Document ID: SEC-2006-0993-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: Chicago Stock Exchange, Inc.
Posted Date: 2006-08-03T04:00Z

[Federal Register: August 3, 2006 (Volume 71, Number 149)]
[Notices]               
[Page 44064-44066]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr03au06-85]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-54226; File No. SR-CHX-2006-23]

 
Self-Regulatory Organizations; Chicago Stock Exchange, Inc.; 
Notice of Filing of a Proposed Rule Change and Amendment No. 1 Thereto 
Regarding Amendments to the Exchange's Bylaws

 July 27, 2006.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that on June 22, 2006, the Chicago Stock Exchange, Inc. (the ``CHX'' or 
the ``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I, II, 
and III below, which Items have been prepared by the CHX. On July 20, 
2006, the Exchange filed Amendment No. 1 to the proposed rule 
change.\3\ The Commission is publishing this notice to solicit comments 
on the proposed rule change, as amended, from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1)
    \2\ 17 CFR 240.19b-4.
    \3\ See Partial Amendment to Form 19b-4 dated July 20, 2006 
(``Amendment No. 1''). In Amendment No. 1, the Exchange incorporated 
(a) a change to the proposed text of Article II, Section 3(a) of the 
Bylaws, replacing the defined term ``CHX Participant Director'' with 
a reference to representatives of the holders of Series A Preferred 
Stock of CHX Holdings, Inc. (``CHX Holdings''); and (b) additional 
descriptive information about the rules changes that are part of the 
filing.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    Through this filing, the Exchange proposes to amend its bylaws and 
rules to make several governance changes. This proposal would (1) 
Require the Exchange's Board of Directors to identify one position in 
each class of directors as the ``Subject to Petition (STP) Participant 
Director,'' with candidates for that position to be subject to a 
petition process involving the Exchange's participants; (2) change the 
composition of the Exchange's Nominating & Governance Committee to 
include two public directors and two STP Participant Directors; and (3) 
modify the Exchange's rules to confirm that each participant firm would 
need only one trading permit to conduct business on the Exchange. The 
text of this proposed rule change is available on the Exchange's Web 
site at http://www.chx.com/rules/proposed_rules.htm, at the Exchange's 

principal office, and in the Commission's Public Reference Room.

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 CHX included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received regarding the proposal. The text of 
these statements may be examined at the places specified in Item IV 
below. The CHX 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 Proposed Rule Change

 1. Purpose
    As a result of its demutualization in February 2005, the Exchange 
became the wholly-owned subsidiary of CHX Holdings, a Delaware 
corporation.\4\ The Exchange's demutualization was driven, in part, by 
a desire to generate opportunities to enter into strategic alliances by 
offering stock to interested entities. On June 21, 2006, CHX Holdings 
announced that it had agreed to the terms of strategic transactions 
with four firms that will result in an investment in CHX Holdings, in 
exchange for minority equity stakes in the company. In connection with 
these transactions, CHX has agreed to propose amendments to its bylaws 
and rules to (1) Require the Exchange's Board of Directors to identify 
one position in each Board class as the STP Participant Director, with 
candidates for that position to be subject to a petition process 
involving the Exchange's participants; (2) change the composition of 
the Exchange's Nominating & Governance Committee to include two public 
directors and two STP Participant Directors; and (3) modify the 
Exchange's rules to confirm that each participant firm would need only 
one trading permit to conduct business on the Exchange.
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    \4\ See Securities Exchange Act Release No. 51149 (February 8, 
2005), 70 FR 7531 (February 14, 2005).
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Changes in Exchange Governance Contemplated by the Proposed Transaction
    Under the terms of the agreements reached with potential investors, 
the Exchange's Board of Directors would be reduced by one director--
after the closing of the transactions, the Board would consist of the 
Exchange's chief

[[Page 44065]]

