[Federal Register Volume 63, Number 56 (Tuesday, March 24, 1998)]
[Notices]
[Pages 14153-14160]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-7513]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-39759; File No. SR-CHX-97-36]
Self-Regulatory Organizations; Order Approving Proposed Rule
Change by the Chicago Stock Exchange, Inc., Relating to the Structure
and Composition of the Board of Governors
March 6, 1998.
I. Introduction
On December 16, 1997, The Chicago Stock Exchange, Inc. (``CHX'' or
``Exchange'') filed with the Securities and Exchange Commission
(``SEC'' or ``Commission'') a proposed rule change pursuant to Section
19(b)(1) of the Securities Exchange Act of 1934 (``Act''),\1\ and Rule
19b-4 thereunder.\2\ In this filing the Exchange proposed amendments to
the structure and composition of its Board of Governors (``Board'') to
include greater participation and oversight by individuals who are not
affiliated with the Exchange or registered brokers or dealers.\3\ The
filing was amended on January 16, 1998, to revise certain Board
[[Page 14154]]
and committee membership qualifications.\4\ Notice of the proposed rule
change, as amended, was published in the Federal Register on February
5, 1998.\5\ The Commission did not receive any comment letters on the
proposal.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ Specifically, the CHX proposed amendment to Articles III, IV
and V of its Constitution and Article IV, Rules 7, 8 and 10 of its
Rules. The revised text of the Constitution and Rules accompany this
Order in the Addendum hereto and are incorporated herein.
For purposes of this Order, ``affiliated'' refers to a member of
the Board of Governors or a committee who is either a member of the
Exchange or affiliated with a broker or dealer in securities, and
includes all Member Governors and CHX committee members. Non-
affiliated and Non-Industry both refer to a CHX Board or committee
member who is neither a member of the Exchange nor affiliated with a
broker or dealer. Finally CHX Public Governors and committee
members, a subset of the Non-Affiliated or Non-Industry category,
are those who have no material business relationship with the
Exchange, a broker or a dealer.
\4\ See Letter Amendment No. 1 from Joseph M. Klauke, Foley &
Lardner to Katherine A. England, Division of Market Regulation,
Commission, dated January 16, 1998.
\5\ See Securities Exchange Act Release No. 39603 (January 30,
1998), 63 FR 5982 (File No. SR-CHX-97-36). To allow time for
approval of the proposal by its members, the Exchange agreed to
extension of the time period specified in Section 19(b)(2) of the
Act. See letter from Joseph M. Klauke, Foley & Lardner to Katherine
A. England, Division of Market Regulation, Commission, dated
December 30, 1997. A technical amendment to the filing memorializing
member approval of the proposal was submitted on February 12, 1998.
See Letter Amendment No. 2 from Joseph M. Klauke, Foley & Lardner to
Katherine A. England, Division of Market Regulation, Commission,
dated February 12, 1998. This technical amendment, which served to
notify the Commission that the CHX complied with its internal
procedures, did not require notice and comment, as it did not affect
the substance of the rule filing.
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II. Background
The Exchange is a non-stock membership corporation registered in
the State of Delaware. Its corporate structure is defined in its
Certificate of Incorporation and its By-laws. The Certificate of
Incorporation includes general parameters of corporate governance,
while the By-laws, composed of the Constitution and the Rules, contains
the specific requirements for constitution of the Board, its committees
and the daily operation of the Exchange. The submitted filing proposes
changes to the By-laws only. Within the By-laws, the structure of the
Board, the Executive Committee and the Nominating Committee are set
forth in the Constitution, while the Audit Committee and Compensation
Committee requirements are included in the Rules.\6\
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\6\ Collectively, these four committees are referred to as the
``Committees.''
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The current Board of Governors has twenty-seven voting members,
including the Vice-Chair of the Board (who must be a member of the
Exchange active on its trading floor) (``Vice-Chair''), the president
of the CHX (who is an Exchange employee appointed by the Board) (the
``President'') and twenty-five elected Governors. The Chair of the
Board (who, as a matter of practice, is not a member of the Exchange
active on its trading floor) (``Chair'') is appointed by the full Board
from among the elected Governors. The twenty-five governors include
sixteen affiliated with the CHX or with a registered broker or dealer
(known as Member Governors), and nine without such affiliations (known
as Non-Member Governors).\7\ Of the affiliated Governors, nine must be
from Chicago, and the remaining seven from outside the metropolitan
area. Moreover, the affiliated Governors cannot serve more than two
consecutive Board terms.
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\7\ See current Article III, Sec. 2 ``Members of the Board of
Governors'' of the Constitution. See also, supra note 3, defining
``affiliated'' and ``non-affiliated'' Governors and Committee
members.
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The current Executive Committee consists of seven or more members,
who are appointed by the Vice-Chair of the Board. The Chair and the
President serve as ex-officio members with full voting power. The Chair
of the Board also serves as chair of the Executive Committee. A
majority of members (including the ex-officio) constitute a quorum for
transaction of business. All committee members must be Governors, but
there are no other compositional requirements.\8\ Notwithstanding this,
the members of the Executive Committee are currently balanced between
affiliated and non-affiliated members.\9\
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\8\ See current Article V, Sec. 4 ``Membership of Executive
Committee'' of the Constitution.
\9\ Telephone call between Joseph M. Klauke, Foley & Lardner and
Mandy Cohen, Division of Market Regulation, Office of Market
Supervision dated March 5, 1998.
