[Federal Register Volume 60, Number 65 (Wednesday, April 5, 1995)]
[Notices]
[Pages 17376-17378]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-8340]



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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-35550; File No. SR-CHX-95-03]


Self-Regulatory Organizations; Chicago Stock Exchange, Inc.; 
Order Granting Approval to Proposal Rule Change and Notice of Filing 
and Order Granting Accelerated Approval of Amendment No. 2 to a 
Proposed Rule Change Relating to Reporting and Disclosure Requirements

March 30, 1995.
    On February 6, 1995, the Chicago Stock Exchange, Inc. (``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 amend various Exchange Rules 
regarding reporting and disclosure requirements. Specifically, the rule 
change proposed to (1) Amend Article VI, Rule 5 and add an 
interpretation thereto to require that members and member organizations 
maintain written procedures to ensure compliance with the securities 
laws (and SEC regulations promulgated thereunder) and the Rules of the 
Exchange; (2) amend Article XI, Rule 4 to provide the Exchange with the 
authority to require any member or member organization to have an 
accounting firm audit its books and to clarify that all members and 
member organizations are required to comply with the disclosure 
requirements of Rule 17a-5; and (3) add Article XI, Rule 9 to require 
that floor brokers who do not clear their own trades procure a letter 
of guarantee prior to trading. On February 14, 1995 and March 30, 1995, 
the Exchange submitted to the Commission Amendments No. 1 and No. 2, 
respectively, to the proposed rule change.\3\

    \1\15 U.S.C. 78s(b)(1) (1988).
    \2\17 CFR 240.19b-4 (1991).
    \3\Amendments No. 1 and No. 2 made non-substantive, clarifying 
changes to the proposal. See Letters from Jay O. Wright, Esq., Foley 
& Lardner, to Elisa Metzger, Senior Counsel, SEC, dated February 14, 
1995 and March 30, 1995.
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    The proposed rule change was published for comment in Securities 
Exchange Act Release No. 35394 (February 17, 1995), 60 FR 10620 
(February 27, 1995). No comments were received on the proposal. This 
order approves the proposed rule changes.

I. Proposal

    Currently, Article VI, Rule 5(c) requires each member organization 
that does business with the public to establish procedures, and a 
system for applying such procedures, to assure that its registered 
representatives and other [[Page 17377]] employees are adequately and 
closely supervised. Rule 5(c) further states that a system will be 
deemed adequate only if it is reasonably designed to prevent and detect 
violations of the applicable securities laws, the rules and regulations 
thereunder, and the CHX Constitution and Rules. The CHX is proposing to 
amend Article VI, Rule 5 and add an interpretation thereto to require 
that such procedures and systems be in writing. The CHX believes that 
requiring written procedures allows the CHX to more easily verify the 
existence of such procedures and that such a requirement facilitates 
the CHX's verification of the content of the procedures. The CHX also 
believes that the visibility of such written procedures will remind 
members and member organizations of their obligations to comply with 
the securities laws, SEC rules, and the CHX's rules, thus enhancing 
compliance.
    The CHX is also proposing amendments to Article XI, Rule 4. Article 
XI, Rule 4 requires certain member organizations to have an audit as 
required by SEC Rule 17a-5 and any other additional audits that the 
Exchange may require for good cause.\4\ The additional audits must be 
made by an independent public accountant, acceptable to the CHX and be 
conducted in accordance with the requirements of SEC Rule 17a-5. The 
CHX is amending the rule to provide the Exchange with the authority to 
require any member or member organization to have an accounting firm 
audit its books and have the member or member organization file a 
statement with the Exchange to the effect that such additional audits 
have been made. In addition, the CHX's purpose for amending Article XI, 
Rule 4(c) is to clarify that all CHX members and member organizations 
are required to file monthly and quarterly Focus Reports with the CHX 
in accordance with SEC Rule 17a-5 unless the member or member 
organization is exempt.