executive officer, six public directors and five participant 
directors.\5\ The Exchange is required to use its best efforts to place 
a representative of each of the four investors on the CHX Board.\6\ The 
remaining participant director would not be affiliated with any of the 
investors.
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    \5\ The Exchange's Board of Directors currently consists of its 
chief executive officer, seven public directors and five participant 
directors. The Board members are divided into three classes, with 
each class serving a three-year term. See Article II, Section 2(c) 
of the Exchange's bylaws. A ``public director'' is a director who 
(i) Is not a participant in the Exchange, or an officer, managing 
member, partner or employee of an entity that is a participant, (ii) 
is not an employee of the Exchange or any of its affiliates, (iii) 
is not broker or dealer or an officer or employee of a broker or 
dealer, or (iv) does not have any other material business 
relationship with CHX Holdings or the Exchange (or with any of their 
affiliates) or with any broker or dealer. See Article II, Section 
2(b) of the Exchange's bylaws. A ``participant director'' is a 
director who is a participant or an officer, managing member or 
partner of an entity that is a participant. Id. A person or entity 
is a participant in the Exchange if he or it holds a trading permit 
issued by the Exchange.
    \6\ One investor representative has been named, by the 
Exchange's Nominating & Governance Committee, as a candidate for the 
open position in Class 1 on the Exchange's Board. The Exchange 
anticipates that, immediately following the 2006 stockholders' 
meeting, two participant directors (one director currently serving 
in Class 1 and one director currently serving in Class 3 of the 
Board) will resign, resulting in vacancies that will be filled with 
representatives of two other investors. One of the potential 
investors already has a representative on the Exchange's Board of 
Directors; this person would retain his position on the Board.
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Identification of STP Participant Directors
    Under the Exchange's existing bylaws, the Nominating & Governance 
Committee identifies candidates to fill the Board positions that are up 
for election each year.\7\ In identifying candidates for public 
director positions, the Committee typically meets to discuss candidates 
and provides its slate of nominees to the Exchange's sole stockholder, 
CHX Holdings, for election. The process for identifying candidates for 
participant director positions, however, is more detailed and includes 
both a requirement that the Committee hold two open meetings with 
Exchange participants and a petition process that allows participants 
to add names to the Committee's initial slate.\8\ This process is 
designed to provide Exchange participants with fair representation in 
the selection of Exchange directors.\9\
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    \7\ See Article II, Section 3(b) of the Exchange's bylaws.
    \8\ Specifically, under this process, no later than 60 days 
prior to the date announced for the annual stockholder meeting, the 
Committee's initial nominees for participant director positions are 
reported to the Exchange's secretary, who then must promptly 
announce the nominees to the Exchange's participants. See Article 
II, Section 3(d) of the Exchange's bylaws. Participants may identify 
other candidates for one or more of these positions by submitting a 
written petition, signed by at least ten participants, with respect 
to each additional candidate. Id. If one or more valid petitions are 
submitted, the Exchange conducts an election to confirm the 
participants' selections of nominees for the participant director 
positions. See Article II, Section 3(e) of the Exchange's bylaws. 
Each participant has one vote with respect to each participant 
director position that is to be filled. The individuals having the 
largest number of votes are the final nominees; the Nominating & 
Governance Committee must nominate these persons to fill the 
available positions. See Article II, Sections 3(c) and 3(e) of the 
Exchange's bylaws.
    \9\ See 15 U.S.C. 78f(b)(3) (requiring that the rules of an 
exchange assure a fair representation of its members in the 
selection of its directors and administration of its affairs).
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    The Exchange now proposes to amend its bylaws to require the Board 
of Directors to set aside one position in each Board class as the ``STP 
Participant Director,'' with the candidates for each of those positions 
to be subject to the petition process described above. Although this 
proposal would reduce the number of participant directors whose 
elections are subject to this petition process, it would still ensure 
that at least 20% of the Exchange's directors (on a Board of fifteen or 
fewer people) are selected in this manner, meeting the ``fair 
representation'' percentage currently required by the Commission.\10\ 
Moreover, by requiring that the Board identify one position in each of 
the three Board classes to be subject to this process, the proposal 
would allow participants an opportunity to select at least one 
participant director each year.\11\
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    \10\ See Securities Exchange Act Release No. 50699 (November 18, 
2004), 69 FR 71126 (December 8, 2004) (``SRO Governance Release''). 
In note 148 of the SRO Governance Release, the Commission states, 
among other things, that it has taken the position that the fair 
representation requirement could be satisfied if an exchange's rules 
provide that members constitute at least 20% of the individuals 
serving on an exchange's nominating committee.
    \11\ Once the Board sets aside these three STP participant 
director positions, only the candidate(s) for one STP participant 
director position each year would ordinarily be up for election. If 
one of the STP participant director positions that is not normally 
up for election in a particular year becomes vacant during that 
year, however, the candidates for this now vacant position also 
would be subject to the petition process.
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Composition of the Nominating & Governance Committee
    The Exchange's Nominating & Governance Committee currently is 
composed of six Board members--three participant directors and three 
public directors.\12\ Through this filing, the Exchange seeks to change 
this Committee's composition by reducing its size so that it consists 
of two public directors and two STP participant directors.\13\ This 
reduced Committee size has a better overall relationship to the size of 
the Exchange's Board of Directors, while still ensuring that the 
Committee is appointed by the full Board of Directors and composed of 
an equal number of public and participant directors.\14\
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    \12\ See Article II, Section 3(a) of the Exchange's bylaws.
    \13\ See Proposed Amendment to Article II, Section 3(a) of the 
Exchange's bylaws.
    \14\ The proposal also is designed to ensure that a participant 
director who is not affiliated with the four investors will serve on 
the Committee. The proposed text does this by requiring that one of 
the STP participant directors on the Committee must not be a 
representative of a firm that is a holder of Series A Preferred 
Stock of CHX Holdings. Each of the investors will be making a 
minority investment in CHX Holdings through the purchase of Series A 
Preferred Stock and, at least immediately following the transaction, 
the four firms will be the only holders of the Series A Preferred 
Stock.
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One Trading Permit per Participant
    Under the Exchange's existing rules, each participant firm or each 
person who is registered as a co-specialist, floor broker or market 
maker for a participant firm must hold a valid trading permit.\15\ 
Through this submission, the Exchange proposes to change that 
requirement so that each participant firm must hold a valid trading 
permit, but individuals who serve as co-specialists, floor brokers and 
market makers for a firm are no longer subject to this requirement.\16\ 
The Exchange believes that this change better positions it for the move 
to its proposed new trading model by reducing the number of permits 
that most participants are required to hold in a manner that the 
Exchange believes is more consistent with other automated

