[Federal Register Volume 63, Number 24 (Thursday, February 5, 1998)]
[Notices]
[Pages 5982-5985]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-2886]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-39603; File No. SR-CHX-97-36]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change by the Chicago Stock Exchange, Inc. and Amendment No. 1 to the
Proposed Rule Change Relating to the Structure and Composition of the
Board of Governors
January 30, 1998.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ notice is hereby given that on December 16, 1997, the
Chicago Stock Exchange, Incorporated (``CHX'' or ``Exchange'') filed
with the Securities and Exchange Commission (``Commission'' or ``SEC'')
the proposed rule change, as described In Items I, II, and III below,
which Items have been prepared by the self-regulatory organization.
Amendment No. 1 to the proposed rule change was received by the
Commission on January 20, 1998.\2\ 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\ Letter from Joseph M. Klauke, Foley & Lardner to Katherine
A. England, Assistant Director, Division of Market Regulation,
Commission dated January 16, 1998. Several additional non-
substantive changes to the proposed rule change are also included in
this Notice. Telephone call between Joseph M. Klauke, Foley &
Lardner and Mandy S. Cohen, Division of Market Regulation,
Commission dated January 27, 1998.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to amend Articles, III, IV and V of its
Constitution and Article IV, Rules 7, 8 and 10 of its Rules relating to
the structure and composition of its Board of Governors.
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 self-regulatory organization
included statements concerning the purpose of and basis for the
proposed rule change and discussed any comments it received
[[Page 5983]]
on the proposed rule change. The text of these statements may be
examined at the places specified in Item IV below. The self-regulatory
organization 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
The purpose of the proposed rule change is to amend the Exchange's
Constitution and Rules to promote an enhanced governance structure for
the Exchange. The proposed changes are based upon recommendations made
by the Exchange's Governance Committee, whose purpose it is to review
and make recommendations regarding the Exchange's governance structure,
including the operations of the Exchange and the composition of its
Board, committees, and other entities involved in the Governance of the
Exchange.
The most significant proposed changes to the Constitution and Rules
concern reducing the size of the Board and changing its composition.
The Constitution currently provides for a Board composed of twenty-
seven Governors. The proposed changes would reduce that number to
twenty-four. Reducing the size of the Board will make deliberations
more efficient and manageable. Given the Exchange's withdrawal from the
clearance and settlement and securities depository businesses, and
recent sale of the Exchange's remaining operating subsidiary, a smaller
Board is appropriate.
The Board currently consists of the Vice Chairman of the Board, the
President, sixteen Governors who are members, general partners of
member firms or officers of member corporations (``Member Governors'')
and nine Governors who are unaffiliated with the Exchange or any broker
or dealer in securities (``Non-member Governors''). The proposed
changes would reduce the number of Member governors to ten and increase
the number of Non-member Governors to twelve (and re-categorize them as
``Non-Industry'' as described below). The result would be a fifty
percent representation of Non-Industry Governors on the board.
The amendments include a series of new definitions. Currently,
there are no definitions of the terms ``Non-Industry'' and ``Public.''
The definitions set forth in the amendments preclude the possibility
that someone with other than a nominal connection with the securities
industry could be considered Non-Industry.
The definition of Non-Industry encompasses one who is a Public
governor or committee member, an officer or employee of an issuer of
securities listed exclusively on the Exchange, or any other individual
who:
Is not, or has not served in the prior three years (or
such lesser period as deemed appropriate by the Exchange, in its
discretion, but not less than one year), as an officer, director, or
employee of a broker or dealer and has not had (within the same time
period specified above) an ownership interest in a broker or dealer
that permits him or her to be engaged in the day-to-day management of a
broker or dealer. However, an outside director or a director not
engaged in the day-to-day management of a broker or dealer may be
considered ``Non-Industry;''
is not an officer, director (not including an outside
director), or employee of an entity that owns more than ten percent of
the equity of a broker or dealer that accounts for more than five
percent of the entity's gross revenues;
does not own more than five percent of the equity
securities of any broker or dealer, whose investments in brokers or
dealers do not exceed ten percent of his or her net worth, or whose
ownership interest does not otherwise permit him or her to be engaged
in the day-to-day management of a broker dealer;
does not provide and whose firm does not provide
professional services to brokers or dealers that constitute twenty
percent or more of his or her professional revenues or twenty percent
or more of the gross revenues received by the individual's firm;
does not provide and whose firm does not provide
professional services to a director, officer, or employee, in their
professional capacities, or a broker, dealer, or corporation that owns
fifty percent or more of the voting stock of a broker or dealer, and
which constitute twenty percent or more of his or her professional
revenues or twenty percent or more of the gross revenues received by
the individual's firm; and
has not had a consulting or employment relationship with
and has not provided professional services to the Exchange at any time
within the last three years.