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The current Nominating Committee has five members, who hold no
other positions with the Exchange.\10\ The members of the Nominating
Committee must include at least two affiliated persons; one who is
active on the trading floor of the Exchange, and one who is not. Two
non-affiliated committee members are also required by the
Constitution.\11\
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\10\ For instance, a single individual cannot be both member of
the Board and member of the Nominating Committee. See current
Article IV, Sec. 3 ``Nominating Committee'' of the Constitution.
\11\ See id.
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The current Audit Committee is composed of at least three
Governors, plus the Chair of the Board. The majority of voting
committee members cannot be affiliated individuals active on the
trading floor of the Exchange. In addition, the Rules suggest inclusion
of at least two non-affiliated participants, when the Audit Committee
has five or more voting members.\12\ While inclusion of non-affiliated
persons is not required, the Audit Committee currently operates with a
balance of affiliated and non-affiliated members.\13\
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\12\ See current Article IV, Rule 8 ``Audit Committee'' of the
Rules.
\13\ Telephone call between Joseph M. Klauke, Foley & Lardner
and Mandy Cohen, Division of Market Regulation, Office of Market
Supervision dated March 5, 1998.
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The current Compensation Committee consists of the Chair and at
least one affiliated and one non-affiliated Governor. The Chair of the
Compensation Committee must be a non-affiliated Governor. The majority
of the voting members of the Compensation Committee cannot be active on
the trading floor of the exchange, and if the committee has five or
more voting members, the Rules suggest inclusion of at least two non-
affiliated participants.\14\ Consistent with this approach, and similar
to the practices of the Audit Committee and the Executive Committee,
the Compensation Committee currently contains a balance of affiliated
and non-affiliated committee members without being positively required
to do so.\15\
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\14\ See current Article IV, Rule 7 ``Compensation Committee''
of the Rules.
\15\ Telephone call between Joseph M. Klauke, Foley & Lardner
and Mandy Cohen, Division of Market Regulation, Office of Market
Supervision dated March 5, 1998.
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Finally, there currently does not exist either Public
representation requirements of the type included in the proposal or
quorum provisions related to compositional structure on either the
Board or the four committees.\16\
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\16\ See current Article IV Rule 10 ``Committee Quorum'' of the
Rules (Audit and Compensation Committees); see also current Article
III, Sec 7 ``Quorum'' (Board) and current Article V, Sec. 4
``Membership of the Executive Committee'' (Executive Committee) of
the Constitution. There is no particular quorum for the Nominating
Committee set for in the current By-laws; therefore, a majority of
the members is required. Delaware Gen. Corp L Section 141.
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III. Description of the Proposal
The Exchange's proposal will change the structure and composition
of the Board and the Executive, Nominating, Audit and Compensation
Committees by imposing an enhanced non-industry and public
participation requirement similar to those recently adopted by certain
other self-regulatory organizations (``SROs'').\17\ The proposed
changes are based upon recommendations made by the Exchange's
Governance Committee, who is responsible for general oversight of the
CHX's corporate governance matters.\18\ The changes represent the
[[Page 14155]]
latest in a continuing series of amendments to the corporate governance
structure of the CHX over the past two decades.\19\
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\17\ Securities Exchange Act Release No. 39608 (February 2,
1998), 63 FR 6249 (February 6, 1998) (File No. SR-Philadep-97-06);
Securities Exchange Act Release No. 39609 (February 2, 1998), 63 FR
6250 (February 6, 1998) (File No. SR-SCCP-97-06); Securities
Exchange Act Release No. 39326 (November 14, 1997), 62 FR 62385
(November 21, 1997) (File No. SR-NASD-97-71); and Securities
Exchange Act Release No. 38960 (August 22, 1997), 62 FR 45904
(August 29, 1997) (File No. SR-PHLX-97-31).
\18\ See current Article IV, Rule 9 ``Committee on Organization
and Governance'' of the Rules; see also 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) (formalizing the
duties of the Committee on Organization and Governance).
\19\ See, e.g., Securities Exchange Act Release No. 34563
(August 19, 1994), 59 FR 44207 (August 26, 1994) (File No. SR-CHX-
94-15) (increasing Board membership to accommodate operation of
Exchange and its clearance, settlement and securities depository
subsidiaries as a single entity); Securities Exchange Act Release
No. 33901 (April 12, 1994), 59 FR 18586 (April 19, 1994) (File No.
SR-CHX-93-28) (including changes to the Executive and Finance
Committees, voting powers of President and Chair and adding
definition of Non-Member Governor); Securities Exchange Act Release
No. 32488 (June 18, 1993), 58 FR 34284 (June 24, 1993) (File No. SR-
MSE-93-13) (changing name from Midwest Stock Exchange, Inc. to
Chicago Stock Exchange, Inc.); Release No. 34-31633, supra note 18
at page 6 (transferring duties from Chair to President and making
Chair part-time, requiring Vice-Chair to be an On-Floor member,
formalizing various standing Board committees, etc.); Securities
Exchange Act Release No. 30844 (June 19, 1992), 57 FR 29106 (June
30, 1992) (File No. SR-MSE-92-07) (conforming certificate of
incorporation to previous by-laws and rule changes); Securities
Exchange Act Release Nos. 16468 and 16468A (January 4, 1980, as
corrected January 16, 1980) (File No. SR-MSE-79-22, as corrected to
reference SR-MSE-79-25).
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A. Board Composition and Size
The first portion of the proposal calls for reduction in the number
of Governors and modification of Board membership standards to include
greater participation and supervision by individuals without securities
industry affiliation. Under the proposal, the current members of the
Board will be reduced from twenty-seven to twenty-four and the number
of Governors affiliated with Exchange or registered brokers or dealers
from sixteen to ten.\20\ At the same time, the number of non-affiliated
Governors will rise from nine to twelve.\21\
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\20\ See proposed Article III, Sec. 2 ``Members of the Board of
Governors'' of the Constitution.
