[Federal Register Volume 60, Number 66 (Thursday, April 6, 1995)]
[Notices]
[Pages 17595-17597]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-8491]



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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-35556; File No. SR-CHX-94-22]


Self-Regulatory Organizations; Chicago Stock Exchange, 
Incorporated; Order Granting Approval to Proposed Rule Change and 
Notice of Filing and Order Granting Accelerated Approval to Amendment 
No. 3 to Proposed Rule Change Relating to Exclusive Issues

March 31, 1995.

I. Introduction

    On November 10, 1994, 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 impose additional requirements 
and prohibitions on specialists, and others associated with specialists 
units, registered in exclusive issues. On January 4, and 9, 1995, the 
Exchange submitted, respectively, Amendments Nos. 1 and 2 to the 
proposed rule change.\3\

    \1\15 U.S.C. 78s(b)(1) (1988).
    \2\17 CFR 240.19b-4 (1994).
    \3\See letters from David Rusoff, Foley & Lardner, to Amy 
Bilbija, SEC, dated December 29, 1994; and to Glen Barrentine, SEC, 
dated January 5, 1995. Amendment Nos. 1 and 2 made non-substantive 
changes to the proposal.
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    The proposed rule change was published for comment in Securities 
Exchange Act Release No. 35233 (Jan. 18, 1995), 60 FR 4651 (Jan. 24, 
1995). No comments were received on the proposal. On March 29, 1995, 
the Exchange submitted to the Commission Amendment No. 3 to the 
proposed rule change.\4\ This order approves the proposed rule change, 
including Amendment No. 3, on an accelerated basis.

    \4\See letter from David Rusoff, Foley & Lardner, to Glen 
Barrentine, SEC, dated March 28, 1995. See infra note 6 for a 
description of Amendment No. 3.
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II. Description of the Proposal

    Currently, the Exchange Rules impose only a general prohibition on 
specialists, who are prohibited from effecting purchases or sales of 
any security in which the specialist is registered, unless such 
dealings are reasonably necessary to permit such specialist to maintain 
a fair and orderly market.\5\ The Exchange proposes a new rule, Article 
XXX, Rule 23, to impose additional requirements and 
[[Page 17596]] prohibitions on specialists, and certain others, where 
specialists are registered in exclusive issues.\6\ Specifically, the 
proposed rule prohibits specialists, co-specialists, or other 
associated persons, officer, directors, partners, or employees of 
specialist units registered in an exclusive issue from engaging in any 
business transaction with the issuer of the exclusive issue.\7\

    \5\See Chicago Stock Exchange Guide, Article XXX, Rule 9, (CCH) 
1929.
    \6\An ``exclusive issue'' is defined in the proposed rule as the 
stock of any company traded on the Exchange not otherwise traded on 
the New York or American Stock Exchanges or Nasdaq/MNS, and, where 
there exists another market for such issue the Exchange has executed 
15% or more of the volume in the issue during the three previous 
months. Amendment No. 3 amended the definition of ``exclusive 
issue,'' to include issues where the Exchange has executed 15% or 
more of the volume in the issue during the three previous months 
rather than 25% or more of the transactions in the issue. In 
Amendment No. 3, the Exchange noted that, currently, 14 issues that 
are not traded on the New York or American Stock Exchanges or 
Nasdaq/NMS are traded on the Exchange and assigned to specialists. 
Of these 14 issues, the Exchange trades more than 25% of the volume 
of 7 issues and less than 4% in 7 issues. See letter from David 
Rusoff, Foley & Lardner, to Glen Barrentine, SEC, dated March 28, 
1995.
    \7\The term ``business transaction'' is intended to be 
interpreted broadly to include: loans, purchase of assets from the 
issuer, and acquisition of any beneficial ownership of shares of 
such issuer.
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    The proposed rule also prohibits certain specific dealings by 
specialists in exclusive issues without the prior approval of the floor 
officials. For example, a purchase at a price above the last sale in 
the same session or a proposed transaction involving a price movement 
of \1/2\ point or more are not to be effected except with the prior 
approval of two floor officials. Moreover, the proposed rules makes the 
``equalizing'' exemption in paragraph (e)(5) of SEC Rule 10a-1 
unavailable for specialists and market makers when selling short an 
exclusive issue.\8\

    \8\17 CFR 240.10a-1(e)(5). Rule 10a-1 generally prohibits 
persons from effecting a short sale or a registered security (a) 
below the price of the last sale, or (b) at such price if it is 
lower than the last sale at a different price. The exception 
provided for in paragraph (e)(5) permits registered specialists or 
registered exchange market maker (or a third market maker for its 
own account over-the-counter) to effect, for their own account, a 
sale (a) at a price equal to or above the last sale, or (b) at a 
price equal to the most recent offer communicated for the security 
by such registered person if such offer, when communicated, was 
equal to or above the last sale. In addition, the Rule expressly 
provides that an exchange may prohibit its registered specialists 
and market makers from availing themselves of the exemption if the 
exchange determines that such action is necessary or appropriate in 
its market, in the public interest, or for the protection of 
investors.
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    Finally, the Exchange will provide specialists who are registered 
in issues that are not traded on the New York or American Stock 
Exchanges or Nasdaq/NMS with a statistical report on a monthly basis 
containing data for trade and share volume of each issue. The 
specialists, therefore, will be able to determine whether additional 
requirements and prohibitions of Rule 23 have been triggered.

