94-13776. Self-Regulatory Organizations; Notice of Filing of Proposed Rule Change and Amendment Nos. 1 and 2 by the Chicago Stock Exchange, Inc. To Define Members' Rights and Obligations More Precisely  

  • [Federal Register Volume 59, Number 108 (Tuesday, June 7, 1994)]
    [Unknown Section]
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    From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
    [FR Doc No: 94-13776]
    
    
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    [Federal Register: June 7, 1994]
    
    
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    SECURITIES AND EXCHANGE COMMISSION
    
    [Release No. 34-34142; File No. SR-CHX-93-31]
    
     
    
    Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
    Change and Amendment Nos. 1 and 2 by the Chicago Stock Exchange, Inc. 
    To Define Members' Rights and Obligations More Precisely
    
    June 1, 1994.
        Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
    (``Act''), 15 U.S.C. 78s(b)(1), notice is hereby given that on November 
    19, 1993, as subsequently amended on December 29, 1993,\1\ and May 5, 
    1994,\2\ the Chicago Stock Exchange, Inc. (``CHX'' or ``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 self-regulatory organization. The 
    Commission is publishing this notice to solicit comments on the 
    proposed rule change as amended from interested persons.
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        \1\See Amendment No. 1 to SR-CHX-93-31. Amendment No. 1 added a 
    subsection (c) to proposed Rule 18 of Article I of the Exchange's 
    Rules relating to suits against the Exchange.
        \2\See letter from George T. Simon, Foley & Lardner, to Sharon 
    Lawson, Assistant Director, Division, dated April 27, 1994. 
    Amendment No. 2 made several substantive changes to the proposed 
    rule change and added a proposed rule change to Article VIII, Rule 
    12 to make conduct inconsistent with the maintenance of fair and 
    orderly markets or the protection of investors a violation of 
    Exchange Rules.
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    I. Self-Regulatory Organization's Statement of the Terms of Substance 
    of the Proposed Rule Change
    
        The CHX submits the following proposed rule change which would 
    amend (i) Article IX to add a new short sale rule; (ii) Article VII, 
    Rules 2, 3, 4, and 5, to add a new summary suspension rule and 
    procedure; (iii) Article XVII, Rule 4, Article VII, Rule 5(d), Article 
    VI, Rule 8, and Article XII, Rules 3 and 6, to add a standard of 
    review; (iv) Article I, Rules 17 and 18, to add provisions relating to 
    suits against the Exchange and its employees; and (v) Article VIII, 
    Rule 12 to make conduct inconsistent with the maintenance of fair and 
    orderly markets or the protection of investors a violation of Exchange 
    Rules.
    