\21\ See id. The current rules also impose residence
requirements on a portion of the affiliated governors. The proposed
amendments will eliminate the distinction.
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The amendments, as proposed, will result in Exchange management
balanced between non-affiliated individuals and CHX members. Moreover,
the non-affiliated Governors, termed Non-Industry, will include a
mandatory subset of five Public Board members, who should truly enhance
the public interest in CHX operations. The Non-Industry Governor
positions will be filled by individuals who are not presently, and have
not been involved in the securities industry for an extended period of
time, whether directly, as an employee of, or provider of professional
services to, the Exchange or a broker or dealer, or indirectly, through
management or ownership of a securities industry participant. Non-
Industry may, however, include employees and other associates of
issuers exclusively listed on the CHX. Public Governors positions,
however, will be open only to those individuals who have no material
business relationship with a registered broker or dealer or the
Exchange.\22\
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\22\ See proposed Article III, Sec. 2 ``Members of the Board of
Governors'' of the Constitution.
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The affiliated Board members will be split between On-Floor and
Off-Floor Member Governors, reflecting the different types of Exchange
members.\23\ Under the proposal, an On-Floor Member Governor is one who
is, or is associated with, a member of the CHX that is primarily
engaged in business on the Exchange trading floor. The proposed
definition of Off-Floor Member Governors includes all other CHX members
(sometimes referred to as up-stairs members), or their associates.\24\
The changes will also codify the current practice of selecting a Chair
who is not active on the trading floor of the Exchange.
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\23\ The proposed amendments will require a minimum of four On-
Floor Member Governor positions and four Off-Floor Member Governor
positions.
\24\ The current Constitution and Rules refer to those persons
who are ``active on the [trading] 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 On-Floor members under the current interpretation.
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B. Committee Composition
The second portion of the proposed amendments address the
compositional requirements of the Executive, Nominating, Audit and
Compensation Committees. The Executive, Audit and Compensation
Committees are made up of Governors appointed by the Board, while the
Nominating Committee is made up of Non-Industry participants appointed
by the Board, and Member participants elected by the Membership.\25\
The definitions of Non-Industry, Public On-Floor, Off-Floor and Member
Governors apply equally to members of these four committees. As
proposed, not less than fifty percent of the members of the Executive
Committee, the Compensation Committee and the Audit Committee must be
Non-Industry (including at least one Public Governor on the
Compensation and Audit Committees), and the Nominating Committee will
be composed of fifty percent Non-Industry and fifty percent Member
representatives.\26\ Currently, the Audit, Executive, and Compensation
Committees have this balance, although it is not specifically
required.\27\ The Nominating Committee currently has five members, two
of which are Non-Industry.\28\
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\25\ See proposed Article IV, Section 3 ``Nominating Committee''
of the Constitution.
\26\ See proposed Article V, Sec. 4 (Executive Committee) and
proposed Article IV, Sec. 3 (Nominating Committee) of the
Constitution; see also proposed Article IV, Rule 7 (Compensation
Committee) and proposed Article IV, Rule 8 (Audit Committee).
\27\ See supra notes 8 through 14, pp. 3-4.
\28\ See id. The change to require balanced committees will be
effective upon approval of the proposed rule change for these
committees, except the Nominating Committee. One additional Non-
Industry person will be added to the Nominating Committee to achieve
balance in conjunction with the 1999 Annual Election.
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C. Quorum Requirements
The third portion of the proposal addresses quorum requirements.
Currently there are no quorum provisions in the Exchange's Constitution
or Rules related to compositional structure.\29\
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\29\ See supra note 16, p. 5 and accompanying text.
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Under the proposed amendments, a quorum for the transaction of
business on the Board of Governors will require participation by one-
half of the number of Governors then in office.\30\ The Executive and
Nominating Committees will require a majority of members to be present,
while the Audit and Compensation Committees will need at least half of
their members to satisfy their quorum requirements.\31\
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\30\ See proposed Article III, Sec. 7 ``Quorum'' of the
Constitution.
\31\ See proposed Article V, Sec. 4 ``Membership of the
Executive Committee'' of the Constitution (Executive Committee); see
also proposed Article IV, Rule 10 ``Committee Quorum'' of the Rules
(Audit and Compensation Committees).
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In addition, not less than fifty percent of the Non-Industry
participants on both the committees and the Board must be present to
fulfill quorum committee requirements.\32\ Notwithstanding this, an
informed waiver of attendance by Non-Industry Board or Committee
members will satisfy the compositional quorum requirements. Thus, 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 compositional portion of the quorum requirements will be
deemed satisfied.\33\
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\32\ See Id.
\33\ See id.
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[[Page 14156]]
D. Term Limits, Attendance at Board Meetings and Recusal Provisions
The next several portions of the proposal revises gubernatorial
term limits, impose an attendance requirement on Board members and
expand the recusal provisions for interested Governors. The current
term limits on Board service affect only affiliated Governors.\34\ The
proposed changes impose a three term limit on all elected Board
members, regardless of affiliation, and partial terms will not count.
After serving three complete terms, a minimum of two years must elapse
before a former Governor can again serve on the Board.\35\
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\34\ See current Article IV, Sec. 5 ``Limitation on Service'' of
the Constitution.
\35\ See proposed Article IV, Sec. 5 ``Limitation on Service''
of the Constitution.
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The proposed rule changes will also recognize failure to attend at
least seventy-five percent of all full Board meetings annually as cause
for removal from the Board.\36\ The CHX has represented that this
removal power will not be implemented in an arbitrary fashion.\37\
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\36\ See proposed Article III, Sec. 1 ``The Board of Governors''
of the Constitution.