III. Discussion

    The Commission finds that the proposed rule change is consistent 
with the requirements of the Act and rules and regulations thereunder 
applicable to a national securities exchange, and, in particular, with 
the requirements of Section 6(b).\9\ 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.

    \9\15 U.S.C. 78f(b) (1988).
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    The Commission believes that the rule change will benefit investors 
by eliminating a potential conflict of interest between specialists 
registered in exclusive issues and issuers of such securities. Because 
business transactions between specialists and issuers may exert an 
improper influence over specialists, the proposed rule explicitly 
prohibits these types of transactions as to specialists registered in 
exclusive issues. The Commission believes that the proposed rule would 
be in the interest of the investing public because it sets a standard 
higher than the Exchange Rules currently provide for specialists, and 
others associated with specialist units, registered in exclusive 
issues.\10\

    \10\The Commission's review of the rules of the regional 
exchanges indicates that only the Boston Stock Exchange, Inc. 
(``BSE'') has a similar business transaction prohibition on equity 
specialists. See Boston Stock Exchange Guide, Chapter XV, Section 
11, (CCH) 2149. The Rules of the Philadelphia Stock Exchange, Inc. 
(``Phlx'') prohibit only option specialists from conducting business 
transactions with an issuer of a security underlying an option in 
which the specialist is registered. See Philadelphia Stock Exchange 
Guide, rule 1023(a), (CCH) 3023.
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    At the present time, the Commission believes that the limitation of 
the proposed rule's prohibition to exclusive issues is appropriate. 
Exclusive issues, as defined by the proposed rule, would exclude only 
those issues that are traded on the New York Stock Exchange, Inc. 
(``NYSE''), the American Stock Exchange, Inc. (``Amex''), or Nasdaq/
NMS, or where the Exchange is making a de minimis market for the 
security. Where the Exchange is the primary market for an issue, the 
Exchange specialists would have more of an opportunity to manipulate 
the market for the security and abuse the specialist position. Such a 
situation is less likely to occur in an issue that is also trading on 
the NYSE, Amex, or Nasdaq/NMS, or where the Exchange specialist is 
making a de minimis market for a security.\11\

    \11\The Commission, however, does not dismiss the possibility 
that there may arise a situation in the future where it would be 
appropriate to extend the prohibition of the proposed rule to all 
specialists regardless of the issues in which they are registered. 
Although the 15% threshold provides a benchmark for determining when 
the Exchange is a primary market for a security, it may become 
appropriate at some point to impose the prohibition on all 
specialists because of the difficulties with monitoring exclusive 
issues through the use of historical data and the potential 
manipulating the volume of trading to avoid the prohibition.
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    Moreover, the Commission finds good cause for approving Amendment 
No. 3 to the proposed rule change prior to the thirtieth day after the 
date of publication of notice of filing thereof. The Exchange's 
original proposal was published in the Federal Register for the full 
statutory period and no comments were received.\12\ Amendment No. 3 
alters the definition of an exclusive issue. Under the amended 
definition, the Exchange must have executed 15% or more of the volume 
in a particular issue during the three previous months for a security 
to qualify as an exclusive issue rather than 25% or more of the 
transactions as originally proposed. The Commission believes that a 
threshold based upon the volume of shares executed rather than upon the 
number of transactions is unlikely to alter the number of specialists 
affected by the proposed rule. Moreover, to the extent a threshold 
based upon volume would have such an effect, the Commission believes 
that the lower numerical percentage is likely to provide a sufficient 
cushion to offset any decrease in the number of specialists that 
otherwise would be affected by the proposed rule.

    \12\See Securities Exchange Act Release No. 35233 (Jan. 18, 
1995), 60 FR 4651 (Jan. 24, 1995).
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning Amendment No. 3. Persons making written 
submissions should file six copies thereof with the Secretary, 
Securities and Exchange Commission, 450 Fifth Street, NW., Washington, 
DC 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 person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. Sec. 552, will be [[Page 17597]] available for 
inspection and copying at the Commission's Public Reference Section, 
450 Fifth Street, NW., Washington, DC 20549. Copies of such filing will 
also be available for inspection and copying at the principal office of 
the Exchange. All submissions should refer to File No. SR-CHX-94-22 and 
should be submitted by April 27, 1995.

Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\13\ that the proposed rule change (SR-CHX-94-22) is approved.

    \13\15 U.S.C. 78s(b)(2) (1988).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\14\

    \14\17 CFR 200.30-3(a)(12) (1994).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-8491 Filed 4-5-95; 8:45 am]
BILLING CODE 8010-01-M