The definition of ``Public'' is an individual who has no material
business relationship with a broker or dealer, or the Exchange. At
least five of the Non-Industry Governors must be ``Public,'' and
therefore unaffiliated with the brokerage industry in any material way.
Specific definitions of the types of Member Governors will also be
included. ``On Floor'' when used in the context of Governors and
committee members will mean members who are primarily engaged in
business on the Exchange's trading floor or persons associated with
member organizations primarily engaged in business on the Exchange's
trading floor.\3\ ``Off-Floor'' when used in the context of Governors
and committee members, will mean members and persons associated with
member organizations who are not ``On-Floor.'' In addition, the
proposed amendments will require a minimum of four On-Floor Member
Governor positions and four Off-Floor Member Governor positions.
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\3\ The current Constitution and Rules refer to those persons
who are ``active on the floor of the Exchange'' as floor Governors,
although a specific definition is not included. These persons have
been interpreted to include floor members acting as, i.e., floor
brokers, market makers or specialists. The definition of ``On-
Floor'' is somewhat broader in scope, and will include all persons
associated with floor members under the current interpretation.
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Also the rules currently require nine of the Member Governors to be
from the Chicago area and seven to be from elsewhere. The proposed
amendments will eliminate the distinction.
In addition to requiring a balanced Board, the proposed amendments
also require that not less than fifty percent of the members of the
Executive Committee, the Compensation Committee and the Audit Committee
be ``Non-Industry'' (including at least one Public Governor on the
Compensation Committee and the Audit Committee), and that the
Nominating Committee be composed of fifty percent Non-Industry and
fifty percent Member representatives. Currently, the Audit, Executive,
and Compensation Committees have this balance, but such balance is not
required. The Nominating Committee currently has five members, two of
which are Non-Industry. The change to require balanced committees would
be effective upon SEC approval of the proposed rule change for these
committees, except the Nominating Committee. One additional Non-
Industry person would be added to the Nominating Committee to achieve
balance in conjunction with the 1999 Annual Election.
Currently there are no provisions in the Exchange's Constitution or
Rules which specify the Member/Non-Industry makeup of a quorum. The
current quorum requirement for the Board and the Compensation and Audit
Committees is one-half of their
[[Page 5984]]
members, and for the Executive and Nominating Committees, a majority of
their members. Under the proposed amendments, a quorum for the
transaction of business on the Board of Governors, the Nominating
Committee, the Executive Committee, the Compensation Committee and the
Audit Committee would also require not less than fifty percent of the
number of Non-Industry Board members or committee members, as
applicable. To lessen the possibility that the Exchange would not be
able to transact business because at least half of the Non-Industry
Board or Committee members cannot attend a meeting, the proposed
amendment would allow the Exchange to obtain pre-meeting waivers of
attendance from the Non-Industry Board or Committee members. If at
least fifty percent of the Non-Industry Board or Committee members are
either present at a meeting or have waived their attendance for the
meeting after receiving notice of, and an agenda for, such meeting,
then the requirement that at least fifty percent of the Non-Industry
Board or Committee members be present to constitute a quorum will be
deemed satisfied.
Term limits for Governors will also be changed under the proposed
amendments. Currently, Member Governors who have served all or part of
two terms must be off the Board for a minimum of one year before they
may again serve in such capacity. Non-member Governors currently have
no term limit. The proposed changes impose a three term limit on both
Non-Industry and Member Governors. In addition, partial terms will no
longer count towards the term limit. After serving three complete
terms, Governors would have to remain off the Board in such capacity
for a minimum of two years (an increase from the current one year
hiatus requirement).
The proposed rule changes also impose an attendance requirement on
Governors. It will require a Board member to attend seventy-five
percent of the full Board meetings on an annual basis (e.g., four out
of five Board meetings) or face removal from the Board. The CHX
believes that Board member participation is extremely important and
should be required in order for a Governor to continue on the Board.
Taken as a whole, the changes brought about the proposed amendments
will have a beneficial impact on the Board and the Exchange. Changing
the composition of the Board to increase the number and percentage of
Non-Industry Governors will help diversify the Board and broaden its
perspective. Requiring a Member/Non-Industry balance for the Board and
certain committees in terms of membership and quorums will ensure that
diverse and representative bodies are participating in the Exchange's
business and decision-making processes. Eliminating the geographical
distinction for Member Governors will provide the Nominating Committee
with more flexibility and will eliminate an arbitrary distinction in
recognition of the Exchange's national constituency. Imposing term
limits on all Governors will foster a healthy influx of fresh
perspectives on the Board. Setting attendance requirements will promote
attendance and thus enhance participation in Board meetings.