\37\ Telephone call between Craig Long, Foley & Lardner and
Mandy Cohen, Division of Market Regulation, Commission dated
February 26, 1998.
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Finally, the proposal includes changes to those provisions of the
Constitution related to disqualification of Governors due to personal
interest in a matter. The text of these provisions will be amended to
refer to ``determination'' of matters rather than just ``adjudication''
(as currently worded). Member Governors will not, however, be precluded
from participating in decisions that affect members or classes of
members in general, on the grounds of personal interest.\38\
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\38\ See proposed Article III, Sec. 3 ``Participation in
Meeting, Action or Proceeding'' of the Constitution.
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E. Technical Amendments
In addition to the foregoing, the last portion of the proposal
includes certain technical changes to the Constitution and rules, for
organizational or accuracy purposes. These include those changes
necessary throughout the Constitution and Rules to reflect the use of
the terms Non-Industry and On-Floor.\39\ In addition, a number of
revisions of the term ``member'' are included. For example, use of the
word member in connection with operation of the Nominating Committee,
is being changed to person (or otherwise modified) whenever necessary
to prevent confusion.\40\ Similarly, the reference to member used in
the context of voting designees is being clarified to specifically
refer to a member of the Exchange.\41\
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\39\ See, e.g., Article IV, Rules 7 and 8 of the Rules
(regarding the Compensation Committee and the Audit Committee).
\40\ See, e.g., proposed Article IV, Sections 3 ``Nominating
Committee'' of the Constitution.
\41\ See e.g., proposed Article IV, Section 14 ``Term `Member'
includes Voting Designee'' of the Constitution.
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IV. Discussion
As discussed below, the Commission has determined at this time to
approve the Exchange's proposal. The Commission must approve a proposed
rule change if its finds that the proposal is consistent with the
requirements of the Act and the rules and regulations thereunder that
govern the Exchange. The standard by which the Commission must evaluate
a proposed rule change is set forth in Section 19(b) of the Act.\42\ In
addition, Section 6 of the Act establishes specific standards for
Exchange rules against which the Commission must measure CHX's
proposal.\43\ In evaluating a given proposal, the Commission examines
the record before it and all relevant factors and necessary
information.
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\42\ 15 U.S.C. 78s(b).
\43\ 15 U.S.C. 78o-3.
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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.\44\ In
particular, the Commission believes that the proposal is consistent
with Sections 6(b)(1), (3), (5), and (8) of the Act.\45\ Section
6(b)(1) requires that an exchange be organized and have the capacity to
carry out the purposes of the Act and to comply, and to enforce
compliance by its members and persons associated with its members with
the Act, the rules and regulations thereunder, and the rules of the
exchange. Section 6(b)(3) of the Act requires, among other things, that
the rules of an exchange assure a fair representation of its members in
the selection of its directors and administration of its affairs.
Section 6(b)(5) requires, among other things, that the rules of an
exchange be designed, in general, to protect investors and the public
interest. Finally, Section 6(b)(8) requires that the rules of an
exchange not impose any burden on competition not necessary or
appropriate in furtherance of the purposes of the federal securities
laws.
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\44\ 15 U.S.C. 78f(b).
\45\ 15 U.S.C. 78f(1), (3), (5) and (8).
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The Commission believes that the proposals to diversify the
composition of the CHX's Board, Executive Nominating, Compensation and
Audit Committees \46\ should increase non-partisan participation on
these governing bodies and provide adequate representation of On-Floor
members, ``upstairs firms'' and investors. The changes to the structure
of the Board and Committees are a positive step to ensure that no one
group will be able to dominate the governance of the Exchange. The
Commission believes that these bodies, as revised, should be more
responsive to the interests of the Exchange and its various
constituencies, including the public, and thus are consistent with both
the fair representation requirements of Section 6(b)(3) of the Act and
the protection of investors and the public interest pursuant to Section
6(b)(5) of the Act. Moreover, the changes should result in the more
efficient operation of the Exchange generally, and therefore do not
impose any unnecessary or inappropriate burdens on competition.
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\46\ See supra, text accompanying notes 19 to 32.
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The CHX Board of Governors is responsible for oversight of all
aspects of Exchange and SRO operations. Over the past ten years, these
operations have changed in various ways, and the Board has been
adjusted to reflect these changes.\47\ As suggested by this filing, the
CHX believes that the recent sale of its clearance and settlement and
securities depository subsidiaries requires readjustment of Board
structure. The Exchange submits that the governors added to the Board
when the subsidiaries were consolidated into Exchange operations are no
longer necessary, and that a smaller Board will make deliberations more
efficient and manageable.
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\47\ See Securities Exchange Act Release No. 34563 (August 19,
1994), 59 FR 44207 (August 26, 1994) (File No. SR-CHX-94-15)
(increasing the number of Board members upon consolidation of the
Exchange and its subsidiaries under one management structure).
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The Commission agrees that given the Exchange's downsizing, a
smaller Board may be appropriate. Moreover, as the remaining number of
Governors (twenty-four) is substantial, and since the present
restructuring includes an increase in the proportion of non-affiliated
Governors, the Commission believes that reduction of the number of
Board members should improve the Exchange's ability to perform its SRO
responsibilities, conduct its business, provide fair representation to
its members, and adequately protect investors.
