Notice2024-28548
Self-Regulatory Organizations; The Options Clearing Corporation; Order Granting Approval of Proposed Rule Change by The Options Clearing Corporation Concerning Modifications to Its Governance Documents To Align With Recently Adopted SEC Governance Rules
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
December 6, 2024
Issuing agencies
Securities and Exchange Commission
Full Text
<html>
<head>
<title>Federal Register, Volume 89 Issue 235 (Friday, December 6, 2024)</title>
</head>
<body><pre>
[Federal Register Volume 89, Number 235 (Friday, December 6, 2024)]
[Notices]
[Pages 97127-97131]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2024-28548]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-101792; File No. SR-OCC-2024-015]
Self-Regulatory Organizations; The Options Clearing Corporation;
Order Granting Approval of Proposed Rule Change by The Options Clearing
Corporation Concerning Modifications to Its Governance Documents To
Align With Recently Adopted SEC Governance Rules
December 2, 2024.
I. Introduction
On October 21, 2024, The Options Clearing Corporation (``OCC'')
filed with the Securities and Exchange Commission (``Commission'' or
``SEC''), pursuant to Section 19(b)(1) of the Securities Exchange Act
of 1934 (``Act'' or ``Exchange Act''),\1\ and Rule 19b-4 thereunder,\2\
a proposed rule change (the ``Proposed Rule Change'') to amend its
governance documents as part of an effort to achieve compliance with
recently adopted governance requirements \3\ and to make changes
identified during OCC's annual review process. The Proposed Rule Change
was published for comment in the Federal Register on October 31,
2024.\4\ The Commission has not received any comments on the Proposed
Rule Change. For the reasons discussed
[[Page 97128]]
below, the Commission is approving the Proposed Rule Change.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 98959 (Dec. 5,
2023), 88 FR 84454 (Dec. 5, 2023) (File No. S7-21-22) (``SEC
Adopting Release''), <a href="https://www.govinfo.gov/content/pkg/FR-2023-12-05/pdf/2023-25807.pdf">https://www.govinfo.gov/content/pkg/FR-2023-12-05/pdf/2023-25807.pdf</a>.
\4\ Securities Exchange Act Release No. 101444 (October 25,
2024), 89 FR 86868 (October 31, 2024) (File No. SR-OCC-2024-015)
(``Notice'').
---------------------------------------------------------------------------
II. Description of the Proposed Rule Change
OCC is registered with the Commission as a clearing agency for the
purpose of clearing standardized equity options. The Proposed Rule
Change amends OCC's Board of Directors Charter and Corporate Governance
Principles (``Board Charter''), Governance and Nominating Committee
(``GNC'') Charter, Risk Committee Charter, Technology Committee
Charter, Compensation and Performance Committee (``CPC'') Charter,
Regulatory Committee Charter, Audit Committee Charter, Fitness
Standards, Third-Party Risk Management Framework, and Article III of
OCC's By-Laws (together, ``governance documents''). OCC proposes such
amendments in response to the new governance rules that apply to
OCC.\5\ Specifically, OCC proposes changes to require that a majority
of the Board and any Board-level committee are independent directors;
establish policies and procedures to identify, mitigate, or eliminate
conflicts of interest; and establish policies and procedures for
monitoring and managing risks relating to third-party providers of core
services. The amendments also make other conforming changes and
typographical corrections.
---------------------------------------------------------------------------
\5\ See SEC Adopting Release.
---------------------------------------------------------------------------
A. Board Charter and By-Laws
OCC proposes to amend the Board Charter to provide that a majority
of the Board and all Board-level committees be independent
directors.\6\ As a conforming change, OCC would also remove references
in the current Board Charter indicating that only the Audit Committee
must be comprised of independent directors.
---------------------------------------------------------------------------
\6\ Under the amendments, such independence would need to meet
the definition of that term in, and be determined in accordance with
the requirements of, Rule 17Ad-25(a) under the Exchange Act. See
Notice, 89 FR at 86869; Exhibit A (Board Charter) to File No. SR-
OCC-2024-015.
