Federal Register / Vol. 63, No. 100 /Tuesday, May 26, 1998 / Notices 28533

9Section 6(b)(7) requires the Commission to

determine that a registered national securities

exchange’s rules are designed to provide a fair

procedure for the disciplining of members and

persons associated with members.

10Cf. CBOE Rule 2.1(c) (no member shall

participate in adjudication of a matter in which he

is personally interested) and PCX Rule 10.8(b)

(review board member required to disclose any

circumstances that might preclude him from

rendering an objective and impartial determination)

and Rule 11.3 (no committee member shall

participate in an adjudication of a matter in which

he is personally interested).

11See supra note 4, Amendment No. 2 at p.2.

12 15 U.S.C. 78s(b)(2).

13 17 CFR 200.30–3(a)(12).

1 15 U.S.C. 78s(b)(1).

2 17 CFR 240.19b–4.

3See Letter from Patricia L. Levy, Senior Vice

President and General Counsel, CHX, to Katherine

A. England, Division of Market Regulation

(‘‘Division’’), Commission, dated March 17, 1998

(‘‘Amendment No. 1’’). Amendment No. 1 revises

CHX Article VI, Rule 2(a) to state that registered

persons, as defined in CHX Article VI, Rule 2(b),

must register with the CHX.

4See Securities Exchange Act Release No. 39804

(March 25, 1998), 63 FR 15906.

5See Letter from Patricia L. Levy, Senior Vice

President and General Counsel, CHX, to Yvonne

Fraticelli, Attorney, Division, Commission, dated

May 6, 1998 (‘‘Amendment No. 2’’). Amendment

No. 2 revises CHX Article VI, Rule 2(b) to include

members in the CHX’s definition of registered

persons.

6See Letter from Patricia L. Levy, Senior Vice

President and General Counsel, CHX, to Yvonne

Fraticelli, Division, Commission, dated May 15,

1998 (‘‘Amendment No. 3’’). Amendment No. 3

revises Interpretation and Policy .01 to CHX Article

VI, Rule 2, to indicate that amendments to Form U–

4 and Form BD regarding any registered person

must be filed within 30 days after the registered

person learns the facts or circumstances requiring

the forms to be revised or, if the revision involves

a statutory disqualification, as defined in the Act,

within 10 days after the statutory disqualification

occurs. The CHX’s original proposal did not include

the 10-day limit for the filing of amendments

involving a statutory disqualification.

7See Amendment No. 1, supra note 3.

consistent with Section 6(b)(7) 9 of the

Act. The proposed rule change provides

fair procedures for disciplining its

members and associated persons by

changing the composition of

Disciplinary Panels to allow

professional hearing officers to serve as

chairmen and voting members on these

panels. Providing more responsibility

and authority to these professional

hearing officers lends credibility to the

disciplinary process because all parties

involved in the dispute will benefit

from their expertise and knowledge of

the law as it applies to the securities

industry. This expertise and knowledge

should result in speedier Panel

decisions without sacrificing due

process.

The Commission notes, however, that

the Exchange’s rules do not specifically

address the possibility of conflicts of

interest between the panelist and parties

in the dispute.10 In response, the

Exchange states that its Hearings

Department screens panel members for

conflicts of interest.11 Initially,

prospective panel members are chosen

who do not present apparent conflicts.

These prospective panelists are then

given the names of the parties, names of

lawyers or agents representing the

parties, names of any potential

witnesses disclosed by the parties, and

the nature of the case. Prospective

panelists are then asked whether they

have any past or present relationships

with any of the persons mentioned and

whether they are aware of any other

conflict presented by any of the persons

mentioned or by the nature of the case.

The Exchange also forwards the names

of prospective panelists to the parties so

that the parties can conduct their own

conflicts check. In the Commission’s

view, this procedure should go on a

long way in removing any interested

persons from the list of prospective

panelists before the panel is selected,

thereby minimizing the possibility of

conflicts.