    II. Self-Regulatory Organization's Statement of the Purpose of and 
    Statutory Basis for, the Proposed Rule Change
    
        In its filling 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 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 filing is to amend various 
    Exchange Rules which, collectively, define members' rights and 
    obligations more precisely and give the Exchange more flexibility and 
    protection in dealing with violations of Exchange Rules.
        First, with respect to short sales, currently if a member enters 
    into a contract to sell stock, as a general matter he must believe at 
    that time that he will be able to perform. If he has no intention of 
    performing (i.e., delivering stock on settlement date), then entering 
    into the contract is both fraudulent and a violation of just and 
    equitable principles of trade. In furtherance of this, the Exchange's 
    proposed rule requires that prior to effecting a short sale, members 
    make arrangements to borrow the security or obtain other assurances 
    that delivery can be made on settlement date. Consistent with other 
    exchanges' short sale rules, the new rule provides an exception for 
    bona fide market making activities.\3\ However, in order to use the 
    exception, the burden is on the specialist, market maker or odd-lot 
    dealer to show that the sale was indeed part of bona fide market making 
    activities. In addition, as a monitoring tool, the new short sale rule 
    requires a specialist, market maker or odd-lot dealer to notify the 
    Exchange whenever he accumulates a position (long or short) in a 
    security that is greater than or equal to 5% of the outstanding public 
    float of the security.
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        \3\See, e.g., New York Stock Exchange Rule 440C.10, 
    Interpretation 01 (Short Sales).
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        The Exchange also proposes to add new rules under Article VII to 
    give the President of the Exchange greater flexibility and a greater 
    ability to take summary action against a member if the President has 
    reasonable grounds to believe that the member is in violation of, and 
    will continue to violate Exchange Rules. This expands the President's 
    ability to take summary action, which currently applies primarily to 
    situations where the member has financial or operational difficulties. 
    Under the proposed rules, the summary action could include a 
    suspension, or a limitation on the member's activities or a limitation 
    on the member's access to Exchange services. Because of the summary 
    nature of the action that will be permitted by the proposed rules, the 
    Exchange's proposed rules also contain provisions for an expedited 
    appeal, requiring, among other things, that the appeal be heard within 
    ten (10) days.\4\
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        \4\The proposed rule provides that the President, within two 
    business days of taking summary action, furnish the member with a 
    written statement setting forth the reasons and specific grounds 
    that constitute the basis for the action. The proposed rule also 
    provides that the member affected may make a request for an appeal 
    by filing a written notice of appeal with the Secretary of the 
    Exchange within five days after notification of the President's 
    action. Appeals filed under the proposed rule must be considered and 
    decided by a panel appointed by the Board, composed of three members 
    of the Board, within ten days. After consideration of the appeal, 
    the panel, by majority vote, affirms, reverses, or modifies the 
    action upon which the appeal was made. All decisions of the panel 
    are final.
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        The proposed rules also adopt a formal standard of review for the 
    hearing of appeals. Currently, there is no articulated standard of 
    review contained in the Exchange's rules. The standard in the proposed 
    rules prohibits an appeal panel from overturning the fact finder's 
    decision if the factual conclusions in that decision are supported by 
    substantial evidence and if the decision itself is not arbitrary, 
    capricious or an abuse of discretion.
        The proposed rules also add provisions relating to Exchange 
    liability and suits filed against the Exchange and its employees. 
    Current Exchange rules limit liability against the Exchange as a result 
    of a member's use or enjoyment of the Exchange facilities.\5\ The rules 
    of MBS Clearing Corporation limit its liability to members to a broader 
    extent.\6\ The proposed rules limit the liability of the Exchange to 
    its members to situations where the Exchange has acted willfully or 
    with gross negligence.\7\
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        \5\See Article X, section 2 of the CHX's Constitution.
        \6\See Article V, Rule 6, section 1 of the MSB Clearing 
    Corporation's By-Laws limits the Corporation's liability to 
    situations where it has acted willfully or with gross negligence.
        \7\The Commission notes that the proposed rule purports to limit 
    the liability of the Exchange to third parties, as well as to 
    Exchange members. The following is the text of the proposed rule:
        The Exchange shall use its best efforts to perform its duties 
    and responsibilities in the manner specified in the Rules but shall 
    have no liability to any member or any third party for any loss, 
    cost, expense, damage or liability for nonperformance or 
    misperformance of such duties and responsibilities, except to the 
    extent that it is attributable to the willful misconduct, gross 
    negligence, bad faith, or fraudulent or criminal acts of the 
    Exchange or its officers, employees or agents.
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        The possibility of this type of suit against individual staff 
    members of the Exchange when they are acting on Exchange business makes 
    it impossible for such persons to perform their duties. The proposed 
    rule also prohibits a member form suing any officer, director, employee 
    or agent of the Exchange or any of its subsidiaries or any other 
    Exchange official, if such person is acting on Exchange business or 
    business of any of its subsidiaries. This proposed rule does not, 
    however, prohibit a member from suing the Exchange as a result of the 
    actions of these individuals; rather, it merely prohibits suits against 
    the persons in his or her individual capacity.\8\
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        \8\The following is the text of the proposed rule:
        No member or member organization shall institute a lawsuit or 
    any other type of legal proceeding against any officer, director, 
    employee or agent of the Exchange or any of its subsidiaries or any 
    other Exchange official, if such person is acting on Exchange 
    business or business of any of its subsidiaries except for as 
    violation of the federal securities laws and except, with respect to 
    Governors of the Exchange to the extent inconsistent with the 
    Exchange's Certificate of Incorporation.
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        In addition, the proposed rule adds a provision that requires a 
    member who fails to prevail in a legal proceeding instituted by that 
    member against CHX or other specified parties\9\ to pay all reasonable 
    expenses, including attorneys' fees, incurred by CHX in defense of such 
    proceeding. This requirement to pay CHX's expenses, however, is only 
    triggered if CHX's expenses exceed twenty thousand dollars ($20,000). 
    This will minimize the impact of this new rule for small members that 
    pursue claims against CHX but do not prevail at an early stage. When in 
    place, the rule will serve to discourage frivolous and harassment-type 
    suits against CHX.
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        \9\The proposed rule would apply to legal proceeding instituted 
    by members against the Exchange or any of its officers, directors, 
    committee members, employees or agents, and specifically would not 
    apply to internal disciplinary actions or administrative appeals.
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        Finally, the Exchange proposes to amend Article VIII to make 
    conduct inconsistent with the maintenance of a fair and orderly market 
    or the protection of investors a violation of Exchange Rules.
    2. Statutory Basis
        The proposed rule change is consistent with section 6(b)(5) of the 
    Securities Exchange Act of 1934 in that it is designed to promote just 
    and equitable principles of trade and to protect investors and the 
    public interest, and is not designed to permit unfair discrimination 
    between customers, issuers, brokers or dealers.
    
    B. Self-Regulatory Organization's Statement on Burden on Competition
    
        The Exchange believes that no burden will be placed on competition 
    as a result of the proposed rule change.
    
    C. Self-Regulatory Organization's Statement on Comments on the Proposed 
    Rule Change Received From Members, Participants, or Others
    
        No comments were received.
    
    III. Date of Effectiveness of the Proposed Rule Change and Timing for 
    Commission Action
    
        Within 35 days of the publication of this notice in the Federal 
    Register or within such other 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 date, views and 
    arguments concerning the foregoing. Persons making written submissions 
    should file six copies thereof with the Secretary, Securities and 
    Exchange Commission, 450 Fifth Street NW., Washington, DC 20549. Copies 
    of the submission, all subsequent amendments, all written statements 
    with respect to the proposed rule change that are filed with the 
    Commission, and all written communications relating to the proposed 
    rule change between the Commission and any person, other than those 
    that may be withheld from the public in accordance with the provisions 
    of 5 U.S.C. 552, will be available for inspection and copying at the 
    Commission's Public Reference Section, 450 Fifth Street, NW., 
    Washington, DC 20549. Copies of such filing will also be available for 
    inspection and copying at the principal office of the CHX. All 
    submissions should refer to File No. SR-CHX-93-31 and should be 
    submitted by June 28, 1994.
    
        For the Commission, by the Division of Market Regulation, 
    pursuant to delegated authority.
    Margaret H. McFarland,
    Deputy Secretary.
    [FR Doc. 94-13776 Filed 6-6-94; 8:45 am]
    BILLING CODE 8010-01-M
    
    
    

Document Information

Published:
06/07/1994
Department:
Securities and Exchange Commission
Entry Type:
Uncategorized Document
Document Number:
94-13776
Pages:
0-0 (1 pages)
Docket Numbers:
Federal Register: June 7, 1994, Release No. 34-34142, File No. SR-CHX-93-31