[Federal Register Volume 62, Number 178 (Monday, September 15, 1997)]
[Notices]
[Pages 48329-48331]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-24305]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-39028; File No. SR-CHX-97-15]


Self-Regulatory Organizations; Chicago Stock Exchange, Inc.; 
Order Granting Approval to Proposed Rule Change Relating to a 
Specialist's De-Registration in an Issue

September 8, 1997.

I. Introduction

    On June 4, 1997, the Chicago Stock Exchange, Inc. (``CHX'' or 
``Exchange'') submitted to the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change to amend Article XXX, Rule 1, Interpretation and 
Policy .01 of the CHX Rules, to change a policy of the Exchange's 
Committee on Specialist Assignment and Evaluation (``CSAE'') relating 
to the time periods for which a co-specialist must trade a security 
before deregistering as the specialist for the security. This policy 
would be in effect for a one year pilot program.
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    \1\ 15 U.S.C. Sec. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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    Notice of the proposed rule change, together with the substance of 
the proposal, was published for comment in Securities Exchange Act 
Release No. 38882 (July 28, 1997), 62 FR 41981 (August 4, 1997). No 
comments were received on the proposal. This order approves the 
proposed rule change.

II. Description

    The Exchange's CSAE is responsible for, among other things, 
appointing

[[Page 48330]]

specialists and co-specialists \3\ and conducting de-registration 
proceedings in accordance with Article XXX of the Exchange's rules.\4\ 
As described in existing Interpretation and Policy .01 of Rule 1 of 
Article XXX, seven circumstances may lead to the need for assignment or 
re-assignment of a security. One such circumstance is by specialist 
request.
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    \3\ A specialist is a ``unit'' or organization which has 
registered as such with the Exchange under Article XXX, Rule 1. A 
co-specialist is an individual who has registered as such under 
Article XXX, Rule 1. See CHX Rules Article XXX, Rule 1, 
Interpretation and Policy .01.4(a).
    \4\ See CHX Rules Article IV, Rule 4.
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    Currently, the CSAE ``will initiate a re-assignment proceeding if 
it believes that such action is called for.'' \5\ Using this standard, 
the CSAE's current policy is to require a co-specialist to trade an 
issue awarded in competition \6\ for a two year period, and to trade an 
issue awarded without competition for a six-month period, before 
permitting a co-specialist to de-register in the issue.
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    \5\ See CHX Rules Article XXX, Rule 1, Interpretation and Policy 
.01.2.
    \6\ In this context, ``in competition'' means that more than one 
specialist had applied to be the specialist in the issue.
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    The CHX proposes to amend this policy for a one year pilot program. 
Specifically, the proposal would change the time periods for which a 
co-specialist must trade an issue before the CSAE will, in general, 
approve a co-specialist's request to deregister in an issue.\7\ These 
time periods would vary depending on whether the issue was awarded in 
competition or without completion and whether another specialist will 
assume the responsibility to trade the issue.
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    \7\ The Exchange stated its intention to have the new policy 
apply anytime there will not be another specialist assigned to the 
issue, such as if the security was to be returned to the cabinet, 
put in the cabinet for the first time, or traded by a lead primary 
market maker pursuant to CHX Rules Article XXXIV, Rule 3. See 
Amendment No. 2, supra note 1. Cabinet securities are those 
securities which the Board of Governors designates to be traded in 
the cabinet system because in the judgment of the Board such 
securities do not trade with sufficient frequency to warrant their 
retention in the specialist system. See CHX Rules Article XXVIII, 
Rule 6. For a more detailed explanation of the operation of the 
cabinet system, see CHX Rules Article XX, Rule 11.
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    Under the proposed rule change, for a security that was awarded to 
a co-specialist in competition, such co-specialist will be required to 
trade the security for one year before being able to deregister in the 
security if no other specialist will be assigned to the security after 
posting.\8\ The two year time period currently in place for an intra-
firm transfer of such issues (i.e., transferring the issue to another 
co-specialist in the same specialist unit) will remain. For a security 
that was awarded to a co-specialist without competition, such co-
specialist will be required to trade the security for a three month 
period before being able to deregister in the security if no other 
specialist will be assigned to the security after posting. The six 
month time period currently in place for an intra-firm transfer of such 
issues will remain.
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    \8\ In this context, posting means that all specialists are put 
on notice that the security in question is available for 
reassignment. See CHX Rules Article XXX, Rule 1. Telephone 
conversation between David Rusoff, Attorney, Foley & Lardner, and 
Heather Seidel, Attorney, Division of Market Regulation, Commission, 
on July 24, 1997.
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    Whether or not the security was awarded in competition, the 
effective date of a specialist's deregistration in an issue for which 
no specialist will be assigned after posting will be the first business 
day of each calendar quarter; provided, however, that the applicable 
time period for which a specialist is required to trade an issue must 
have been satisfied prior to such date.
    Whether or not the security was awarded in competition, in general, 
the CSAE will require specialists to provide sending firms at least 15 
days advance notice of a its intention to de-register in the issue.

