[Federal Register Volume 59, Number 165 (Friday, August 26, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-21060]
[[Page Unknown]]
[Federal Register: August 26, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-34563; File No. SR-CHX-94-15]
Self-Regulatory Organizations; Chicago Stock Exchange, Inc.;
Order Granting Accelerated Approval to Proposed Rule Change and
Amendment No. 1 to Proposed Rule Change Relating to Corporate
Governance Issues
August 19, 1994.
On June 23, 1994, the Chicago Stock Exchange, Inc. (``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 amend certain provisions of
its Constitution relating to corporate governance issues. On June 30,
1994, the Exchange submitted to the Commission Amendment No. 1 to the
proposed rule change in order to narrow the scope of the original
filing.\3\
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\1\15 U.S.C. 78s(b)(1) (1988).
\2\17 CFR 240.19b-4 (1991).
\3\See letter from David T. Rusoff, Attorney, Foley & Lardner,
to Sandra Sciole, Special Counsel, Division of Market Regulation,
SEC, dated June 29, 1994 (``Amendment No. 1'').
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The proposed rule change, including Amendment No. 1, was published
for comment in Securities Exchange Act Release No. 34379 (July 14,
1994), 59 FR 37110 (July 20, 1994). No comments were received on the
proposal. This order approves the proposed rule change on an
accelerated basis.
The CHX's Board of Governors (``Board'') is responsible for
managing the business of the Exchange and is vested with all the 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.\4\ Currently, the
Board consists of twenty-four elected Governors, plus the Vice Chairman
of the Board and the President of the Exchange.\5\ Of the twenty-four
Governors, sixteen must be members, general partners of member firms or
officers of member corporations (``member Governors''); and eight must
be unaffiliated with the Exchange or any broker-dealer in securities
(``non-member Governors'').\6\ The CHX Constitution also requires that
nine of the sixteen member Governors be from the Chicago area, at least
three of whom must be active on the floor of the Exchange, and that
seven member Governors be from outside the Chicago area.\7\
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\4\See Article III, Sec. 1 of the CHX Constitution.
\5\See Article III, Sec. 2 of the CHX Constitution. The Chairman
of the Board is appointed by the Board from among the elected
Governors. Id. Since 1992, the Chairman has served in a non-
management capacity and has been primarily responsible for Board
oversight of management performance. See 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). The Vice Chairman
of the Board is elected by the membership and must be active on the
floor of the Exchange. See Art. III, Sec. 2 of the CHX Constitution.
The Vice Chairman has the power, subject to Board approval, to
appoint individuals to serve on certain Exchange committees. See
Art. VI, Sec. 3 of the CHX Constitution. Finally, the President of
the Exchange is appointed by the Board to serve at its pleasure. The
President is the chief executive officer of the Exchange and cannot
be a member or affiliated with a member organization during his or
her incumbency. See Art. VI, Sec. 4 of the CHX Constitution.
\6\See Article III, Sec. 2 of the CHX Constitution. For purposes
of Board elections, the twenty-four Governors are divided into three
classes, as follows: there are five member Governors and three non-
member Governors in Classes I and III; there are six member
Governors and two non-member Governors in Class II. Id.
\7\See Article IV, Sec. 4(b)(i) of the CHX Constitution.
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The CHX proposes to amend its Constitution to achieve a governance
structure under which the Exchange and its wholly-owned subsidiaries,
the Midwest Clearing Corporation (``MCC'') and the Midwest Securities
Trust Company (``MSTC''),\8\ will be able to operate as a single,
coherently run business.\9\ In effect, the proposed rule change will
enable the same individuals to serve on the Boards of the Exchange, MCC
and MSTC.
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\8\For discussion of corresponding amendments to the By-Laws of
MCC and MSTC, see Securities Exchange Act Release No. 34427 (July
21, 1994), 59 FR 38653 (July 29, 1993) (File Nos. SR-MCC-94-07 and
SR-MSTC-94-09) (``MCC/MSTC Proposal'').