---------------------------------------------------------------------------
OCC proposes adding to the Board's mission an oversight role for
service providers that provide core services to OCC. The oversight
would be accomplished by overseeing senior management's review, risk
assessment, and approval of agreements for service providers of core
services, and by reviewing senior management's policies and procedures
that govern relationships and manage risks for service providers of
core services. The amendments to the Board Charter also would require
the Board to evaluate certain of senior management's actions related to
such service providers, including senior management's efforts to
monitor identified material issues with, document weaknesses or
deficiencies of, and remedy significant deterioration in performance of
such service providers.
The proposed changes to the Board Charter would remove statements
indicating that a substantial portion of directors must be independent
``of OCC and OCC's management,'' and instead state that the Board's
policy is to require that a majority of directors be independent at all
times. The proposed changes would also clarify the role of the GNC in
selecting Exchange Directors, including a requirement that the GNC have
a written evaluation process for Exchange Directors, and that the GNC
will evaluate each Exchange Director before that director is elected by
the Equity Exchange at each annual meeting of stockholders.
OCC proposes adding the word ``additional'' before ``independence''
to describe independence criteria for the Audit Committee. The
amendments would also detail specific requirements the Board would use
to determine whether an individual director meets the definition of
Public Director in the Board Charter and Article III of the By-Laws.
Further proposed amendments to the Board Charter would require the
Board to have at least five directors who are not an associated person
or employee of an entity or entity affiliate that is registered or
exempt from registration with the Commission or Commodity Futures
Trading Commission. The current requirement that a Public Director must
not be affiliated with any national securities exchange or association,
designated contract market, futures commission merchant, or broker or
dealer in securities would be removed.
Finally, OCC proposes amending Article III, Section A of the By-
Laws to require the GNC to nominate for Public Director a non-
associated person or employee of an entity or entity affiliate that is
registered or exempt from registration with the Commission or Commodity
Futures Trading Commission before each annual meeting of stockholders
where a Public Director is elected.
B. GNC Charter
OCC proposes amending the GNC Charter to provide that at least a
majority of the Committee must be comprised of independent directors.
The proposed changes also require the Chair to be a Public Director who
is also an independent director. Under the amendments, the GNC would be
required to assist the Board in overseeing OCC's corporate governance
processes, including evaluating Board candidates, to more closely align
existing practice with rule text. This evaluation would include a new
written process and a packet of materials containing background and
other relevant information for all Board candidates. In addition, as
part of the written evaluation process, the GNC would be required to
identify, screen, and review individuals qualified to serve as
Directors, and to document the outcome of the written evaluation
process once completed.
OCC also proposes eliminating from the GNC Charter the terms
``Member Directors'' and ``Public Directors'' and instead using the
term ``Directors.'' Under the amendments, the GNC would be required to
specify fitness standards for serving as a director that are documented
in writing and approved by the Board. When evaluating director
nominees, the GNC would be required to consider the views of other
stakeholders who may be affected by the decisions of the Board, other
than owners and Clearing Members. Finally, the GNC would be required to
review and advise the board on whether directors are independent, and
annually recommend for Board approval the appointment of directors to
Board committees and assignment of Committee Chairs.
C. Risk Committee Charter
The proposed amendments to the Risk Committee Charter would require
the GNC and the Board, in making their nominations, to take into
consideration a broad array of market participants on risk management
issues. The proposed amendments would also amend the Risk Committee
Charter to provide that at least a majority of the Committee must be
comprised of independent directors. Finally, the Risk Committee would
be required to provide risk assessments to the Board for any service
providers of core services.
D. Technology Committee Charter
OCC proposes amending the Technology Committee Charter to provide
that at least a majority of the Technology Committee must be comprised
of independent directors.
E. Compensation and Performance Committee (``CPC'') Charter
OCC proposes amending the CPC Charter to provide that at least a
majority of the Committee must be comprised of independent directors.
