[Federal Register Volume 62, Number 205 (Thursday, October 23, 1997)]
[Notices]
[Page 55293]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-28030]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-39245; File No. SR-CSE-97-09]


Self-Regulatory Organizations; Cincinnati Stock Exchange, Inc.; 
Order Granting Approval to Proposed Rule Change Increasing Net Capital 
Requirements

October 16, 1997.
    On July 30, 1997, the Cincinnati Stock Exchange, Inc. (``CSE'' or 
``Exchange'') submitted to the Securities and Exchange Commission 
(``SEC'' or ``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 increase net capital 
requirements for members and Designated Dealers.
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    \1\ 15 U.S.C. Sec. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Introduction

    The proposed rule change was published for comment in Securities 
Exchange Act Release No. 38956 (August 21, 1997), 62 FR 45893 (August 
29, 1997). No comments were received on the proposal.

II. Description of the proposals

    Exchange Article II, Section 5.1 presently requires 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 \3\ or 
$25,000. The Exchange proposes to amend this rule to increase that 
requirement from $25,000 to $250,000. As previously required, members 
would still be subject to any higher net capital requirements imposed 
by Commission Rule 15c3-1.\4\
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    \3\ 17 CFR 240.15c3-1.
    \4\ Id.
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    The Exchange also proposes to amend Exchange Rule 11.9(a). That 
rule 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. The Exchange proposes to amend this rule to 
increase the Exchange requirement from $100,000 to $500,000. Again, 
members would still be subject to any higher net capital requirement 
imposed by Commission Rule 15c3-1.\5\
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    \5\ Id.
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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 Sections 6(b) and 11(b) of the 
Act.\6\ In particular, 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.\7\ The Commission also believes that 
the proposal is consistent with Section 11(b) of the Act,\8\ and Rule 
11b-1 \9\ thereunder, which allows securities exchanges to promulgate 
rules relating to specialists in order to maintain fair and orderly 
markets. The proposal is consistent with Rule 11b-(a)(2)(i) \10\ which 
requires that the rules of a national securities exchange which permit 
a member to register as a specialist and to act as a dealer include, 
among other things, adequate minimum capital requirements in view of 
the markets for securities on such exchange.
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    \6\ 15 U.S.C. Sec. 78f(b); 15 U.S.C. Sec. 78k(b).
    \7\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. 15 U.S.C. Sec. 78c(f).
    \8\ 15 U.S.C. Sec. 78k(b).
    \9\ 17 CFR 240.11b-1.
    \10\ 17 CFR 240.11b-1(a)(2)(i).
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    The Commission finds that the rule change will help ensure greater 
financial stability of the Exchange's members by requiring those 
members to maintain higher capital levels. The Commission examined this 
issue when it revised Rule 15c3-1 in 1992.\11\ In proposing to raise 
the minimum net capital requirements under Commission rules, the 
Commission noted that under Rule 15c3-1 customers are placed at risk by 
brokers that do not receive or hold customer securities because such 
brokers have indirect access to customer funds and securities, and can 
direct the movement of such assets by placing orders with clearing 
firms. Customers are often unaware of or unable to distinguish between 
introducing brokers and clearing firms, and tend to rely heavily upon 
the representations of brokers of introducing firms. Higher net capital 
requirements will help ensure the financial integrity of such 
introducing firms and thereby help to protect investors.\12\ The 
Commission concurs with the Exchange that better capitalized 
introducing firms are less likely to become insolvent and in the event 
that an introducing firm does become insolvent, higher net capital 
levels would help increase the changes that the firm can quickly find a 
purchaser of its assets and minimize the impact of such a failure on 
the investing public.\13\ Finally, the Commission has previously stated 
its belief that raising minimum net capital levels will further the 
antifraud provisions of the federal securities laws.\14\ The Exchange 
noted that member firms have access to customer securities and funds 
either directly, as a clearing firm, or indirectly, as an introducing 
firm that places orders with a clearing firm on behalf of its 
customers. In either case, firms can convert those assets to their own 
benefit. A firm with sufficient net capital may be less likely to 
attempt to convert funds in this manner.
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    \11\ Securities Exchange Act Rel. No. 31512 (Nov. 24, 1992), 57 
FR 57027 (Dec. 2, 1992).
    \12\ Id.
    \13\ Id.
    \14\ Id.
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    The Commission also believes that it is important that Designated 
Dealers are adequately prepared to provide depth and liquidity to the 
Exchange's markets in times of market stress or volatility. The 
Commission agrees with the Exchange that the growth in the U.S. capital 
markets generally, and in the CSE's market in particular, has created 
market conditions which have created a need for greater capital levels 
on the CSE. The Commission finds that the increased net capital 
requirement for Designated Dealers will better protect the integrity 
and quality of the Exchange's market.

IV. Conclusion

    It is Therefore Ordered, pursuant to Section 19(b)(2) of the 
Act,\15\ that the proposed rule change (SR-CSE-09) is approved.

    \15\ 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.\16\
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    \16\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-28030 Filed 10-22-97; 8:45 am]
BILLING CODE 8010-01-M