1958 Federal Register / Vol. 61, No. 16 / Wednesday, January 24, 1996 / Notices

18The MSRB determined not to include within

the definition of consultant persons who are

engaged by a dealer at the request or direction of

the issuer because those persons do not assist the

dealer in obtaining or retaining municipal securities

business. The MSRB stated in its filing that it will

review the issue of ‘‘issuer-designated’’

professionals and other issuer involvement in the

underwriting process and will address this subject,

including the question of requiring disclosure of

issuer-designated persons, at a future time. The

Commission encourages the MSRB to consider such

further initiatives in this area in order to promote

the awarding of municipal securities business based

on merit.

19 15 U.S.C. 78o–4.

20First Fidelity, supra n. 13, quoting Statement of

the Commission Regarding Disclosure Obligations

of Municipal Securities Issuers and Others,

Securities Act Release No. 7049 (Mar. 9, 1994), 59

FR 12748 (Mar. 17, 1994).

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

2 17 CFR 240.19b–4.

3See letter from David Rusoff, Foley & Lardner,

to Glen Barrentine, Senior Counsel, Division of

Market Regulation, SEC, dated July 26, 1995. In

Amendment No. 1, the Exchange notified the

Commission that the proposed rule change was

approved by the Exchange’s Executive Committee

on July 20, 1995.

4See CHX Article XXX, Rule 2. A professional

order is any order for the account of a broker-dealer,

the account of an associated person of a brokerdealer, or any account in which a broker-dealer or

an associated person of a broker-dealer has any

direct or indirect interest. See Interpretation .04 of

CHX Article XXX, Rule 2.

5See Article XX, Rule 37(a). Under the

Exchange’s Best Rule, Exchange specialists are

required to guarantee executions of market and

limit orders under certain circumstances. For all

agency limit orders in Dual Trading System issues,

the specialist must fill the order if the bid or offer

at the limit price has been exhausted in the primary

market, there has been price penetration of the limit

in the primary market (a trade through of a CHX

limit order), or the issue is trading at the limit price

on the primary market, unless it can be

demonstrated that such order would not have been

executed if it had been transmitted to the primary

market or the broker and specialist agree to a

specific volume related or other criteria for

requiring a fill.

the compensation paid in connection

with each Consultant Agreement; (iv)

where applicable, a listing of the

municipal securities business obtained

or retained through the activities of each

consultant; (v) a listing of the issuers

and a record of disclosures made to

such issuers concerning each consultant

used by the municipal securities firm to

obtain or retain municipal securities

business with each such issuer; and (vi)

the date of termination of any

consultant arrangement. The

amendment to rule G–9 will require

municipal securities firms to maintain

these records for a six-year period.

III. Comment Letters

As noted above, the Commission

received one comment letter concerning

the proposed change. The Rubin Letter

argued that although the proposed rule

change may assist in uncovering

payments to third parties that are

intended to influence the awarding of

municipal securities business, such

business will continue to be awarded

based on criteria other than merit until

issuers are required to select the best

underwriters for debt issuance. The

Commission agrees with the Rubin

Letter that the rule change approved

today, standing alone, will not operate

to cleanse the municipal market of all

practices resulting in issuers awarding

municipal securities business on a basis

other than the merits of the

underwriting firm chosen.18 As noted

above, however, the rule change

approved today is intended to provide

additional information to issuers and to

the public to assist in determining the

extent to which payments to consultants

influence the issuer’s selection process

in connection with municipal securities

business, as well as the extent to which

such payments increase the cost of

bringing municipal securities issues to

market.

IV. Discussion and Findings

The Commission finds that the rule

change is consistent with the provisions

of Section 15B(b)(2)(C) 19 of the Act,

which provides that the Board’s rules

shall be designed to prevent fraudulent

and manipulative acts and practices, to

promote just and equitable principles of

trade, to foster cooperation and

coordination with persons engaged in

regulating, clearing, settling, processing

information with respect to, and

facilitating transactions in, municipal

securities, to remove impediments to

and perfect the mechanism of a free and

open market in municipal securities,

and, in general, to protect investors and

the public interest. The Commission

believes that the rule change removes

impediments to and perfects the

mechanism of a free and open market in

municipal securities in that the

amendments enhance the ability of

municipal securities firms to compete

for, and be awarded, municipal

securities business on the basis of merit,

rather than political or financial

influence. Such healthy competition

will act to lower artificial barriers to

those municipal securities firms not

willing or able to hire consultants to

obtain or retain municipal securities

business, thereby maintaining the

integrity of the municipal securities

market, as well as the public trust and

confidence that is essential to the longterm health and liquidity of the market.