In addition, OCC proposes expanding the
[[Page 97129]]
description of the role of the CPC in overseeing OCC's human resources
programs and requiring the CPC to oversee the development of human
resources programs and policies, including talent acquisition,
compensation performance management, diversity, equity, and inclusion
programs, training and development, benefits, and succession planning
for critical roles.
F. Regulatory Committee Charter
OCC proposes amending the Regulatory Committee Charter to provide
that at least a majority of the Committee must be comprised of
independent directors. The Regulatory Committee Charter also would be
amended to correct minor grammatical errors identified in OCC's annual
review.
G. Audit Committee Charter
OCC proposes amending the Audit Committee Charter to provide that
at least a majority of the Audit Committee must be comprised of
independent directors.
H. Fitness Standards
OCC proposes amending its Fitness Standards to specify that, when
considering nominees for election or appointment to the Board, the GNC
must consider whether the individual would help demonstrate that the
Board has diverse skills, knowledge, and experience and whether the
individual understands and considers the views of stakeholders who may
be affected by Board decisions other than OCC's owners and Clearing
Members.
OCC also proposes amending its Fitness Standards to align with the
proposed changes to the description of Public Director and the proposed
changes in OCC's Board Charter and By-Laws.Specifically, the proposed
amendments would replace current language in the Fitness Standards
prohibiting a director from having an affiliation with any national
securities exchange, national securities association, designated
contract market, futures commission merchant, or broker-dealer in
securities with language precluding the director from being an
associated person or employee of an exempt or registered entity or
affiliate of the Commission or Commodity Futures Trading Commission, as
described above. OCC also proposes adding that this requirement will
not prevent a person from serving as a Public Director solely based on
some other relationship with an entity described in the previous
sentence.
I. Third-Party Risk Management Framework
OCC proposes amending its Third-Party Risk Management Framework to
require enhanced lifecycle management by OCC's management and Board for
third-party service providers of core services. The amendments would
require OCC's Management Committee, as part of the process for
onboarding a service provider of core services, to evaluate and
document risks related to the service agreement with the service
provider, assess the risks, and submit its findings to the Board for
review and approval prior to onboarding. OCC's Management Committee
also would be required to conduct and report to the Board its
evaluation of ongoing monitoring for service providers of core
services. In addition, the Management Committee would be required to
monitor service provider performance and: (i) remedy significant
deterioration in services; (ii) address changing risks or material
issues; or (iii) assess and document weaknesses or deficiencies if the
risks or material issues cannot be remedied. The Management Committee
would be required to report to the Board any action taken by senior
management to remedy significant deterioration in performance of the
service provider for core services or address material issues with the
service provider for core services, or to assess and document
deficiencies that cannot be remedied.
Under the Proposed Rule Change, the Third-Party Risk Management
Framework would be amended to provide that each OCC staff working group
responsible for identifying and escalating risks throughout the third-
party relationship lifecycle will have a chair and designated
Management Committee member responsible for identifying matters to be
escalated to the Management Committee. The proposed changes would also
add a definition of ``Service Provider for Core Services'' as a service
provider for core services that directly supports the delivery of
clearance or settlement functionality or any other material purpose on
an going basis to OCC's business through a written agreement.
In Section I, Executive Summary, the description of Exchange-
related risks would be broadened from those arising from ``Exchanges''
to those arising from ``Exchange Relationships.'' This definition would
be moved from a footnote to section V, Definitions.
In Section II, Risk Identification, OCC proposes expanding the
definitions of both Information Technology and Security risks and Legal
and Regulatory risks to include when third-parties are unable to
safeguard OCC's systems and data. The proposed changes would also add
as specifically identified Legal and Regulatory risks: (i) when a
third-party fails to fulfill its obligations to OCC; (ii) when OCC
fails to fulfill its obligations to a third-party; and (iii) when a
third-party fails to comply with regulatory standards and protocols.
In Section III, Relationship Lifecycle, OCC proposes changing the
header to read ``Third-Party Relationship Cycle,'' and adding the
language ``in compliance with agreement terms'' to clarify current risk
management responsibilities relating to third-party off-boarding about
off-boarding third-parties.