The restructuring of the Board and the Committees, to include a
greater proportion of non-affiliated members,
[[Page 14157]]
and the redefinition of Public, Non-Industry and Member Governors and
committee members reflect recent trends in SRO corporate governance
generally, and ease concerns previously raised by the Commission. In
approving earlier changes to the Board and its committees, the
Commission expressed concerns about domination by Governors active on
the trading floor of the Exchange.\48\ By supplementing the non-
affiliated representation on these governing bodies, and imposing
compositionally-based quorums, the current proposal should have the
effect of countering the influence of On-Floor members, and increasing
the influence of unbiased Board and committee members. Recognizing a
distinction between Public and Non-Industry individuals advances this,
and requiring Public participation in critical areas should enhance the
non-partisan oversight of Exchange operations. Inclusion of
compositionally-based quorums, requiring diversity between Non-Industry
and Member participants, further protects such oversight.\49\ The
Commission retains some concerns that the categories of permissible
Board members do not include securities industry individuals who are
not members of the CHX. The increased participation by Non-Industry and
Public individuals, however, should provide the balance necessary for
unbiased oversight by the Board and the Committees as a whole.
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\48\ See Release No. 34-31633.
\49\ In conversations with the Commission concerning the
compositional quorum requirements, the Exchange expressed concerns
about the potential for disruption in operations caused by the
absence of the non-affiliated members (due to the part-time nature
of their service) at various meetings. The informed waiver of
participation by Non-Industry Governors and Committee members (which
allows non-affiliated members to review the agenda before a meeting
to determine the nature of the matters to be discussed) addresses
this concern, without sacrificing the benefits of the non-
affiliate's non-partisan oversight. By viewing the agenda, the non-
affiliate member will be able to judge the import of the subjects to
be discussed and, if necessary, will be able to allocate his or her
time to the most important issues.
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The proposal's remaining changes should similarly ease and improve
the operations of the Board and the Committees. Eliminating the
geographical distinction for Member Governors should provide the
Nominating Committee with more flexibility in its choice of potential
Governors and should eliminate an inappropriate arbitrary distinction
given CHX's current national constituency. Imposing term limits on all
Governors should foster a healthy influx of fresh perspectives on the
Board. Setting attendance requirements should promote attendance and
thus enhance participation in Board meetings. Allowing removal for
failure to attend Board meetings should allow replacement of Board
members who are not performing their required duties. Extending the
recusal provisions to include all determinations by Board members more
appropriately reflects the kind of activities that Governors become
involved in.
Taken as a whole, the changes brought about by the proposed
amendments will have a beneficial impact on the Board, the Committees
and the Exchange. The Commission believes that the changes will benefit
members of the Exchange and investors particularly and the public
interest generally, are consistent with the provisions of the Act, and
appropriate for approval at this time.\50\
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\50\ See 15 U.S.C. 78c(f).
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V. Conclusion
For all of the aforementioned reasons, the Commission finds that
the proposal is consistent with the requirements of Section 19(b)(2) of
the Act \51\ and the rules and regulations thereunder applicable to a
national securities exchange.
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\51\ 15 U.S.C. 78s(b)(2).
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It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\52\ that the proposed rule change (SR-CHX-97-36), as amended, is
approved.
\52\ Id.
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For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\53\
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\53\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
Addendum
Additions are italicized; deletions are [bracketed].
Constitution
Article III
Government and Administration
Powers of the Board of Governors
SEC. 1. The business of the Exchange shall be managed by its
Board of Governors which shall be vested with all powers necessary
for the government of the Exchange, the regulation of the business
conduct of members and member organizations, and the promotion of
the welfare, objects and purposes of the Exchange. Without limiting
the generality of the foregoing: The Board of Governors may
establish Rules governing the qualifications for membership, the
requirements for remaining a member in good standing and the
circumstances under which a membership owned by a person or
organization not in good standing may be sold by the President. It
may fix fees and compensation to be paid Governors, members of
committees and officers. It may fix dues, fees, assessments and
other charges to be paid by members and member organizations. It
may, for cause, remove any Governor or officer of the Exchange.
``Cause'' shall include, but not be limited to, failure by a
Governor to attend at least seventy-five percent of the Board
meetings held in a calendar year. It may fill vacancies in the Board
of Governors or the office of Vice Chairman who shall serve until
the next annual meeting, and the office of Chairman, President, or
Non-[Member] Industry [Committee] committee members of the
Nominating Committee who shall serve until the expiration of their
term, and shall approve all appointments to Committees (other than
the Nominating Committee) made by the Vice Chairman. It may
determine the manner in which its own proceedings and the
proceedings of any committee of the Exchange shall be conducted. It
shall have power to interpret the Constitution and Rules of the
Exchange and any interpretation thereof made by it shall be final
and conclusive.
The foregoing specification of the powers and authority of the
Board of Governors is in furtherance of and not by way of limitation
of the power and authority of the Board of Governors to do all
things necessary for the government and administration of the
Exchange, including all such things which are not by statute, by the
Certificate of Incorporation or by the Constitution directed or
required to be done by the members.
Members of the Board of Governors
SEC. 2. The Board of Governors shall be composed of the Vice
Chairman of the Board, the President and [25] 22 Governors (one of
which shall be appointed Chairman of the Board as hereinafter
provided). The Vice Chairman of the Board shall be a member, general
partner in a member firm, or officer of a member corporation [and
shall be active on the floor of the Exchange] who is On-Floor.