The Commission agrees that

extending the right of indemnification

to persons serving on Disciplinary

Panels and to Exchange Officials should

allow the Exchange to attract and retain

qualified persons to serve in these

capacities. By eliminating the

possibility of litigation and potential

judgment as factors in deciding whether

to participate on a Panel, the pool of

qualified candidates should increase

and their decisions will be based on

impartial analysis of the evidence and

circumstances, not fear of reprisal.

Finally, the Commission supports the

Exchange vesting in the Executive

Committee the authority to hear all

appeals. Streamlining the appeals

process should result in expedited

enforcement action where necessary,

which will, in turn, benefit the public.

IV. Conclusion

For the above reasons, the

Commission believes that the proposed

rule change is consistent with the

provisions of the Act, and in particular

with Section 6(b)(7).

It is therefore ordered, pursuant to

Section 19(b)(2) of the Act,12 that the

proposed rule change (SR–AMEX–97–

30) be, and hereby is approved.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.13

[FR Doc. 98–13817 Filed 5–22–98; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–39998; File No. SR–CHX–

98–06]

Self-Regulatory Organizations; Order

Approving Proposed Rule Change and

Notice of Filing and Order Granting

Accelerated Approval to Amendment

Nos. 2 and 3 to the Proposed Rule

Change by the Chicago Stock

Exchange, Inc. Relating to Registration

Requirements

May 18, 1998.

I. Introduction

On February 18, 1998, the Chicago

Stock Exchange, Inc. (‘‘CHX’’ or

‘‘Exchange’’) filed with 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 proposal to amend its

rules to clarify the persons required to

register with the CHX. On March 18,

1998, the CHX filed Amendment No. 1

to the proposal.3 The proposed rule

change and Amendment No. 1 were

published for comment in the Federal

Register on April 1, 1998.4 On May 7,

1998, the CHX filed Amendment No. 2

to the proposal.5 On May 15, 1998, the

CHX filed Amendment No. 3 to the

proposal.6 No comments were received

regarding the proposal. This order

approves the proposed rule change, as

amended.

II. Description of the Proposal

CHX Article VI, ‘‘Restriction and

Requirements,’’ Rule 2, ‘‘Registration

and Approval of Member and Member

Organization Personnel,’’ governs the

registration and approval of member

and member organization personnel and

other associated persons. The CHX

proposes to replace the current text to

CHX Article VI, Rule 2 with new text in

order to clarify those persons who are

required to register with the Exchange.

Specifically, new CHX Article VI, Rule

2(a), ‘‘Registration,’’ will require all

registered persons, as defined in CHX

Article VI, Rule 2(b), to register with the

CHX.7 The CHX may waive the

registration requirement or permit a

short-form registration or notification

for an individual who is properly

registered with another self-regulatory

organization (‘‘SRO’’).

New CHX Article VI, Rule 2(b),

‘‘Definition of Registered Persons,’’

defines ‘‘registered persons’’ as all

members and persons associated with a

member or member organization who

are engaged or will be engaged in the

securities business of a member or
28534 Federal Register / Vol. 63, No. 100 /Tuesday, May 26, 1998 / Notices

8Schedule A of Form BD requests information

concerning direct owners and executive officers;

Schedule B requests information concerning

indirect owners; and Schedule C is used to amend

Schedules A and B.

9See Letter from Douglas Scarff, Director,

Division, Commission, to Gordon S. Macklin,

President, National Association of Securities

Dealers, Inc., dated June 18, 1982 (‘‘1982 Letter’’).

In its 1982 Letter, the Division noted that the Act

requires that a person selling securities be

registered with the Commission as a broker-dealer

under Section 15(a) unless he or she is an

associated person as defined in Section 3(a)(18) of

the Act. With regard to securities salespersons

designated as independent contractors, the Division

stated that unless an independent contractor’s

activities are subject to control by a broker-dealer

within the scope of Section 3(a)(18) of the Act, the

salesperson must be registered individually as a

broker-dealer. The Division noted that an

independent contractor salesperson whose

activities are subject to control by a broker-dealer

must be registered with an SRO and should be

covered by the employer broker-dealer’s fidelity

bond. Finally, the Division stated that a firm is

responsible for ensuring either that an independent

contractor is registered as a broker-dealer or

assuming the supervisory responsibilities attendant

to a relationship with an associated person.