In Section IV, Third-Party Relationship Management, the proposed
changes would broaden the header from ``Exchanges'' to ``Exchange
Relationships,'' as noted above. As part of OCC's current on-boarding
process, OCC staff is required to present a summary of due diligence
and on-boarding activities to OCC's Board. Under the Proposed Rule
Change, OCC staff would present such summaries to the Management
Committee as well as a summary of legal documents and requirements to
the Board of Directors. OCC proposes inserting language to require the
escalation of identified legals risks to the Legal Department. Further,
OCC proposes replacing ``OCC Officer'' with ``authorized signatories''
to define who would be responsible for executing agreements that
address control and business requirements. OCC proposes removing
language from the Off-Boarding section to avoid the implication that
OCC is authorized to limit connectivity with an Exchange only in the
context of off-boarding an exchange. The Vendors section would be
amended to require Information Technology personnel to review requests
for on-boarding new technology vendors and verify that the vendors meet
enterprise requirements. The Framework would be amended to clarify that
agreements with vendors are required to be negotiated through the
process outlined in OCC's Legal Services Policy. Lastly, references
that Third-Party Risk Management personnel monitor vendors throughout
the Section IV would be eliminated because it is the vendor
relationship managers who are responsible for monitoring vendors;
Third-Party Risk Management personnel gather information and escalate
if necessary.
In Definitions, Section V, the definition of ``Watch Level'' would
be amended to add ``risk management'' to a list of events requiring a
risk response.
Finally, OCC proposes combining the Exchange Working Group and
Vendor
[[Page 97130]]
Risk Working Group to create the Exchange and Vendor Working Group
throughout the Third-Party Risk Management Framework. OCC also proposes
making non-substantive conforming changes throughout for consistency.
III. Discussion and Commission Findings
Section 19(b)(2)(C) of the Act requires the Commission to approve a
proposed rule change of a self-regulatory organization if it finds that
the Proposed Rule Change is consistent with the requirements of the Act
and the rules and regulations thereunder applicable to the
organization.\7\ Under the Commission's Rules of Practice, the ``burden
to demonstrate that a proposed rule change is consistent with the
Exchange Act and the rules and regulations issued thereunder . . . is
on the self-regulatory organization [`SRO'] that proposed the rule
change.'' \8\
---------------------------------------------------------------------------
\7\ 15 U.S.C. 78s(b)(2)(C).
\8\ Rule 700(b)(3), Commission Rules of Practice, 17 CFR
201.700(b)(3).
---------------------------------------------------------------------------
The description of a proposed rule change, its purpose and
operation, its effect, and a legal analysis of its consistency with
applicable requirements must all be sufficiently detailed and specific
to support an affirmative Commission finding,\9\ and any failure of an
SRO to provide this information may result in the Commission not having
a sufficient basis to make an affirmative finding that a proposed rule
change is consistent with the Exchange Act and the applicable rules and
regulations.\10\ Moreover, ``unquestioning reliance'' on an SRO's
representations in a proposed rule change is not sufficient to justify
Commission approval of a proposed rule change.\11\
---------------------------------------------------------------------------
\9\ Id.
\10\ Id.
\11\ Susquehanna Int'l Group, LLP v. Securities and Exchange
Commission, 866 F.3d 442, 447 (D.C. Cir. 2017) (``Susquehanna'').
---------------------------------------------------------------------------
After carefully considering the Proposed Rule Change, the
Commission finds that the Proposed Rule Change is consistent with the
requirements of the Exchange Act and the rules and regulations
thereunder applicable to OCC. More specifically, for the reasons given
below, the Commission finds that the Proposed Rule Change is consistent
with Section 17A(b)(3)(A) and (F) of the Act \12\ and Rules 17Ad-
22(e)(2) and 17Ad-25 thereunder.\13\
---------------------------------------------------------------------------
\12\ 15 U.S.C. 78q-1(b)(3)(F) and 15 U.S.C. 78q-1(b)(3)(F).
\13\ 17 CFR 240.17Ad-22(e)(2) and 17 CFR 240.17Ad-25.
