C. 5465(e)(2)(D).
    \104\ See OCC Letter II at 11.
---------------------------------------------------------------------------

    Moreover, the Capital Plan is consistent with providing for the
equitable allocation of reasonable dues, fees, and other charges among
its participants in the following ways. The Fee Policy provides for the
Business Risk Buffer, which is designed to ensure that fees will be
sufficient to cover projected operating expenses. The Refund Policy and
Dividend Policy both allow for refunds of fees or payment of dividends,
respectively, only to the extent that the distribution of which would
allow OCC to maintain shareholders' equity at the Target

Capital Requirement. The Refund Policy and Dividend Policy also
prohibit refunds and dividends when Class C Common Stock is outstanding
under the Replenishment Capital Plan, and OCC is in the process of
rebuilding its capital base. In addition, the Replenishment Capital
Plan establishes a mandatory mechanism for the contribution of
additional capital by OCC's Stockholder Exchanges in the event capital
falls below desired levels. Together, these features of the Capital
Plan help ensure that OCC maintains levels of capital sufficient to
allow it to absorb substantial business losses and meet its ongoing
obligations as a critical component of the national system for
clearance and settlement, which in turn helps reduce OCC's overall
level of risk, while also being consistent with Section 17A(b)(3)(D) of
the Act.\105\
---------------------------------------------------------------------------

    \105\ 15 U.S.C. 78q-1(b)(3)(D).
---------------------------------------------------------------------------

    The Commission finds the Capital Plan is consistent with Section
17A(b)(3)(I) of the Act,\106\ which requires that the rules of a
registered clearing agency do not impose any burden on competition not
necessary or appropriate in furtherance of the purposes of the Act. The
Commission recognizes that four commenters set forth arguments that the
Capital Plan is inconsistent with this provision because the Capital
Plan does not address the competitive burden on non-Stockholder
Exchanges.\107\ More specifically, these commenters argue that the
Capital Plan places the Stockholder Exchanges at a competitive
advantage over the non-Stockholder Exchanges because they would be able
to use dividend payments to offset operating costs, which would in turn
enable them to provide trading and execution services at lower prices
than their non-Stockholder counterparts.\108\ Another commenter stated
that the rate of return is excessive, far above market rates, and does
not reflect the low risk of the investment.\109\ As further discussed
below, the Commission is not persuaded by these arguments.
---------------------------------------------------------------------------

    \106\ 15 U.S.C. 78q-1(b)(3)(I).
    \107\ See BATS Letter I and II; BOX Letter I; MIAX Letter I and
II; and MM Letter.
    \108\ Id.
    \109\ See BATS Letter II.
---------------------------------------------------------------------------

    As determined by OCC's Board of Directors, the Stockholder
Exchanges have agreed to make a substantial equity contribution to
ensure OCC has sufficient capital immediately and have agreed to commit
to a replenishment capital contribution should OCC's capital fall below
specified levels. OCC considers that the dividends are being paid to
Stockholder Exchanges to compensate the Stockholder Exchanges for
bearing the risk of the loss of their capital contributions, both in
the near term and in the future, should OCC need to replenish those
funds. These contributions and potential contributions are considerable
and remain at risk when outstanding. As such, OCC considers the
dividends not to be windfall profits or an extra refund, as some
commenters contend, but rather a plan to direct cash flows to those
entities that put their capital at risk. The Stockholder Exchanges are
contributing their own capital, and bearing the risk of that
contribution, as such, the dividends serve as compensation for bearing
that risk.
    Further, the cost of that capital investment and the rate of return
that will be paid to the Stockholder Exchanges were determined to be
fair and in the best interests of OCC by OCC's Board of Directors,
which has representation from the Stockholder Exchanges, clearing
members, and independent directors, and in consultation with outside
financial advisors. OCC has represented that the Board of Directors
determined, in its exercise of business judgment and in compliance with
its governance provisions and its responsibilities under Delaware
corporate laws, that the dividends were fair and in the best interests
of OCC, particularly in light of the nature of the investment and the
risks inherent in the funded and unfunded capital commitments by the
Stockholder Exchanges.
    We understand that in a perfect capital market, the dividend would
compensate Stockholder Exchanges exactly for the risk borne by the
capital contribution (i.e., the rate of return exactly equals OCC's
cost of capital). Further, we acknowledge that a dividend that does not
accurately reflect the true risk of the investment may result in a
burden on competition on one group versus another. The magnitude and
incidence of the burden depends on whether the dividend payment is high
or low relative to the true cost of the capital. OCC is a unique entity
and not publicly traded. As such, determining accurate rates on the
cost of capital is subjective. Absent available market prices for OCC's
equity shares, OCC's Board of Directors must use its judgment to
determine the appropriate or competitive rate of return and the
dividend policy that appropriately reflects the risk of the Stockholder
Exchanges' equity investment.
    Given the critical role OCC plays in the U.S. options market and
its designation as a systemically important financial market utility,
the Commission believes that it is both necessary and appropriate for
OCC to obtain and retain sufficient capital to ensure its ongoing
operations in the event of substantial business losses. While the
precise magnitude and incidence of any burden that exists in this case
is necessarily subjective, the Commission believes that, even if OCC's
Capital Plan may result in some burden on competition, such a burden is
necessary and appropriate in furtherance in the purposes of the Act
given the importance of OCC's ongoing operations to the U.S. options
market and the role of the Capital Plan in assuring its ability to
facilitate the clearance and settlement of securities transactions in a
wide range of market conditions. For these reasons, the Commission
believes OCC's Capital Plan, as approved by its Board of Directors in
the exercise of its business judgment, is consistent with OCC's
obligations under Section 17A(b)(3)(I) of the Act.\110\
---------------------------------------------------------------------------

