[Federal Register Volume 60, Number 66 (Thursday, April 6, 1995)]
[Notices]
[Pages 17595-17597]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-8491]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-35556; File No. SR-CHX-94-22]
Self-Regulatory Organizations; Chicago Stock Exchange,
Incorporated; Order Granting Approval to Proposed Rule Change and
Notice of Filing and Order Granting Accelerated Approval to Amendment
No. 3 to Proposed Rule Change Relating to Exclusive Issues
March 31, 1995.
I. Introduction
On November 10, 1994, the Chicago Stock Exchange, Incorporated
(``CHX'' or ``Exchange'' submitted to the Securities and Exchange
Commission (``SEC'' or ``Commission''), pursuant to Section 19(b)(1) of
the Securities Exchange Act of 1934 (``Act'')\1\ and Rule 19b-4
thereunder,\2\ a proposed rule change to impose additional requirements
and prohibitions on specialists, and others associated with specialists
units, registered in exclusive issues. On January 4, and 9, 1995, the
Exchange submitted, respectively, Amendments Nos. 1 and 2 to the
proposed rule change.\3\
\1\15 U.S.C. 78s(b)(1) (1988).
\2\17 CFR 240.19b-4 (1994).
\3\See letters from David Rusoff, Foley & Lardner, to Amy
Bilbija, SEC, dated December 29, 1994; and to Glen Barrentine, SEC,
dated January 5, 1995. Amendment Nos. 1 and 2 made non-substantive
changes to the proposal.
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The proposed rule change was published for comment in Securities
Exchange Act Release No. 35233 (Jan. 18, 1995), 60 FR 4651 (Jan. 24,
1995). No comments were received on the proposal. On March 29, 1995,
the Exchange submitted to the Commission Amendment No. 3 to the
proposed rule change.\4\ This order approves the proposed rule change,
including Amendment No. 3, on an accelerated basis.
\4\See letter from David Rusoff, Foley & Lardner, to Glen
Barrentine, SEC, dated March 28, 1995. See infra note 6 for a
description of Amendment No. 3.
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II. Description of the Proposal
Currently, the Exchange Rules impose only a general prohibition on
specialists, who are prohibited from effecting purchases or sales of
any security in which the specialist is registered, unless such
dealings are reasonably necessary to permit such specialist to maintain
a fair and orderly market.\5\ The Exchange proposes a new rule, Article
XXX, Rule 23, to impose additional requirements and
[[Page 17596]] prohibitions on specialists, and certain others, where
specialists are registered in exclusive issues.\6\ Specifically, the
proposed rule prohibits specialists, co-specialists, or other
associated persons, officer, directors, partners, or employees of
specialist units registered in an exclusive issue from engaging in any
business transaction with the issuer of the exclusive issue.\7\
\5\See Chicago Stock Exchange Guide, Article XXX, Rule 9, (CCH)
1929.
\6\An ``exclusive issue'' is defined in the proposed rule as the
stock of any company traded on the Exchange not otherwise traded on
the New York or American Stock Exchanges or Nasdaq/MNS, and, where
there exists another market for such issue the Exchange has executed
15% or more of the volume in the issue during the three previous
months. Amendment No. 3 amended the definition of ``exclusive
issue,'' to include issues where the Exchange has executed 15% or
more of the volume in the issue during the three previous months
rather than 25% or more of the transactions in the issue. In
Amendment No. 3, the Exchange noted that, currently, 14 issues that
are not traded on the New York or American Stock Exchanges or
Nasdaq/NMS are traded on the Exchange and assigned to specialists.
Of these 14 issues, the Exchange trades more than 25% of the volume
of 7 issues and less than 4% in 7 issues. See letter from David
Rusoff, Foley & Lardner, to Glen Barrentine, SEC, dated March 28,
1995.
\7\The term ``business transaction'' is intended to be
interpreted broadly to include: loans, purchase of assets from the
issuer, and acquisition of any beneficial ownership of shares of
such issuer.
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The proposed rule also prohibits certain specific dealings by
specialists in exclusive issues without the prior approval of the floor
officials. For example, a purchase at a price above the last sale in
the same session or a proposed transaction involving a price movement
of \1/2\ point or more are not to be effected except with the prior
approval of two floor officials. Moreover, the proposed rules makes the
``equalizing'' exemption in paragraph (e)(5) of SEC Rule 10a-1
unavailable for specialists and market makers when selling short an
exclusive issue.\8\
\8\17 CFR 240.10a-1(e)(5). Rule 10a-1 generally prohibits
persons from effecting a short sale or a registered security (a)
below the price of the last sale, or (b) at such price if it is
lower than the last sale at a different price. The exception
provided for in paragraph (e)(5) permits registered specialists or
registered exchange market maker (or a third market maker for its
own account over-the-counter) to effect, for their own account, a
sale (a) at a price equal to or above the last sale, or (b) at a
price equal to the most recent offer communicated for the security
by such registered person if such offer, when communicated, was
equal to or above the last sale. In addition, the Rule expressly
provides that an exchange may prohibit its registered specialists
and market makers from availing themselves of the exemption if the
exchange determines that such action is necessary or appropriate in
its market, in the public interest, or for the protection of
investors.
