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[Federal Register Volume 62, Number 168 (Friday, August 29, 1997)]
[Notices]
[Pages 45893-45894]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-23011]

[[Page 45893]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-38956; File No. SR-CSE-97-09]

Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Cincinnati Stock Exchange, Inc., Relating to Net Capital 
Requirements

August 21, 1997.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
\1\ (``Exchange Act'' or ``Act''), notice is hereby given that on July 
29, 1997, the Cincinnati Stock Exchange, Incorporated (``CSE'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I, II, 
and III below, which Items have been prepared by the CSE. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The Exchange hereby proposes to amend Exchange Article II, Section 
5.1 and Exchange Rule 11.9(a) to increase the net capital requirements 
for members and Designated Dealers.
    The text of the proposed rule change is available at the Office of 
the Secretary, CSE and at the Commission.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the CSE included statements 
concerning the purpose of, and basis for, the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The CSE has prepared summaries, set forth in sections A, 
B, and C below, of the most significant parts of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    (1) Purpose. The Exchange is proposing to increase its net capital 
requirements for member firms. The CSE notes that several smaller, 
introducing broker-dealers have recently encountered financial trouble, 
endangering the investing public. In this increasingly volatile and 
uncertain marketplace, the Exchange believes that increased net capital 
levels are justified. Specifically, the proposed rule change would 
increase the net capital requirement for Exchange specialists, called 
Designated Dealers, to $500,000 from the current requirement of 
$100,000, and the net capital requirement for other members to $250,000 
from the current requirement of $25,000.
    The Exchange Act, as amended, and Commission Rules require 
specialists to undertake certain responsibilities and obligations in 
return for the privilege of trading for their own accounts. These 
include a requirement to maintain adequate minimum capital levels, as 
set forth in exchange rules, and a responsibility to engage in a course 
of dealings for the specialist's own account to assist in the 
maintenance of a fair and orderly market. Specialists are thus required 
to provide liquidity and depth in times of market stress or volatility. 
Minimum net capital requirements are intended to help ensure that 
specialists have the financial resources necessary to perform this 
function.
    Prior to 1984, the CSE's net capital rules required a Designated 
Dealer to maintain at least $500,000 in net capital.\2\ The Exchange 
has subsequently amended the net capital requirement from time to time, 
as market conditions have warranted. Exchange Rule 11.9(a) currently 
requires Designated Dealers to maintain net capital of at least the 
greater of $100,000 or the amount required under Commission Rule 15c3-
1. When implemented in 1989, the $100,000 minimum was determined by the 
Exchange to be a level of capital sufficient to ensure that the 
Exchange's Designated Dealers would possess sufficient financial 
resources to enable them to provide liquidity and depth in times of 
market stress.\3\ Subsequent growth in the United States' capital 
markets generally, and in the CSE's market in particular have 
outstripped this requirement. Record price and volume levels have 
created a need for greater capital levels on the CSE. These greater 
levels of capital will help to ensure that Designated Dealers are 
adequately prepared to provide depth and liquidity to the Exchange's 
markets in times of market stress or volatility. The Exchange believes 
that the previous net capital requirement for Designated Dealers of at 
least the greater of $500,000 or the amount required under Commission 
Rule 15c3-1 will better protect the integrity and quality of the 
Exchange's markets, and therefore the investors whose orders are 
executed on the Exchange.
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    \2\ See Securities Exchange Act Rel. No. 20766 (Mar. 20, 1984), 
49 FR 11274 (Mar. 26, 1984).
    \3\ See Securities Exchange Act Rel. No. 27458 (Nov. 21, 1989), 
54 FR 49376 (Nov. 30, 1989).
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    Article II, Section 5.1 of the CSE By-Laws imposes a minimum net 
capital level on non-specialist Exchange members equal to the greater 
of the net capital level required by Commission Rule 15c3-1 or $25,000. 
The proposed rule change would increase that requirement from $25,000 
to 250,000. Members would, of course, still be subject to any higher 
net capital requirements imposed by Commission Rule 15c3-1. Commission 
Rule 15c3-1 distinguishes minimum net capital levels among dealer firms 
that trade for their own account and between brokerage firms that carry 
accounts and those that introduce customers to other firms. The 
Exchange believes, however, that a higher, uniform minimum requirement 
is appropriate because each of these types of firms may pose a risk to 
the financial integrity of the Exchange, as well as to the investing 
public generally, if permitted to operate with inadequate 
capitalization.
    Commission Rule 15c3-1 currently requires minimum net capital of 
$100,000 for any broker or dealer that effects more than 10 
transactions in any one calendar year for its own investment 
account.\4\ CSE members that trade for their own accounts on the 
Exchange often effect more than 10 trades per day. Because proprietary 
trading places member firm capital directly at risk, the Exchange 
believes the higher net capital requirement of $250,000 is appropriate 
for member firms that trade for their proprietary accounts on the 
Exchange.
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    \4\ 17 CFR 240.15c3-1.
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    Commission Rule 15c3-1 currently imposes a similar $250,000 minimum 
net capital requirement for any broker-dealer that carries customer 
accounts.\5\ The proposed rule change would bring the CSE's net capital 
requirement for brokerage firms that carry accounts in line with the 
Commission's requirements.
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    \5\ 17 CFR 240.15c3-1.
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    The Exchange also believes that a uniform net capital requirement 
should apply to introducing brokerage firms. The CSE notes that the 
Commission examined this issue in revising Commission Rule 15c3-1 in 
1992. The Commission noted in proposing to raise the minimum net 
capital level for introducing brokers under Commission Rule 15c3-1 that 
customers are placed at risk by brokers that do not receive or hold 
customer funds or securities because such brokers have indirect