10Persons in this category may include, for

example, senior officers in a division of a brokerdealer that does not participate in the member’s

securities business. Telephone conversation

between Patricia L. Levy, Senior Vice President and

General Counsel, CHX, and Yvonne Fraticelli,

Attorney, Division, Commission, on March 13, 1998

(‘‘March 13 Conversation’’).

11The current version of CHX Article VI, Rule 2

contains the other requirements listed in new CHX

Article VI, Rule 2(d). In general, these provisions

include the requirements that members: (1)

terminate their relationship with an associated

person for whom the CHX has withdrawn or

withheld registration or approval; (2) obtain CHX

approval before allowing a person subject to a

statutory disqualification to become associated with

the member; (3) take reasonable care to determine

the existence of a statutory disqualification prior to

employing an associated person; and (4) promptly

notify the CHX if an associated person becomes

subject to a statutory disqualification.

12See Amendment No. 3, supra note 6.

13 15 U.S.C. 78f(b)(5)(1998).

14 In approving this rule, the Commission has

considered the proposed rule’s impact on

efficiency, competition, and capital formation. 15

U.S.C. 78c(f).

15 15 U.S.C. 78f(c)(3)(B).

16However, the CHX may waive the registration

requirement or permit a short-form registration or

notification for an individual who is properly

registered with another SRO.

17See note 8, supra.

member organization, or the

management of such securities business,

including those persons whose

functions include supervision,

solicitation, conduct or business and the

training of other persons associated with

the member or member organization for

any of these functions. CHX Article VI,

Rule 2(b) also enumerates, without

limitation, specific persons who are

within the definition of registered

persons, including: (i) Sole proprietors;

(ii) officers; (iii) partners; (iv) principal

stockholders (as defined in CHX Article

II, Rule 4); (v) directors; (vi) branch

office managers; (vii) nominees; (viii)

representatives (including any persons

performing the duties customarily

performed by a salesperson or registered

representative); (ix) persons whose

functions include (a) underwriting,

trading or sales of securities; (b)

research or investment advice, other

than general economic information or

advice, with respect to the activities

described in the preceding clause (a);

and (c) activities other than those

specifically mentioned that involve

communication, directly or indirectly,

with public investors in securities in

connection with the activities described

in the preceding clauses (a) and (b); and

(x) persons listed on Schedule A, B, or

C of the member’s or member

organization’s Form BD.8

With regard to independent

contractors associated with members

and member organizations, the CHX

notes that it has been the long-standing

policy of the Commission to

characterize and treat independent

contractors whose actions are controlled

by a member or member organization as

employees for purposes of the Act.9

This characterization and treatment

applies irrespective of whether such

persons might be deemed employees in

an unrelated statutory context (e.g., for

purposes of IRS regulations).

Accordingly, an independent contractor,

as well as any other person associated

with a member or member organization,

must register with the CHX if he or she

falls within the definition of registered

person.

New CHX Article VI, Rule 2(c),

‘‘Persons Exempt from Registration,’’

exempts from registration persons

associated with a member or member

organization (i) whose functions are

solely and exclusively ministerial; or (ii)

who are not actively engaged in the

securities business.10

The sole new provision in CHX

Article VI, Rule 2(d), ‘‘Other

Registration Requirements,’’ prohibits

members from making application for

the registration of any associated person

where there is no intent to employ such

person in the member’s securities

business.11 The CHX’s proposal also

amends Interpretation and Policy .01 to

CHX Article VI, Rule 2 to state that

amendments to Form U–4 and Form BD

regarding any registered person must be

filed within 30 days after the registered

person learns the facts or circumstances

requiring the forms to be amended or, if

the amendment involves a statutory

disqualification, as defined in the Act,

within 10 days after the statutory

disqualification occurs.12

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, the

requirements of Section 6(b)(5) 13 in that

it is designed to prevent fraudulent and

manipulative acts and practices, to

promote just and equitable principles of

trade, and to protect investors and the

public interest.14 In addition, the

Commission finds that the proposal is

consistent with Section 6(c)(3)(B) 15 of

the Act, which allows a national

securities exchange to require that any

person associated with a member, or

any class of such persons, register with

the exchange in accordance with

procedures established by the rules of

the exchange.