---------------------------------------------------------------------------
A. Consistency With Section 17A(b)(3) of the Act
Section 17A(b)(3) of the Act requires, among other things, that OCC
be so organized and has the capacity to be able to comply with the
provisions of the Act and the rules and regulations thereunder,\14\ and
that OCC's rules be designed to foster cooperation and coordination
with persons engaged in the clearance and settlement of securities
transactions.\15\ Based on review of the record, and for the reasons
discussed below,\16\ OCC's changes are consistent with OCC being so
organized and having the capacity to comply with the provisions of the
Act and the rules and regulations thereunder and with fostering
cooperation and coordination with persons engaged in the clearance and
settlement of securities transactions. Accordingly, the Proposed Rule
Change is consistent with the requirements of Sections 17A(b)(3)(A) and
(F) of the Act.\17\
---------------------------------------------------------------------------
\14\ 15 U.S.C. 78q-1(b)(3)(A).
\15\ 15 U.S.C. 78q-1(b)(3)(F).
\16\ See infra Section III. B. (Consistency with Rule 17Ad-
22(e)(2) under the Act).
\17\ 15 U.S.C. 78q-1(b)(3)(A) and 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------
B. Consistency With Rule 17Ad-22(e)(2) Under the Act
Rule 17Ad-22(e)(2) requires covered clearing agencies to, among
other things, provide for governance arrangements that are clear and
transparent,\18\ establish that the board of directors and senior
management have appropriate experience and skills to discharge their
duties and responsibilities,\19\ and specify clear and direct lines of
responsibility.\20\ In adopting Rule 17Ad-22(e)(2), the Commission
provided guidance that a covered clearing agency generally should
consider in establishing and maintaining policies and procedures,
including, in part, whether the board of directors contains suitable
members with the appropriate skills and incentives to fulfill the
board's multiple roles, and whether the board of directors should
include non-executive board members.\21\
---------------------------------------------------------------------------
\18\ 17 CFR 240.17Ad-22(e)(2)(i).
\19\ 17 CFR 240.17Ad-22(e)(2)(iv).
\20\ 17 CFR 240.17Ad-22(e)(2)(v).
\21\ Securities Exchange Act Release No. 78961 (Sept. 28, 2016),
81 FR 70786, 70806 (Oct. 13, 2016) (File No. S7-03-14) (``Standards
for Covered Clearing Agencies'').
---------------------------------------------------------------------------
OCC's proposed changes would strengthen OCC's written fitness
standards for board nominees. Strengthening the criteria by which OCC
evaluates both directors and nominees would help OCC review each
nominee in the broader context of the diversity of skills, knowledge,
experience, and perspectives of the Board. Additionally, the proposed
changes would insert independence requirements across OCC's governance
documents (e.g., Board and Board committee charters). An increased
focus on director independence would help ensure that the members of
OCC's board of directors have the appropriate incentives to fulfill the
Board's roles. As a result, the proposed changes to fitness standards
and as well as the broader changes across the governing documents are
consistent with ensuring that OCC's board of directors contains members
with the appropriate skills and incentives to discharge their duties.
The proposed changes further detail the lines of responsibility for
management of third-party providers of core services. For example, the
amendments to the Third-Party Risk Management Framework described above
would require the Management Committee to evaluate and document risks
for on-boarding, ongoing monitoring, and off-boarding and submit those
findings to the Board for review and approval. Moreover, the proposed
changes described above detail how each working group will have a chair
and designated member responsible for identifying matters for
escalation to the Management Committee. Separately, the proposed
changes more clearly articulate certain reporting and escalation lines
such as the escalating legal risks related to Exchange Relationships to
OCC's Legal Department, Information Technology's role in on-boarding
new vendors, and consolidation of certain working groups. Taken
together, these procedures establish clear and direct lines of
responsibility.