[[Page 45894]]

access to customer funds and securities, and can direct the movement of 
such assets by placing orders with clearing firms.\6\ Customers are 
often unaware of or unable to distinguish between introducing and 
clearing firms, and tend to rely heavily upon the representations of 
brokers at introducing firms. A higher net capital requirement will 
help ensure the financial integrity of such introducing firms and 
thereby help to protect investors.
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    \6\ Securities Exchange Act Rel. No. 31512 (Nov. 24, 1991), 57 
FR 57027 (Dec. 2, 1992).
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    Similarly, better capitalized introducing firms are less likely to 
become insolvent. In the event that such a firm does become insolvent, 
customers will be better protected by higher minimum net capital 
requirements. The failure of an introducing firm can strand an 
investor, who may be unable to place orders directly with a clearing 
firm because the clearing firm regards the investor as the customer of 
the introducing firm. Such a customer would be unable either to 
liquidate or open new positions until the introducing firm is wound up 
or the customer opens a new account with a different broker. Higher net 
capital levels would likely result in a quicker, easier sale of the 
introducing firm and would help to minimize the impact of such a 
failure on the investing public.
    Finally, the Exchange believes that raising the minimum net capital 
level for members will further the antifraud provisions of the federal 
securities laws. Members have access to customer securities and funds 
either directly, as in the case of a clearing firm, or indirectly, as 
in the case of an introducing firm that places orders with a clearing 
firm on behalf of its customers. In either case, member firms are 
presented with an opportunity to convert customer assets for personal 
or other inappropriate use. Higher net capital levels will help ensure 
adequate firm resources to address such problems. In addition, higher 
net capital levels may create a disincentive toward such activity by 
ensuring sufficient operating capital. That is, a firm with sufficient 
net capital may be less likely to attempt to convert customer funds for 
the firm's use.
    (2) Basis. The proposed rule change is consistent with Section 6(b) 
of the Act in general, and furthers the objectives of Section 6(b)(5) 
in particular in that it is designed to promote just and equitable 
principles of trade and to remove impediments to and perfect the 
mechanism of a free and open market and a national market system, and, 
in general, to protect investors and the public interest. Specifically, 
the proposed rule change will help ensure greater financial stability 
of the Exchange's members by requiring those members to maintain higher 
capital levels. In the event of adverse market movements, these capital 
reserves will help protect members and their customers by helping to 
ensure that funds are available to cover securities positions.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The CSE does not believe that the proposed rule change will impose 
any inappropriate burden on competition.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants or Others

    No comments were solicited in connection with the proposed rule 
change.

III. Date of Effectiveness of the Proposed Rule Change and Timing 
for Commission Action

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) By order approve such proposed rule change; or
    (B) Institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing. Persons making written submissions 
should file six copies thereof with the Secretary, Securities and 
Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549. 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for inspection and copying in the 
Commission's Public Reference Section, 450 Fifth Street, N.W., 
Washington, D.C. 20549. Copies of such filings will also be available 
for inspection and copying at the principal office of the CSE. All 
submissions should refer to File No. SR-CSE-97-09 and should be 
submitted by September 19, 1997.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\7\
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    \7\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-23011 Filed 8-28-97; 8:45 am]
BILLING CODE 8010-01-M
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