[Sixteen] Ten of the [25] 22 Governors shall be [members, general
partners of member firms or officers of member corporations (such
Governors sometimes hereinafter referred to as ``member
Governors'')] Member Governors, of whom at lease 4 shall be On-Floor
and at lease 4 shall be Off-Floor, and [nine] twelve Governors shall
be [unaffiliated with the Exchange or any broker or dealer in
securities (such Governors sometimes hereinafter referred to as
``non-member Governors'')] Non-Industry, of whom at least 5 shall be
Public. The Chairman of the Board shall be appointed by the Board of
Governors [from among the 25] and shall be one of the elected
Governors that is not On-Floor. The President shall be appointed by
the Board of Governors to serve at its pleasure. The Chairman and
the Vice Chairman shall each serve a two-year term in such
capacities. [The initial term of the Chairman shall end at the first
meeting of the Board held after the 1994 annual election meeting of
the Exchange.] The members of the Board of Governors (other than the
Vice Chairman of the Board and the President) shall be divided into
classes; there shall be [eight] seven Governors in Class I, [nine]
[[Page 14158]]
seven Governors in Class II and eight Governors in Class III.
[Three] Four members of each of Class I, Class II and Class III
shall be [non-member] Non-Industry Governors. At each annual meeting
of the Exchange, Governors shall be elected to succeed those whose
terms then expire. The Governors so elected shall be identified as
being of the same class as the Governors they succeed and shall be
elected for a term expiring at the third succeeding annual election
meeting of the Exchange or until their respective successors in each
case are thereafter elected and qualified.
Anything in this Section 2 to the contrary notwithstanding, (1)
any Governor that is a general partner or officer of a participant
of the Midwest Clearing Corporation or Midwest Securities Trust
Company (``Participant Governor'') and is acting as a Participant
Governor as of November 1, 1995 may continue to serve the remainder
of his or her term[, even if doing so causes the total number of
Governors to exceed twenty-five.]; and (2) the transition to a Board
of Governors as comprised in accordance with this Section 2, from
the Board of Governors as comprised as of September 24, 1997, shall
be implemented as follows. At the 1998 annual election, Class I
shall be reduced by two Member Governors. At the 1999 annual
election, Class II shall be reduced by four Member Governors. At the
2000 annual election, Class III shall be reduced by one Member
Governor and Class II shall be increased by one Member Governor. The
Board of Governors shall 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.
Participation in Meeting, Action or Proceeding
SEC. 3. No Governor shall be disqualified from participating in
any meeting, action or proceeding of the Board of Governors by
reason of having, either personally or as a member of any committee,
made prior inquiry, examination or investigation of the subject
under consideration, nor shall any member of any such committee be
disqualified from acting as a Governor upon any appeal from a
decision of any committee. But no [person] Governor shall
participate in the [adjudication] determination of any matter in
which [he] such Governor is personally interested. Notwithstanding
the foregoing, Member Governors shall not be deemed to be personally
interested in the determination of matters that may effect the
members as a whole or certain classes of members, and Member
Governors shall not be prohibited from participating in such
determinations in the normal course of conducting Exchange business.
Quorum
SEC. 7. At all meetings of the Board of Governors, one-half of
the number of Governors then in office (including not less than 50
percent of the Non-Industry Governors) shall constitute a quorum for
the transaction of business and the act of a majority of the
Governors present at any meeting at which there is a quorum shall be
the act of the Board of Governors except as may be otherwise
specifically provided by statute, the Certificate of Incorporation,
the Constitution or Rules. If at least 50 percent of the Non-
Industry Governors are (i) present at or (ii) have waived their
attendance for a meeting after receiving an agenda prior to such
meeting, the requirement that not less than 50 percent of the Non-
Industry Governors be present to constitute the quorum shall be
deemed satisfied. If a quorum shall not be present at any meeting of
the Board of Governors, a majority of the Governors present thereat
may adjourn the meeting from time to time, without notice other than
announcement at the meeting, until a quorum shall be present.
Definitions
SEC. 10. The following terms as used anywhere in the
Constitution or the Rules, unless the context indicates otherwise,
have the meanings herein specified:
(a) ``Non-Industry'' means a Governor or committee member
(excluding the Chief Executive Officer of the Exchange) who is:
(i) a Public Governor or committee member;
(ii) an officer or employee of an issuer of securities listed
exclusively on the Exchange; or
(iii) any other individual who:
(A) 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, excluding an outside director or a director
not engaged in the day-to-day management of a broker or dealer;
(B) is not an officer, director (excluding an outside director),
or employee of an entity that owns more than ten percent of the
equity of a broker or dealer, and the broker or dealer accounts for
more than five percent of the gross revenues received by the
consolidated entity;
(C) 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 or dealer;
(D) does not provide and whose firm or partnership does not
provide professional services to brokers or dealers that constitute
20 percent or more of the professional revenues received by the
Governor or committee member or 20 percent or more of the gross
revenues received by the Governor's or committee member's firm or
partnership;
(E) does not provide and whose firm or partnership does not
provide professional services to a director, officer, or employee of
a broker, dealer, or corporation that owns 50 percent or more of the
voting stock of a broker or dealer, and such services relate to the
director's, officer's, or employee's professional capacity and
constitute 20 percent or more of the professional revenues received
by the Governor or committee member or 20 percent or more of the
gross revenues received by the Governor's or committee member's firm
or partnership; and
(F) does not have a consulting or employment relationship with
or provide professional services to the Exchange and has not had any
such relationship or provided any such services at any time within
the prior three years.
(b) ``Public'' means a Governor or committee member who has no
material business relationship with a broker or dealer or the
Exchange.
(c) ``On-Floor'' when used in the context of Governors and
committee members means 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.
(d) ``Off-Floor'' when used in the context of Governors and
committee members means members and persons associated with member
organizations who are not ``On-Floor.''
(e) ``Member Governor'' means a Governor who is a member,
general partner of a member firm or officer of a member corporation.
