[Federal Register Volume 62, Number 220 (Friday, November 14, 1997)]
[Notices]
[Pages 61157-61158]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-29987]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-39307; File No. SR-CHX-97-21]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Chicago Stock Exchange, Incorporated, Regarding 
Suitability of Customer Recommendations

November 6, 1997.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4,\2\ notice is hereby given that on 
September 18, 1997, the Chicago Stock Exchange, Incorporated (``CHX'' 
or ``Exchange'') file with the Securities and Exchange Commission 
(``Commission'' or ``SEC'') the proposed rule change, as described in 
Items I, II, and III below, which Items have been prepared by the self-
regulatory organization. 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. Sec. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Change

    The Exchange proposes to add Article VIII, Rule 25 to the 
Exchange's Rules relating to market-at-the-close orders. The text of 
the proposed rule change is as follows: new text is italicized.

Article VIII

Business Conduct

    Rule 25. (a) In recommending to a customer the purchase, sale or 
exchange of any security, a member shall have reasonable grounds for 
believing that the recommendation is suitable for such customer upon 
the basis of the facts, if any, disclosed by such customer as to his 
other security holdings and as to his financial situation and needs.
    (b) Prior to the execution of a transaction recommended to a 
customer, other than transactions with customers where investments are 
limited to money market mutual funds, a member shall make reasonable 
efforts to obtain information concerning:
    (i) the customer's financial status;
    (ii) the customer's tax status;
    (iii) the customer's investment objectives;
    (iv) such other information used or considered to be reasonable by 
such member or registered representative in making recommendations to 
the customer.

Interpretations and Policies

    .01 The following is a non-exclusive list of practices that the 
Exchange deems to violate a member's duty to recommend to a customer 
only securities suitable for that customer.
    (a) Recommending speculative low-priced securities to customers 
without knowledge of or an attempt to obtain information concerning the 
customers' other securities holdings, their financial situation and 
other necessary data.
    (b) Excessive activity in a customer's account, often referred to 
as ``churning' or ``overtrading.'' There are no specific standards to 
measure excessiveness of trading in customer accounts, because this 
must be related to the objectives and financial situation of the 
customer involved.
    (c) Trading in mutual fund shares, particularly on a short-term 
basis. It is clear that normally these securities are not proper 
trading vehicles and such activity on its face may raise the question 
of trade violation.
    (d) Fraudulent activity, including: establishing fictitious 
accounts in order to execute transactions which otherwise would be 
prohibited; executing transactions in discretionary accounts in excess 
of or without actual authority from customers; causing the execution of 
transactions which are unauthorized by customers or the sending of 
confirmations in order to cause customers to accept transactions not 
actually agreed upon; and unauthorized use or borrowing of customers' 
funds and securities.
    (e) Recommending the purchase of securities or the continuing 
purchase of securities in amounts that are inconsistent with the 
reasonable expectation that the customer has the financial ability to 
meet such a commitment.
    .02 Derivatives and Other New Financial Products. As new financial 
products are introduced into the marketplace, it is important that 
members make every effort to familiarize themselves with each 
customer's financial situation, trading experience, and ability to meet 
the risks involved with such products and to make every effort to make 
customers aware of the pertinent information regarding new financial 
products. Moreover, members should be careful to always comply with all 
Exchange requirements regarding the trading of such products.

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 Exchange 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 Exchange has prepared summaries, set forth in 
sections A, B, and C below, of the most significant aspects of such 
statements.

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

1. Purpose
    The Exchange currently does not have a rule that expressly 
addresses suitability, churning and related matters for Exchange 
members. While the Exchange believes that such conduct may currently 
fall within existing Exchange rules, such as the Exchange's rule 
relating to ``just and equitable'' activity, the Exchange believes that 
it is desirable at this time to specifically address this type of 
conduct. As a result, the purpose of the proposed rule change is to add 
Rule 25 to Article VIII of the Exchange's rules, requiring that, in 
recommending to a customer the purchase, sale or exchange of any 
security, a member must have reasonable grounds for believing that the 
recommendation is suitable for such customer upon the basis of the 
facts, if any, disclosed by such customer as to

[[Page 61158]]

his other security holdings and as to his financial situation and 
needs.
    Specifically, prior to the execution of a transaction recommended 
to a customer, other than transactions with customers where investments 
are limited to money market mutual funds, a member would be required to 
make reasonable efforts to obtain information concerning the customer's 
financial status, the customer's tax status, the customer's investment 
objectives, and such other information used or considered to be 
reasonable by such member or registered representative in making 
recommendations to the customer.
    The rule change would contain a non-exclusive list of practices 
that the Exchange deems to violate a member's duty to recommend to a 
customer only securities suitable for that customer. These would be: 
(1) Recommending speculative low-priced securities to customers without 
knowledge of or an attempt to obtain information concerning the 
customers' other securities holdings, their financial situation and 
other necessary data; (2) excessive activity in a customer's account, 
often referred to as ``churning'' or ``overtrading''; (3) trading in 
mutual fund shares, particularly on a short-term basis; (4) fraudulent 
activity (including establishing fictitious accounts in order to 
execute transactions which otherwise would be prohibited, executing 
transactions in discretionary accounts in excess of or without actual 
authority from customers, causing the execution of transactions which 
are unauthorized by customers or the sending of confirmations in order 
to cause customers to accept transactions not actually agreed upon, and 
unauthorized use or borrowing of customers' funds and securities); and 
(5) recommending the purchase of securities or the continuing purchase 
of securities in amounts that are inconsistent with the reasonable 
expectation that the customer has the financial ability to meet such a 
commitment.
    In addition, with regard to derivative financial products, the rule 
change would require that members made every effort to familiarize 
themselves with each customer's financial situation, trading 
experience, and ability to meet the risks involved with such products 
and to make every effort to make customers aware of the pertinent 
information regarding new financial products.
2. Statutory Basis
    The purposed rule change is consistent with Section 6(b)(5) of the 
Act in that it is designed to promote just and equitable principles of 
trade, to foster cooperation and coordination with persons regulating 
securities transactions, 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.

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

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

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

    The Exchange has neither solicited nor received written comments on 
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 submission 
should file six copies thereof with the Secretary, Securities and 
Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549. 
Copies of the submissions, 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 at the 
Commission's Public Reference Room, 450 Fifth Street, N.W., Washington, 
D.C. 20549. Copies of such filing will also be available for inspection 
and copying at the principal office of the CHX. All submissions should 
refer to File No. SR-CHX-97-21 and should be submitted by December 5, 
1997.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\3\
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    \3\ 17 CFR 300.30(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-29987 Filed 11-13-97; 8:45 am]
BILLING CODE 8070-01-M