The Commission also believes that the

rule change is in the public interest in

that the amendments enhance the

ability of investors to determine

whether an underwriter may have made

improper payments in order to secure

municipal securities business. The

Commission has recognized that

‘‘information concerning financial and

business relationships among the parties

involved in the issuance of municipal

securities may be critical to an

evaluation of the underwriting.’’ 20

It is therefore ordered, pursuant to

Section 19(b)(2) of the Act, that File No.

SR–MSRB–95–15 be, and hereby is,

approved, effective March 18, 1996.

For the Commission by the Division of

Market Regulation, pursuant to delegated

authority, 17 CFR 200.30–3(a)(12).

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 96–909 Filed 1–23–96; 8:45 am]

BILLING CODE 8010–01–M

[Release No. 34–36730; File No. SR–CHX–

95–18]

Self-Regulatory Organizations;

Chicago Stock Exchange,

Incorporated; Order Granting Approval

to Proposed Rule Change Relating to

Priority and Precedence of Agency and

Professional Orders

January 17, 1996.

I. Introduction

On July 14, 1995, the Chicago Stock

Exchange, Incorporated (‘‘CHX’’ 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

modify the priority and precedence of

agency and professional orders. On July

26, 1995, the Exchange submitted to the

Commission Amendment No. 1 to the

proposed rule change.3

The proposed rule change was

published for comment in Securities

Exchange Act Release No. 36373 (Oct.

16, 1995), 60 FR 54268 (Oct. 20, 1995).

No comments were received on the

proposal.

II. Description of Proposal

Currently, under the Exchange’s rules,

specialists are not required to accept

professional orders for the book unless

such orders better the existing market.4

A specialist also is not required to

provide primary market protection to

professional orders pursuant to the

Exchange’s Best Rule 5 as it does for
Federal Register / Vol. 61, No. 16 / Wednesday, January 24, 1996 / Notices 1959

6Professional market orders with a ‘‘Z’’

designator receive automatic executions based on

the CHX’s Best Rule. The Z designator may be used

by an order sending firm after it negotiates with the

specialist and the specialist agrees to accept the

firm’s professional orders for automatic execution

on the CHX’s automated order routing and

execution system (‘‘MAX’’). Limit orders sent with

the ‘‘Z’’ designator will be represented on the

specialist’s book as professional orders and do not

receive the benefits of the Best Rule. Securities

Exchange Act Release No. 35505 (Mar. 17, 1995), 60

FR 15613 (Mar. 24, 1995) (File No. SR–CHX–95–

09).

7See CHX Artile XXX, Rule 2.

8With regard to the display of limit orders,

however, the Exchange has represented to the

Commission that all bids and offers that improve

the current CHX quote are displayed in the revised

CHX quotation. Telephone conversation between

George Simmon, Craig Long, and David Rusoff,

Foley & Lardner, and Holly Smith, Ivette Lopez,

Glen Barrentine, and Jennifer Choi, Division of

Market Regulation, SEC, on December 19, 1995. See

also CHX Rule 7, Article XX. Therefore, assuming

that the primary market quote in XYZ is 201⁄4–201⁄2,

if a professional order to buy 1,000 shares of XYZ

at 201⁄4 was entered at 9 a.m. and a public agency

order to buy 1,000 of XYZ at 201⁄4 was entered at

9:05 a.m., the CHX specialist quotation would show

at least 2,000 shares of XYZ at 201⁄4.

9See CHX Article XX, Rules 15 (Precedence of

Bids); 16 (Precedence of Bids at Same Price); 17

(Precedence of Offers); 18 (Precedence of Offers at

Same Price); 19 (Precedence of Offers to Buy

‘‘Seller’s Option’’); and 20 (Claim of Prior or Better

Bid).

10 15 U.S.C. 78f(b).

11 15 U.S.C. 78s(b)(2).