III. Discussion

    The Commission finds that the proposed rule change is consistent 
with the requirements of the Act and the rules and regulations 
thereunder applicable to a national securities exchange, and, in 
particular, with the requirements of Section 6(b).\9\ Specifically, the 
Commission believes the proposal is consistent with the Section 6(b)(5) 
requirements that the rules of an exchange be designed to promote just 
and equitable principles of trade, to prevent fraudulent and 
manipulative acts, and, in general, to protect investors and the 
public.\10\
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    \9\ 15 U.S.C. Sec. 78f(b).
    \10\ In approving this rule, the Commission notes that it has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. 15 U.S.C. 78c(f).
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    The Commission believes that the new policy, as proposed, should 
result in a more accurate balance between the interests of consistency 
and continuity with respect to the trading of an issue by a particular 
specialist and that of a specialist in having the flexibility to 
deregister in an unprofitable issue. In this regard, the Commission 
believes that the proposed rule change will still preserve an 
appropriate time period for which the specialist cannot deregister in 
an issue. For a security that was awarded to a co-specialist in 
competition, such co-specialist will be required to trade the security 
for one year before being able to deregister in the security if no 
other specialist will be assigned to the security after posting. For a 
security that was awarded to a co-specialist without competition, such 
co-specialist will be required to trade the security for a three month 
period before being able to deregister in the security if no other 
specialist will be assigned to the security after posting.
    The Commission also believes that the proposed new policy may help 
to encourage more specialists and co-specialists to apply for 
additional issues. The Commission notes that under the current policy, 
a specialist or co-specialist may be reluctant to apply to become a 
specialist in an issue because of the long time period for which it 
must hold the security before deregistering. By reducing the current 
time periods for which a specialist or co-specialist must trade a 
security before being allowed to deregister in that security, when no 
other specialist will be assigned to that security, the proposal may 
reduce the risk and exposure that is attendant with registering for a 
particular issue. In turn, the Commission believes that the proposal 
could increase the overall liquidity and depth of the CHX market by 
encouraging specialists to register in additional securities.
    The Commission further believes that the proposed pilot provides 
adequate notice to order entry firms of the change in the status of an 
issue, by providing that such firms be given at least 15 days advance 
notice of a co-specialist's intention to deregister in the issue. In 
addition, the effective date of a specialist's deregistration will be 
the first business day of each calendar quarter; provided, however, 
that the applicable time period for which a specialist is required to 
trade an issue must have been satisfied prior to such date.
    The Commission believes that approving the proposed rule change as 
a pilot program is reasonable under the Act because it will serve to 
protect investors and the public interest by allowing the CHX time to 
collect data on its effectiveness and to determine whether any 
modifications are necessary. The pilot will expire on September 8, 
1998. The Commission requests that the CHX submit a report on the 
effectiveness of the pilot program by July 8, 1998. The report should 
state the Exchange's views on the effectiveness of the policy change, 
including, but not limited to, whether there has been an increase in 
the

[[Page 48331]]

number of specialists or co-specialists who register in additional 
securities. The report should also include data on (1) the rate of 
deregistration at the specialist's request, and (2) the number of 
specialists applying to register in securities that do not have a 
specialist already assigned, and compare that data for the pilot year 
to the prior year. In addition, the Commission requests that the CHX 
submit by July 8, 1998, any proposed rule change pursuant to Rule 19b-4 
under the Act \11\ to further extend or seek permanent approval of the 
pilot program.
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    \11\ 17 CFR 200.19b-4.
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IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\12\ that the proposed rule change (SR-CHX-97-15) is approved on a 
one year pilot basis through September 8, 1998.

    \12\ 15 U.S.C. Sec. 78s(b)(2).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\13\
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    \13\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-24305 Filed 9-12-97; 8:45 am]
BILLING CODE 8010-01-M