To prevent undue disruption of the Board, the transition from the
Board as currently constituted to the Board required by the proposed
amendments will occur over the course of the next three years. It will
involve normal attrition due to Governors reaching the end of term
limits as currently set, necessitating an adjustment in the phase-in of
the three term limit. Member Governors completing their second full or
partial term in the Classes expiring in 1998 and 1999 would continue to
have a two term limit (and thus would not be eligible for re-election
at that time) and Non-Industry Governors completing their third full
term (or more) in those two classes would be permitted to serve out
their existing term plus be eligible for one additional term. These
transition-related rules are designed to facilitate the changes in
board size and composition described above.
The transition will also require adjustments to the sizes of the
Classes of Governors. The Governors will still be divided into three
Classes, but the size and composition will be adjusted as follows: At
the 1998 annual election, Class I will be reduced by two Member
Governors. At the 1999 annual election, Class II will be reduced by
four Member Governors. At the 2000 annual election, Class III will be
reduced by one Member Governor and Class II will be increased by one
Member Governor. The Board of Governors will be increased by three Non-
Industry Governors by the 1999 annual election to serve for staggered
terms so as to balance the Classes as determined by the Nominating
Committee.
Also proposed are certain technical changes to the Constitution.
The first would codify a current practice that the Chairman cannot be
an On-Floor Member. In approving changes to the Exchange's Constitution
in 1992 to require a floor member Vice Chairman, the SEC, in its
approval order, stated its view that the Chairman's position should not
also be held by a floor member.\4\ The proposed amendment explicitly
states this in the Constitution.
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\4\ Securities Exchange Act Release No. 31633 (December 22,
1992), 57 FR 62402 (December 30, 1992) (File Nos. SR-MSE-92-12 and
SR-MSE-92-13).
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In addition, the proposed changes would amend the Constitution so
that no person shall participate in the ``determination'' as opposed to
``adjudication'' (as currently worded) of any matter in which he or she
is personally interested. This change would expand the coverage of this
provision, which pertains to disqualification of Governors from
participation in Board actions. In order to prevent the scope of the
provision from being too broad, language has been added that makes it
clear that Member Governors are not precluded (by being deemed
personally interested) from participating in decisions in the normal
course of business that affect members of classes of members in
general.
Finally, a number of other revisions to the Constitution and Rules
are proposed for the sake of organization or accuracy. For instance,
the term ``member,'' when used in Article IV, Sections 3 and 4 of the
Constitution (regarding the Nominating Committee) to refer to a member
of the committee or a Class and not necessarily a member of the
Exchange is being changed to ``person'' or otherwise modified whenever
necessary for clarification. In addition, the reference to ``member''
in Article IV, Section 14 of the Constitution (regarding voting
designees) is being clarified to specifically refer to a member of the
Exchange. Further, Article IV, Rules 7 and 8 of the Rules (regarding
the Compensation Committee and the Audit Committee) are being amended
to reflect the use of the terms Non-Industry and On-Floor.
2. Statutory Basis
The Exchange believes the proposed rule change is consistent with
Section 6(b)(3) of the Act \5\ in that more Governors shall be
representative of investors and not associated with a member of the
Exchange, broker or dealer while promoting the opportunity to assure
fair representation of CHX members in the selection of nominees for
Governors and the administration of the affairs of the Exchange.
Additionally, the Exchange believes it is consistent with Section
6(b)(5) of the Act \6\ as it is designed to prevent fraudulent and
manipulative acts and practices, to promote just and equitable
[[Page 5985]]
principles of trade and in general to protect investors and the public
interest.
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\5\ 15 U.S.C. 78s(b)(3).
\6\ 15 U.S.C. 78s(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 change will
impose any burden on competition.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants or Others
The Exchange has neither solicited nor received written comments on
the proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within thirty-five days of the date of publication of this notice
in the Federal Register or within such other period (i) as the
Commission may designate up to ninety 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 such 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 is 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 submissions, 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 five U.S.C. 552, will be available for inspection and copying at the
Commission's Public Reference Section, 450 Fifth Street, N.W.,
Washington, D.C. 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-97-36 and should be
submitted by February 26, 1998.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\7\
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\7\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-2886 Filed 2-4-98; 8:45 am]
BILLING CODE 8010-01-M