New CHX Artidle VI, Rule 2(a) will

require all registered persons, as defined

in CHX Article VI, Rule 2(b), to register

with CHX.16 New CHX Article VI, Rule

2(b) generally defines registered persons

as members and persons associated with

a member who are engaged or will be

engaged in the securities business of a

member, or in the management of such

business, including the functions of

supervision, solicitation, conduct of

business or the training of associated

persons for any of these functions. New

CHX Article VI, Rule 2(b) also

enumerates, without limitation, specific

persons who are within the definition of

registered person. In addition to the

persons required to register under the

CHS’s current rule, new CHX Article VI,

Rule 2(b) also will require that the

following persons register with the

CHX: sole proprietors; principal

stockholders (as defined in CHX Article

III, Rule 4); persons listed on Schedules

A, B, or C of a member’s Form BD; 17

and persons engaged on behalf of a

member in underwriting, trading, or

sales of securities, research or

investment advice, or other activities

involving communication with the

public in connection with underwriting,

trading, sales of securities, or research

or investment advice.

The Commission believes that new

CHX Article VI, Rules 2(a) and 2(b) will

clarify the persons who are required to

register with the Exchange, thereby

facilitating compliance with the CHX’s

registration requirements and helping to

ensure that all persons who are or will

be engaged in a member’s securities

business are registered with the CHX.

Because register persons and persons

seeking to register are subject to the
Federal Register / Vol. 63, No. 100 /Tuesday, May 26, 1998 / Notices 28535

18Registered persons submit to the authority of

the organizations or states to which they apply for

registration on the Form U–4.

19See 1982 Letter, supra note 9.

20As noted above, persons in this category may

include, for example, for example, senior officers in

a division of a broker-dealer that does not

participate in the member’s securities business. See

March 13 Conversation, supra note 10.

21See NASD Rule 1060(a)(1) and (2).

22See Amendment No. 3, supra note 6.

23See NASD By-Law Article V, Section 2(c).

24 15 U.S.C. 78s(b)(2).

25 17 CFR 200.30–3(a)(12).

1On March 12, 1998, NASD Regulation filed

Amendment No. 1 to the proposal. Amendment No.

1 revised Paragraph (b)(9)(A)(ii) to include the

shares of a member’s parent that are publicly traded

on an exchange or Nasdaq in the exemption granted

for shares of members traded on an exchange or

Nasdaq. Section III of this approval order contains

a further discussion of this amendment. In brief, the

technical amendment was necessary to reflect the

fact that members are often part of a holding

company structure wherein the parent of the

member is the entity that actually trades on an

exchange or Nasdaq. Amendment No. 1 also

corrected a drafting error in the original proposal’s

Paragraph (d) of IM–2110–1 to clarify that both

employees and directors may take advantage of an

exemption for issuer directed securities programs.

Because this amendment is technical the statute

does not require that it be published for comment.

2 15 U.S.C. 78s(b)(1).

3 17 CFR 240–19b–4.

4Securities Exchange Act Release No. 39620

(February 4, 1998), 63 FR 7026 (February 11, 1998).

5See letter from Sullivan & Cromwell to Jonathan

G. Katz, Secretary, SEC, dated March 13, 1998.

CHX’s jurisdiction,18 the proposal also

will facilitate the CHX’s oversight of

such persons by ensuring that the CHX

has the authority to enforce its rules and

the federal securities laws against such

persons.

The CHX’s proposal also protests

investors and the public interest by

noting that a person characterized as an

independent contractor must register

with the CHX if he or she falls within

the definition of registered person. This

position is consistent with the 1982

Letter,19 which stated, among other

things, that an independent contractor

salesperson whose activities are subject

to control by a broker-dealer must be

registered with a SRO. By providing a

clear statement of the CHX’s policy

regarding the registration of

independent contractors, the CHX’s

proposal should help to ensure that

independent contractors who come

within the CHX’s definition of

registered person register with the CHX.