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Finally, the Exchange will provide specialists who are registered
in issues that are not traded on the New York or American Stock
Exchanges or Nasdaq/NMS with a statistical report on a monthly basis
containing data for trade and share volume of each issue. The
specialists, therefore, will be able to determine whether additional
requirements and prohibitions of Rule 23 have been triggered.
III. Discussion
The Commission finds that the proposed rule change is consistent
with the requirements of the Act and rules and regulations thereunder
applicable to a national securities exchange, and, in particular, with
the requirements of Section 6(b).\9\ The Commission believes the
proposal is consistent with the Section 6(b)(5) requirements that the
rules of an exchange be designed to promote just and equitable
principles of trade, to prevent fraudulent and manipulative acts, and,
in general, to protect investors and the public interest.
\9\15 U.S.C. 78f(b) (1988).
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The Commission believes that the rule change will benefit investors
by eliminating a potential conflict of interest between specialists
registered in exclusive issues and issuers of such securities. Because
business transactions between specialists and issuers may exert an
improper influence over specialists, the proposed rule explicitly
prohibits these types of transactions as to specialists registered in
exclusive issues. The Commission believes that the proposed rule would
be in the interest of the investing public because it sets a standard
higher than the Exchange Rules currently provide for specialists, and
others associated with specialist units, registered in exclusive
issues.\10\
\10\The Commission's review of the rules of the regional
exchanges indicates that only the Boston Stock Exchange, Inc.
(``BSE'') has a similar business transaction prohibition on equity
specialists. See Boston Stock Exchange Guide, Chapter XV, Section
11, (CCH) 2149. The Rules of the Philadelphia Stock Exchange, Inc.
(``Phlx'') prohibit only option specialists from conducting business
transactions with an issuer of a security underlying an option in
which the specialist is registered. See Philadelphia Stock Exchange
Guide, rule 1023(a), (CCH) 3023.
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At the present time, the Commission believes that the limitation of
the proposed rule's prohibition to exclusive issues is appropriate.
Exclusive issues, as defined by the proposed rule, would exclude only
those issues that are traded on the New York Stock Exchange, Inc.
(``NYSE''), the American Stock Exchange, Inc. (``Amex''), or Nasdaq/
NMS, or where the Exchange is making a de minimis market for the
security. Where the Exchange is the primary market for an issue, the
Exchange specialists would have more of an opportunity to manipulate
the market for the security and abuse the specialist position. Such a
situation is less likely to occur in an issue that is also trading on
the NYSE, Amex, or Nasdaq/NMS, or where the Exchange specialist is
making a de minimis market for a security.\11\
\11\The Commission, however, does not dismiss the possibility
that there may arise a situation in the future where it would be
appropriate to extend the prohibition of the proposed rule to all
specialists regardless of the issues in which they are registered.
Although the 15% threshold provides a benchmark for determining when
the Exchange is a primary market for a security, it may become
appropriate at some point to impose the prohibition on all
specialists because of the difficulties with monitoring exclusive
issues through the use of historical data and the potential
manipulating the volume of trading to avoid the prohibition.
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Moreover, the Commission finds good cause for approving Amendment
No. 3 to the proposed rule change prior to the thirtieth day after the
date of publication of notice of filing thereof. The Exchange's
original proposal was published in the Federal Register for the full
statutory period and no comments were received.\12\ Amendment No. 3
alters the definition of an exclusive issue. Under the amended
definition, the Exchange must have executed 15% or more of the volume
in a particular issue during the three previous months for a security
to qualify as an exclusive issue rather than 25% or more of the
transactions as originally proposed. The Commission believes that a
threshold based upon the volume of shares executed rather than upon the
number of transactions is unlikely to alter the number of specialists
affected by the proposed rule. Moreover, to the extent a threshold
based upon volume would have such an effect, the Commission believes
that the lower numerical percentage is likely to provide a sufficient
cushion to offset any decrease in the number of specialists that
otherwise would be affected by the proposed rule.
\12\See Securities Exchange Act Release No. 35233 (Jan. 18,
1995), 60 FR 4651 (Jan. 24, 1995).
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IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning Amendment No. 3. Persons making written
submissions should file six copies thereof with the Secretary,
Securities and Exchange Commission, 450 Fifth Street, NW., Washington,
DC 20549. Copies of the submission, all subsequent amendments, all
written statements with respect to the proposed rule change that are
filed with the Commission, and all written communications relating to
the proposed rule change between the Commission and any person, other
than those that may be withheld from the public in accordance with the
provisions of 5 U.S.C. Sec. 552, will be [[Page 17597]] available for
inspection and copying at the Commission's Public Reference Section,
450 Fifth Street, NW., Washington, DC 20549. Copies of such filing will
also be available for inspection and copying at the principal office of
the Exchange. All submissions should refer to File No. SR-CHX-94-22 and
should be submitted by April 27, 1995.
Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\13\ that the proposed rule change (SR-CHX-94-22) is approved.
\13\15 U.S.C. 78s(b)(2) (1988).
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\14\
\14\17 CFR 200.30-3(a)(12) (1994).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-8491 Filed 4-5-95; 8:45 am]
BILLING CODE 8010-01-M