As described above, OCC proposes several changes to improve the
clarity of its governance arrangements. For example, the proposed
changes to the CPC Charter would, consistent with current practice,
expand the description of the CPC's oversight role with regard to human
resources at OCC. Similarly, OCC proposes to broaden the relationships
contemplated in the Third-Party Risk Management Framework by replacing
the references to ``Exchanges'' with references to ``Exchange
Relationships,'' and to clarify the who can execute legal agreements by
replacing a reference to ``OCC Officers'' with a reference to
``authorized signatories.'' Separately, the proposed changes would
clarify the situations in which OCC can limit connectivity with an
Exchange and that
[[Page 97131]]
risk management issues may be a basis for Watch Level-related
responses.
Based on the foregoing, the Proposed Rule Change is consistent with
the requirements of Rule 17Ad-22(e)(2) under the Act.\22\
---------------------------------------------------------------------------
\22\ 17 CFR 240.17Ad-22(e)(2).
---------------------------------------------------------------------------
C. Consistency With Rule 17Ad-25 Under the Act
Rule 17Ad-25 requires, among other things, that covered clearing
agencies establish: requirements that a majority of the board of
directors \23\ and any committee \24\ with Board authority be
independent directors \25\; a nominating committee, written evaluation
process, fitness standards, and evaluation of the independence of
nominees and directors \26\; and policies and procedures requiring that
senior management evaluate and document risks and whether the risks can
be managed for service providers of core services.\27\
---------------------------------------------------------------------------
\23\ 17 CFR 240.17Ad-25(b).
\24\ 17 CFR 240.17Ad-25(e).
\25\ 17 CFR 240.17Ad-25(a).
\26\ 17 CFR 240.17Ad-25(c).
\27\ 17 CFR 240.17Ad-25(i).
---------------------------------------------------------------------------
The changes described above require that OCC's Board, and each
committee with Board authority be composed of a majority of independent
directors, and that such independence is determined in accordance with
Rule 17Ad-25. The proposed changes also contemplate a written processes
for nominating, evaluating, and electing directors.
The proposed changes revise the Board Charter and Third-Party Risk
Management Framework to require that senior management review, approve,
monitor, and remediate risks with service providers of core
services.\28\ The proposed amendments also require that senior
management perform ongoing monitoring of relationships with service
providers of core services, and document whether the risks can be
remedied, and to inform the Board of their evaluation. Further, the
proposed changes articulate the Board's role in oversight of the
management of service providers of core services through the reporting
required of the Management Committee.
---------------------------------------------------------------------------
\28\ As described above, OCC's proposed changes include adopting
a definition of Service Provider for Core Services within its rules.
---------------------------------------------------------------------------
Based on the foregoing, the Proposed Rule Change is consistent with
the requirements of Rule 17Ad-25 under the Act.\29\
---------------------------------------------------------------------------
\29\ 17 CFR 240.17Ad-25.
---------------------------------------------------------------------------
IV. Conclusion
On the basis of the foregoing, the Commission finds that the
Proposed Rule Change is consistent with the requirements of the Act,
and in particular, Sections 17A(b)(3)(A) and (F) of the Act \30\ and
Rules 17Ad-22(e)(2) and 17Ad-25.\31\
---------------------------------------------------------------------------
\30\ 15 U.S.C. 78q-1(b)(3)(F).
\31\ 17 CFR 240.17Ad-22(e)(2) and 17 CFR 240.17Ad-25.
---------------------------------------------------------------------------
It is Therefore Ordered pursuant to Section 19(b)(2) of the Act
that the Proposed Rule Change (SR-OCC-2024-015) be, and hereby is,
approved.\32\
---------------------------------------------------------------------------
\32\ In approving the Proposed Rule Change, the Commission
considered the proposal's impacts on efficiency, competition, and
capital formation. 15 U.S.C. 78c(f).
For the Commission by the Division of Trading and Markets,
pursuant to delegated authority.\33\
---------------------------------------------------------------------------
\33\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2024-28548 Filed 12-5-24; 8:45 am]
BILLING CODE 8011-01-P
</pre></body>
</html>Indexed from Federal Register on December 6, 2024.
This is legal information, not legal advice. Laws vary by jurisdiction and change frequently. Always verify current law with official sources and consult a licensed attorney in your jurisdiction for advice on your specific situation.