    \110\ 15 U.S.C. 78q-1(b)(3)(I).
---------------------------------------------------------------------------

    Several commenters raised concerns that OCC's Capital Plan was not
approved in accordance with OCC's By-Laws due to vacancies on the
Board, that certain Board directors (i.e., Stockholder Exchanges) were
``interested parties'' and therefore should have recused themselves
from any decision to approve or disapprove OCC's proposal, and OCC
failed to promptly inform non-Stockholder Exchanges of the proposed
change.\111\ As indicated in OCC's response letter,\112\ OCC represents
that OCC and its Board of Directors have conducted its business in
conformity with applicable state laws and its own By-Laws.\113\ The
Commission has no basis to dispute OCC's position on this matter. For
these reasons, the Commission believes OCC's Capital Plan, as approved,
is consistent with OCC's obligations under the Act.\114\
---------------------------------------------------------------------------

    \111\ See MIAX Letter II; BATS Letter II and III; SIG Letter I;
and BOX Letter II.
    \112\ See OCC Letter IV.
    \113\ See OCC Letter IV (citing to Section 144, Delaware General
Corporation Law). Subsequently, OCC confirmed that OCC and its Board
of Directors conducted its business in conformity with its By-Laws
identified in the comment letters cited in note 111.
    \114\ 15 U.S.C. 78q-1(b)(3).
---------------------------------------------------------------------------

IV. Conclusion

    On the basis of the foregoing, the Commission finds that the
proposal is consistent with the requirements of the Act and in
particular with the requirements of Section 17A of the Act \115\ and
the rules and regulations thereunder.
---------------------------------------------------------------------------

    \115\ 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).

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

    It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\116\ that the proposed rule change (File No. SR-OCC-2015-02) be,
and it hereby is, approved as of the date of this notice or the date of
an order by the Commission authorizing OCC to implement OCC's advance
notice proposal that is consistent with this proposed rule change (File
No. SR-OCC-2014-813), whichever is later.
---------------------------------------------------------------------------

    \116\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\117\
---------------------------------------------------------------------------

    \117\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2015-05556 Filed 3-11-15; 8:45 am]
 BILLING CODE 8011-01-P


[Federal Register Volume 75, Number 248 (Tuesday, December 28, 2010)]
[Notices]
[Page 81683]
[FR Doc No: 2010-32553]

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SECURITIES AND EXCHANGE COMMISSION

[Rule 425; OMB Control No. 3235-0521; SEC File No. 270-462]

Submission for OMB Review; Comment Request

Upon Written Request, Copies Available From: Securities and Exchange
Commission, Office of Investor Education and Advocacy, Washington, DC
20549-0213.

Extension: Rule 425, OMB Control No. 3235-0521, SEC File No. 270-
462.

    Notice is hereby given that, pursuant to the Paperwork Reduction
Act of 1995 (44 U.S.C. 3501 et seq.), the Securities and Exchange
Commission (``Commission'') has submitted to the Office of Management
and Budget the request for extension of the previously approved
collection of information discussed below.
    Rule 425 (17 CFR 230.425) under the Securities Act of 1933 (15
U.S.C. 77a et seq.) requires the filing of certain prospectuses and
communications under Rule 135 (17 CFR 230.135) and Rule 165 (17 CFR
230.165) in connection with business combination transactions. The
purpose of the rule is to permit more oral and written communications
with shareholders about tender offers, mergers and other business
combination transactions on a more timely basis, so long as the written
communications are filed on the date of first use. The information
provided under Rule 425 is made available to the public upon request.
Also, the information provided under Rule 425 is mandatory.
Approximately 1,680 issuers file communications under Rule 425 at an
estimated 0.25 hours per response for a total of 420 annual burden
hours.
    An agency may not conduct or sponsor, and a person is not required
to respond to, a collection of information unless it displays a
currently valid control number.
    The public may view the background documentation for this
information collection at the following Web site, http://www.reginfo.gov. Written comments regarding the above information
should be directed to the following persons: (i) Desk Officer for the
Securities and Exchange Commission, Office of Information and
Regulatory Affairs, Office of Management and Budget, Room 10102, New
Executive Office Building, Washington, DC 20503 or send an e-mail to:
<EMAIL_ADDRESS>and (ii) Thomas Bayer, Chief Information
Officer, Securities and Exchange Commission, c/o Remi Pavlik-Simon,
6432 General Green Way, Alexandria, Virginia 22312; or send e-mail to:
<EMAIL_ADDRESS>Comments must be submitted to OMB within 30 days
of this notice.

    Dated: December 20, 2010.
Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-32553 Filed 12-27-10; 8:45 am]
BILLING CODE 8011-01-P