    \4\Article XI, Rule 4 excepts out of the rule, member 
organizations that are self-clearing and member organizations that 
do a securities business only with other members of a national 
securities exchange.
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    Finally, the CHX proposes to add a new rule, Article XI, Rule 9, 
which would require floor brokers who do not clear their own trades to 
procure a letter of guarantee prior to trading. The CHX's purpose for 
adding Article XI, Rule 9 is to enhance the safety and soundness of the 
clearing system by ensuring that Floor Brokers have sufficient 
financial resources to stand behind their trades As a result, fewer 
disruptions due to the financial distress of a floor broker are likely 
to occur.

II. 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).\5\ In particular, 
the Commission believes the proposal is consistent with the Section 
6(b)(1) requirement that the exchange have the capacity to enforce 
compliance by its members and persons associated with its members, of 
the federal securities laws, rules and regulations thereunder and the 
rules of the exchange. The CHX proposal will permit the CHX to verify 
the existence and content of procedures and systems that require 
compliance with the federal securities laws, rules and regulations 
thereunder and the CHX rules. In addition, the Exchange's proposed 
amendments to Article XI, Rule 4, clarify that all members and member 
organizations are required to comply with the disclosure requirements 
of SEC Rule 17a-5.

    \5\15 U.S.C. 78f(b) (1988).
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    The Commission believes the proposal is consistent with the Section 
6(b)(5) requirements that the rules of an exchange be designed to 
prevent fraudulent and manipulative acts, 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. 
Specifically, the proposed amendments to Article VI, Rule 5 which 
require written procedures that ensure compliance with applicable rules 
and laws, will prevent fraudulent acts and practices and protect 
investors and the public by enforcing compliance with the federal 
securities laws, SEC rules and CHX rules. Similarly, the Commission 
believes that the proposal to provide the Exchange with the authority 
to require any member or member organization to have an accounting firm 
audit its books and to clarify that all members and member 
organizations must comply with SEC Rule 17a-5, is consistent with the 
Section 6(b)(5) requirements. These proposals will enable the CHX to 
investigate any concerns it has with respect to potential financial 
problems of its members or member organizations. Accordingly, the 
Exchange's awareness of any financial problems in advance could limit 
the impact of that member's financial condition on the market.
    The Commission also believes that the proposal to add Article XI, 
Rule 9 to require that floor brokers who do not clear their own trades 
procure a letter of guarantee prior to trading is consistent with the 
Section 6(b)(5) requirements. The Commission agrees with the Exchange 
that the proposed rule will ensure the safety and soundness of the 
clearing system by ensuring that floor brokers have sufficient 
financial resources to stand behind their trades. The proposed rule 
will improve the reliability of the clearing system because fewer 
disruptions due to the financial distress of a floor broker are likely 
to occur.
    The Commission finds good cause for approving Amendment No. 2 prior 
to the thirtieth day after the date of publication of notice of filing 
thereof in the Federal Register. Specifically, Amendment No. 2 makes 
non-substantive, technical changes to the proposal. The Commission 
believes that these technical changes are not material changes that 
raise regulatory concerns not already addressed by the proposal. 
Accordingly, the Commission believes it is consistent with Sections 
6(b)(5) and 19(b)(2) of the Act to approve Amendment No. 2 to the 
proposal on an accelerated basis.

III. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning Amendment No. 2. 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. 552, will be 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 CHX. All 
submissions should refer to File No. SR-CHX-95-03 and should be 
submitted by April 26, 1995.

IV. Conclusion

    It Is Therefore Ordered, pursuant to section 19(b)(2) of the Act\6\ 
that the [[Page 17378]] proposed rule change (SR-CHX-95-03), as amended 
is approved.

    \6\15 U.S.C. 78s(b)(2) (1988).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\7\

    \7\17 CFR 200.30-3(a)(12) (1991).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-8340 Filed 4-4-95; 8:45 am]
BILLING CODE 8010-01-M