[[Page 44066]]

markets.\17\ The Exchange also believes that reducing the relative 
number of trading permits would not undermine or circumvent the Act's 
requirement for fair representation of members.
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    \15\ See Article II, Rule 2(a).
    \16\ Persons who serve in these capacities would continue to be 
required to register with the Exchange in these capacities. See 
Article VI, Rule 2(b)(7) (replacing the concept of a firm's 
``nominee'' with a specific reference to persons serving as co-
specialists, market makers or floor brokers). In making this 
proposed change to its rules, the Exchange has combined current 
Articles II and III to create a single article entitled 
``Participants and Participant Firms.'' Throughout its remaining 
rules, the Exchange has proposed changes to eliminate references to 
``nominees'' and to confirm that participant firms hold trading 
permits while individual persons who serve as co-specialists, market 
makers and floor brokers do not hold trading permits, but are are 
registered in those capacities under Article VI. Other changes 
delete references to rules that are being deleted as part of this 
proposal or that are no longer in the Exchange's Rulebook. See, 
e.g., Proposed Amendment to Article XII, Rule 9(h)(i)(1) (deleting 
rule from the Minor Rule Violation Plan that is being deleted as 
part of this proposal because it relates to the registration of a 
participant firm through an individual who holds a trading permit); 
and Proposed Amendment to Article XII, Rule 9(h)(i)(5) (deleting a 
reference to a rule that no longer exists). While these changes 
appear extensive, they simply repeat the same types of changes 
wherever appropriate in the Exchange's rules.
    \17\ In the Exchange's proposed new trading model, the Exchange 
seeks to move to a more automated system, which would allow 
participants--from any location--to submit orders for immediate 
execution. See SR-CHX-2006-05. By reducing the number of trading 
permits that a firm needs (in this new model and even before it is 
fully implemented), the Exchange is reducing the fees that must be 
paid by that firm. Under the Exchange's current fee schedule, a 
participant must pay $6,000 each year, divided into monthly 
installments, for each trading permit that it holds.
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    As mentioned above, each of these proposed changes to the 
Exchange's bylaws and rules are related to the recently-announced 
strategic transactions through which four firms have agreed to make 
investments in CHX Holdings, in exchange for minority equity stakes in 
the company. The Exchange believes that each of these proposed changes 
is reasonable and continues to provide Exchange participants with a 
fair opportunity to participate in the governance of the Exchange.
2. Statutory Basis
    Approval of the rule changes proposed in this submission is 
consistent with the requirements of the Act and the rules and 
regulations thereunder that are applicable to a national securities 
exchange, and, in particular, with the requirements of Section 6(b) of 
the Act.\18\ In particular, the proposed changes are consistent with 
Section 6(b)(5) of the Act,\19\ because they would promote just and 
equitable principles of trade, remove impediments to, and perfect the 
mechanism of, a free and open market and a national market system, and, 
in general, protect investors and the public interest by allowing the 
Exchange to make reasonable changes to certain aspects of its 
governance that are both consistent with the terms of proposed 
transactions and with providing all of its participants with fair 
representation in the Exchange's governance.
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    \18\ 15 U.S.C. 78f(b).
    \19\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule changes would 
impose any burden on competition.

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

    No written comments were either solicited or received.

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 the 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, including whether the proposed rule 
change, as amended, is consistent with the Act. Comments may be 
submitted by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml.
); or     Send an e-mail to rule-comments@sec.gov. Please include 

File No. SR-CHX-2006-23 on the subject line.

Paper Comments

     Send paper comments in triplicate to Nancy M. Morris, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.
    All submissions should refer to File No. SR-CHX-2006-23. This file 
number should be included on the subject line if e-mail is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml
). 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 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 comments received will be posted 
without change; the Commission does not edit personal identifying 
information from submissions. You should submit only information that 
you wish to make available publicly. All submissions should refer to 
File No. SR-CHX-2006-23 and should be submitted on or before August 24, 
2006.
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    \20\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\20\
J. Lynn Taylor,
Assistant Secretary.
[FR Doc. E6-12521 Filed 8-2-06; 8:45 am]

BILLING CODE 8010-01-P