Article IV
Meetings of Members, Nominations and Elections
Nominating Committee
SEC. 3. There shall be a Nominating Committee composed of five
(six to act in conjunction with the 1999 Annual Election and
thereafter) [members] persons. Three [members] persons shall be
elected at each annual election meeting of the Exchange from among
members, general partners of member firms and officers of member
corporations who do not hold any other office in the Exchange
(``Member Committee members''). At least one Member Committee member
shall be [active on the floor of the Exchange] On-Floor and at least
one Member Committee member shall [not be active on the floor of the
Exchange] be Off-Floor. Two [members other than Member Committee
members] other persons on the Committee (three to act in conjunction
with the 1999 Annual Election and thereafter) shall be [unaffiliated
with any broker or dealer in securities] Non-Industry and shall be
appointed annually by the Board of Governors at its first meeting
held after the annual election meeting of the Exchange [(``Non-
member Committee members'')]. Any vacancy in Member Committee
members [upon] on the Nominating Committee shall be filed by the
remaining [member of] persons on the Nominating Committee from among
persons who would have been eligible for election to such position
at the preceding annual election meeting. Any vacancy in Non-
[member] Industry [Committee] committee members shall be filled by
the Board of Governors. No [member of] person on the Nominating
Committee in any year shall be eligible for election to any office
or position in the Exchange for the ensuing year nor shall [he] such
person serve [as a member of] on the Nominating Committee for two
successive years. At all meetings of the Nominating Committee, a
quorum for the
[[Page 14159]]
transaction of business shall consist of a majority of the committee
members, including not less than 50 percent of the Non-Industry
committee members. If at least 50 percent of the Non-Industry
committee members are (i) present at or (ii) have filed a waiver of
attendance for a meeting after receiving notice of such meeting, the
requirement that not less than 50 percent of the Non-Industry
committee members be present to constitute the quorum shall be
deemed satisfied.
Reporting of Nominating Committee
SEC. 4(a). After consulting with the President and the Chairman
of the Board with respect to the current developments and needs of
the Exchange which should be considered in connection with
nominations and not later than 30 days preceding each annual
election meeting, the Nominating Committee shall report to the
Secretary nominations to be voted on at the annual election meeting
as follows:
(i) A Vice Chairman of the Board to serve for two years if his
term is then expiring or until the end of the unexpired term if the
office had been filled by the Board as a result of a vacancy.
(ii) [Eight] Subject to the transition provisions of Article
III, Sec. 2, seven Governors [five] three of whom shall be [member]
Member Governors and [three] four of whom shall be [non-member] Non-
Industry Govenors to serve for a term of three years, if the
Governors whose terms are expiring are [members of] in either Class
I or Class [III] II, or [nine] eight Governors, [six] four of whom
shall be [member] Member Governors and [three] four whom shall be
[non-member] Non-Industry Governors to serve a term of three years,
if the Governors whose terms are expiring are [members of] in Class
[II] III.
(iii) That number of Governors required to fill any vacancies on
the Board of Governors to serve for any unexpired terms. Any person
nominated to fill a vacancy on the Board of Governors shall be of
the same category ([from the Chicago area or elsewhere, member]
Member or [non-member] Non-Industry) as the Governor he is nominated
to succeed;
(iv) Three Member Committee members of the Nominating Committee
to act in connection with the next following annual election
meeting;
(b) [The] Subject to the transition provisions of Article III,
Sec. 2, Nominating Committee shall make its nominations so as to
accomplish the following:
(i) [Having] Of the [16] 10 [member] Member Governors [in
Classes I, II and III consist of nine from the Chicago area (at
least three of whom shall be active on the Floor of the Exchange)
and seven from elsewhere in the United States or Canada, selected
with a view to providing, over time, representation on the Board to
all geographical areas in which there are member organizations which
support and significantly contribute to the strength and growth of
the Exchange ]at least 4 must be On-Floor and at least 4 must be
Off-Floor, and, of the 12 Non-Industry Governors, at least 5 must be
Public.
(ii) Having a Vice Chairman of the Board and [member] Member
Governors who, if affiliated with member organizations, occupy
senior management positions having substantial responsibility in
such member organizations.
(iii) Having persons on the Board of Governors and the
Nominating Committee who are interested in and knowledgeable about
the various aspects of Exchange operations and of the securities
business and the activities of the subsidiaries of the Exchange.
Limitation on Service
SEC. 5. No [member] Member or Non-Industry Governor[, nor the
Chairman nor the Vice Chairman of the Board] who has served all [or
part] of [two] three consecutive terms in such capacity [(excluding
terms expiring at the first annual meeting of the Exchange)] shall
be eligible for election [or appointment] in such capacity except
after an interval of at least [one year] two years. Notwithstanding
the foregoing (1) No person who was elected as a Member Governor,
whose term expires in either 1998 or 1999 and who will have served
all or part of two consecutive terms in such capacity by the annual
election meeting in 1998 or 1999, respectively, shall then be
eligible for election in such capacity except after an interval of
at least two years; and (2) any Non-Industry Governor whose term
expires in either 1998 or 1999 and who will have served all of three
or more consecutive terms in such capacity by the annual election
meeting in 1998 or 1999, respectively, shall be eligible for
election for one additional term. Neither the Chairman nor the Vice
Chairman of the Board who has served all or part of two consecutive
terms in such capacity shall be eligible for election or appointment
in such capacity except after an interval of at least one year. No
[non-member]Non-Industry Governor shall be eligible for election or
reelection as a Governor of the Exchange upon reaching the age of
71; however, having been elected or re-elected prior to reaching the
age of 71 such [non-member] Non-Industry Governor shall be entitled
to complete the term during which he or she reached the age of 71.