12 17 CFR 200.30–3(a)(12).

agency orders.6 Moreover, a specialist

may retain priority over a professional

order provided it is displaying its

interest, including the size, over the

quotation system (‘‘Specialist Priority

Rule’’). Specialists, however, are always

required to give precedence (i.e., yield)

to agency orders.7 On the other hand,

under the current CHX rules, agency

orders do not have priority over

professional orders, and professional

orders that have established time

priority are not required to give

precedence to agency orders.8

The Exchange believes that the

interplay among the Specialist Priority

Rule, the Best Rule, and the Exchange’s

other rules of priority and precedence 9

often results in the unintended anomaly

of providing the professional order the

benefit of the Best Rule and/or the

specialist being unable to retain priority

over professional orders as provided in

the Specialist Priority Rule. For

example, assume a specialist accepts a

professional order for his book and

thereafter an agency order is entered on

the book at the same price. If the agency

order is due a fill under the Best Rule

because of prints in the primary market,

the professional order must also be

filled because it has higher (i.e., time)

priority in the book. Moreover, assume

a specialist bid is entered first in time

and thereafter a professional order and

an agency order at the same price are

entered respectively. Under the current

rules, even if the specialist’s bid may

retain priority over the professional

order and only has to yield to the public

agency order at the same price, in this

situation the specialist bid must yield to

both orders because the professional

order has time priority over the public

agency order.

The Exchange states that due to this

anomaly, specialist are hesitant to

accept professional orders. The

Exchange proposes to add interpretation

and policy .05 to Rule 2 of Article XXX

of the Exchange’s Rules to give

specialists an incentive to accept

professional orders for inclusion in the

book.

Currently, as well as under the

proposed rule change, when a

professional order ‘‘has the post,’’ (i.e.,

is the highest priority order in the

specialist’s book at a given price), the

professional order would not be

required to yield precedence to an

agency order at the same price that has

not established time priority over the

professional order. Under the proposal,

however, in the event that the agency

order is due a fill under the Exchange’s

Best Rule, the agency order would be

filled even though the professional

order, which has a higher priority on the

book, is not filled. Therefore, although

an incoming MAX order will be filled

against the professional order and not

against subsequently entered agency

orders that have not established time

priority, if the subsequently entered

agency orders are due a fill under the

Best Rule, the agency orders would be

executed without filling the professional

order, which only has post protection.

Moreover, under the proposed rule

change if a specialist’s own order has

the post (i.e., an order that originates

with the specialist as dealer is the

highest priority order in the specialist’s

book at a given price) and a professional

order and an agency order are

subsequently entered in the book at the

same price, the professional order must

yield precedence to the agency order if

the specialist’s own order yields

precedence to the agency order.

Therefore, the specialist bid second, and

the professional order third. This

proposed interpretation and policy is

intended to allow the agency order to

displace the specialist’s order while at

the same time allow the specialist’s

order to retain priority over the

professional order in accordance with

the Specialist Priority Rule.

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).10 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 interest.

The Commission believes that the

proposed rule change is consistent with

the requirements of the Act because it

may contribute to the depth and

liquidity of the CHX market if, as the

CHX suggests, more order flow is

attracted to the Exchange. The

Commission notes that the Exchange

has represented that the proposed rule

change does not affect the primary

market protection afforded to agency

orders under the Exchange’s Best Rule,

affect the standing of agency orders in

relation to a dealer’s orders for its own

account, or modify the conditions under

which a specialist’s bid may retain

priority over a professional order. In

addition, the Exchange has represented

to the Commission that the proposed

rule change will not affect the

application of the Exchange’s current

quote dissemination policy, which

requires all customer limit orders,

regardless of priority, to be displayed in

the CHX specialist’s quote when the

customer order improves the specialist’s

quote or the national best bid or offer.

The Commission, therefore, believes

that the rule change will not

disadvantage public agency orders.

IV. Conclusion

It is therefore ordered, pursuant to

section 19(b)(2) of the Act.11 that the

proposed rule change (SR–CHX–95–18)

is approved.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.12

[FR Doc. 95–1032 Filed 1–23–96; 8:45 am]

BILLING CODE 8010–01–M

[Release No. 34–36731; File No. SR–NYSE–

95–41]

Self-Regulatory Organization; Notice of

Filing and Immediate Effectiveness of

Proposed Rule Change by the New

York Stock Exchange, Inc. Relating to

the Vendor Service Administrative Fee

January 17, 1996.

Pursuant to section 19(b)(1) of the

Securities Exchange Act of 1934