CHX Article VI, Rule 2(c), ‘‘Person

Exempt from Registration,’’ provides

exemptions from registration for

associated persons who functions are

solely and exclusively clerical or

ministerial or who are not actively

engaged in the securities business.20

The Commission notes that the rules of

the National Association of Securities

Dealers, Inc. (‘‘NASD’’) also provide

these exemptions from registration.21

Accordingly, the Commission believes

that these exemptions from registration

are reasonable and raise no new

regulatory issues.

New CHX Article VI, Rule 2(d),

‘‘Other Registration Requirements,’’

prohibits members from making

application for the registration of any

associated person when there is no

intent to employ such person in the

member’s securities business. NASD

Rule 1031(a) also contains this

prohibition. Accordingly, the

Commission believes that this provision

of the CHX’s proposal is reasonable and

raises no new regulatory issues.

The Commission believes that it is

reasonable for the CHX to amend

Interpretation and Policy .01 to indicate

that amendments to Forms U–4 and

BDA regarding any registered person

must be submitted to the CHX within 30

days after the registered person learns

the facts or circumstances requiring the

forms to be revised, or, if the

amendment involves a statutory

disqualification, as defined in the Act,

within 10 days after the disqualification

occurs.22 The Commission notes that the

rules of the NASD contain a similar

provision.23 Accordingly, the

Commission believes that the CHX’s

amendment to Interpretation and Policy

.01 is reasonable and raises no new

regulatory issues.

The Commission finds good cause for

approving Amendment Nos. 2 and 3 to

the proposal prior to the thirtieth day

after the date of publication of notice of

filing thereof in the Federal Register.

Amendment No. 2 clarifies new CHX

Article VI, Rule 2(b) by indicating that

members, as well as associated persons,

are registered persons under CHX

Article VI, Rule 2(b). This change

reflects the inclusion of sole proprietors

within CHX Article VI, Rule 1(b)’s

enumerated list of registered persons

and eliminates an inconsistency that

would arise if the CHX defined

registered persons to include only

persons associated with members and

member organizations. Amendment No.

3 strengthens the CHX’s proposal by

requiring the filing of amendments to

Forms U–4 and BD that involve a

statutory disqualification within 10 days

after the statutory disqualification

occurs. Accordingly, the Commission

believes that it is consistent with

Sections 6 and 19(b) of the Act to

approve Amendment Nos. 2 and 3 on an

accelerated basis.

IV. Solicitation of Comments

Interested persons are invited to

submit written data, views, and

arguments concerning Amendment Nos.

2 and 3, including whether Amendment

Nos. 2 and 3 are consistent with the Act.

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 persons, 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

Room. 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 number

SR–CHX–98–06 and should be

submitted by June 16, 1998.

V. Conclusion

It is therefore ordered, pursuant to

Section 19(b)(2) of the Act,24 that the

proposed rule change (SR–CHX–98–06)

is approved.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.25

[FR Doc. 98–13816 Filed 5–22–98; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–40001; File No. SR–NASD–

97–95]

Self-Regulatory Organizations; Order

Granting Approval of Proposed Rule

Change By the National Association of

Securities Dealers, Inc. Relating to

Amendments to the Free-Riding and

Withholding Interpretation

May 18, 1998.

I. Introduction

On December 23, 1997,1 the National

Association of Securities Dealers

Regulation, Inc. (‘‘NASD Regulation’’)

filed with the Securities and Exchange

Commission (‘‘SEC’’ or ‘‘Commission’’)

a proposed rule change pursuant to

Section 19(b)(1) of the Securities

Exchange Act of 1934 (‘‘Act’’),2 and

Rule 194–b thereunder.3 Notice of the

proposal appeared in the Federal

Register on February 11, 1998.4 The

Commission received one comment

letter regarding the proposal.5 The