Nominations by Members
SEC. 7. Members may nominate other candidates for the same
office or offices as the candidates nominated by the Nominating
Committee. Such nominations shall be by written petition which shall
designate the candidate by name and office and shall be signed by
the members so nominating. The petition must be filed with the
Secretary at least 20 days prior to the annual election meeting. A
petition shall not be valid unless signed by not less than 10
members. No member may endorse more than one candidate for the same
office, excepting candidates for members of the Board of Governors
and of the Nominating Committee, in which cse as many candidates as
there are offices to be filled may be endorsed. In case of any
nomination of a candidate or candidates for election to the Board of
Governors pursuant to this Section 7, the election of [member]
Member Governors [from the Chicago area, member Governors from
elsewhere in the United States or Canada] and [non-member] Non-
Industry Governors shall be separate so that the candidate or
candidates so nominated will be opposing only the candidate or
candidates of the same category nominated by the Nominating
Committee.
Term ``Member'' Includes Voting Designee
SEC. 14. The word ``member'' wherever used in this Article IV in
the context of a member of the Exchange shall include and also mean
the ``voting designee'' of a member organization but shall not
include or mean the ``nominee'' of a member organization.
Article V
Committees
Membership of Executive Committee
SEC. 4. The Executive Committee shall consist of not less than
seven member of the Board of Governors, plus the Chairman of the
Board and the President as ex-officio members with full voting
powers. Not less than 50 percent of the committee members shall be
Non-Industry. The Chairman of the Board shall be the Chairman of the
Executive Committee. Appointments to the Executive Committee shall
be made by the Vice Chairman of the Board with the approval of the
Board of Governors. Such appointments shall be made with a view to
providing, over time, representation on the Committee to all
geographical areas in which there are member organizations which
support and significantly contribute to the strength and growth of
the Exchange and with a view to having persons on the Executive
Committee who are interested in the knowledgeable about the various
aspects of Exchange operations and of the securities business and
the activities of the subsidiaries of the Exchange. Any Governor may
be appointed a temporary member of the Executive Committee by the
Vice Chairman of the Board during the absence or inability to act of
a regular member of the Committee. Such temporary appointee shall
have all the rights, powers, authority, duties and obligations of
the regular committeeman until the later returns or is again able to
act. A majority of members of the Executive Committee (including not
less than 50 percent of the Non-Industry committee members), which
may include ex-officio members, shall constitute a quorum. If at
least 50 percent of the Non-Industry committee members are (i)
present at or (ii) have filed a waiver of attendance for a meeting
after receiving an agenda prior to such meeting, the requirement
that not less than 50 percent of the Non-Industry committee members
be present to constitute the quorum shall be deemed satisfied.
Rules
Article IV
Committees
Compensation Committee
RULE. 7. There shall be a Compensation Committee which shall
consist of the Chairman of the Board with full voting powers, and
not less than two other Governors[,]. [at] [least one of whom] Not
less than 50 percent of the committee members shall be [a non-
member[ Non-Industry Governors (including at least one Public
[[Page 14160]]
Governor). [(Throughout the Rules, the term non-member governor
shall mean a Governor who is unaffiliated with the Exchange or any
broker or dealer in Securities, as defined in Article III, Section 2
of the Exchange's Constitution).] It shall have the responsibility
of establishing the compensation of the President and of
coordinating with the President to determine a comprehensive
corporate compensation and benefits policy. The comprehensive
corporate policy shall include the structure and the administration
of the determined compensation policy, the advisability and use of
outside consultants, and a periodic review of the manner in which
the determined policy is being administered.
Audit Committee
RULE 8. There shall be an Audit Committee which shall have not
less than three members, all of whom shall be Governors, in addition
to the Chairman of the Board. [The majority of the voting members of
the Committee shall not be active on the floor of the Exchange. In
the event that the Committee is appointed with five or more voting
members, two such members shall be, if practicable, non-member] Not
less then 50 percent of the committee members shall be Non-Industry
Governors (including at least one Public Governor). The Chairman of
the Committee shall be a [non-member] Non-Industry Governor. The
Committee shall have the responsibility to annually review with the
independent auditors, the scope of their examination and the cost
thereof. It shall periodically review with the independent auditors
and the internal auditor, the Exchange's internal controls and the
adequacy of the internal audit program. It shall review the annual
``management letter'' and other reports submitted by the independent
auditors, and take such action with respect thereto as it may deep
appropriate. The Committee shall also annually recommend to the
Board of Governors independent public accountants for appointment as
auditors of the books, records and accounts of the Exchange and its
subsidiaries.
Committee Quorum
RULE 10. One-half of its members, including the ex-officio ones,
shall constitute a quorum of each committee provided for in this
Article, except for the Committee on Specialist Assignment and
Evaluation, the Compensation Committee and the Audit Committee. For
[such] the Committee on Specialist Assignment and Evaluation, one-
half of its members, not counting ex-officio members, shall
constitute the number of committee members required for a quorum.
Ex-officio members may be included for purposes of determining a
quorum, provided that at least one-half of those members present are
no ex-officio ones. For the Compensation Committee and the Audit
Committee, a quorum for the transaction of business shall consist of
one-half of the committee members, including not less than 50
percent of the Non-Industry members of such committees. If at least
50 percent of the Non-Industry committee members are (i) present at
or (ii) have filed a waiver of attendance for a meeting after
receiving an agenda prior to such meeting, the requirement that not
less than 50 percent of the Non-Industry committee members be
present to constitute the quorum shall be deemed satisfied.
[FR Doc. 98-7513 Filed 3-23-97; 8:45 am]
BILLING CODE 8010-01-M
