[Federal Register Volume 59, Number 108 (Tuesday, June 7, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-13776]
[[Page Unknown]]
[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