\9\The CHX has indicated, however, that the Exchange and its
subsidiaries will continue to be separate legal entities. Telephone
conversation between David T. Rusoff, Attorney, Foley & Lardner, and
Beth A. Stekler, Attorney, Division of Market Regulation, SEC, on
August 10, 1994.
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Under the proposed amendments to the CHX Constitution, five
Governors will be added to the Exchange's Board, for a total of twenty-
nine elected Governors plus the Vice Chairman and the President.\10\
The proposed rule change also will create a new category of Governor to
represent MCC and MSTC participants in the governance process.\11\
Thus, upon approval and implementation of these proposals, the Board
will include one additional non-member Governor and four Governors who
are general partners or officers of a participant of MCC or MSTC
(``participant Governors'').\12\
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\10\The proposed rule change will not affect the powers of the
CHX Board, see supra note 4 and accompanying text, or the method of
selection and duties of the Exchange's senior officers. See supra
note 5.
\11\The Exchange has proposed conforming changes to other
Constitutional provisions in order to reflect the creation of the
new participant Governor category. See, e.g., Article IV, Sec. 5
(``Limitation on Service'') and Sec. 7 (``Nominations by Members'').
\12\The five new Governors will be divided among the three
classes, see supra note 6, as follows: there will be one participant
Governor in Classes I and II, and two participant Governors in Class
III; the additional non-member Governor will be placed in Class II.
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In terms of their qualifications, participant Governors must have
securities clearance and/or settlement expertise, background or
responsibilities. To ensure that floor members are not over-represented
on the Board, the Exchange has stated that management will use its best
efforts to ensure that the newly created participant Governor positions
will not initially or thereafter be filled by floor members.\13\
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\13\In the event that a floor member is elected to fill a
participant Governor position, the Exchange has stated that it will
promptly notify the Commission. In addition, if the Exchange's best
efforts do not succeed in ensuring that floor members do not fill
participant Governor positions, the Exchange is committed to revisit
this issue. See letter from David T. Rusoff, Attorney, Foley &
Lardner, to Sharon Lawson, Assistant Director, Division of Market
Regulation, SEC, dated July 8, 1994 (``July 8 Letter'').
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Finally, the Exchange proposes to allow a participant Governor to
be re-categorized as a member Governor, or a member Governor to be re-
categorized as a participant Governor, so long as both positions are
within the same class.\14\ The proposed rule change will provide this
increased flexibility only if the Governor being recategorized
otherwise meets the qualifications for his or her new position.
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\14\See supra, notes 6 and 14. According to the Exchange, the
President will recommend and the Board (or Executive Committee) must
approve the recategorization of a Governor. The CHX has stated that,
after initial implementation of the proposed rule change, the
recategorization provision mainly will be used to help fill
vacancies on the Board. Telephone conversation between David T.
Rusoff, Attorney, Foley & Lardner, and Beth A. Stekler, Attorney,
Division of Market Regulation, SEC, on August 17, 1994. A
recategorization will not affect the qualifications for serving in a
given Board position or the length of the Governor's term.
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According to the CHX, the proposed rule change is consistent with
Section 6(b)(5) of the Act in that it is designed to promote just and
equitable principles of trade, to remove impediments and perfect the
mechanism of a free and open market and a national market system and,
in general, to protect investors and the public interest.
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, and, in
particular, with the requirements of Section 6(b).\15\ In particular,
the Commission believes the proposal is consistent with Sections
6(b)(1), 6(b)(3) and 6(b)(5) of the Act. Section 6(b)(1) of the Act
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 that the rules of an exchange assure the
fair representation of its members in the selection of its directors
and administration of its affairs and provide that one or more
directors represent issuers and investors and not be associated with a
member of the exchange or a broker-dealer. Finally, Section 6(b)(5) of
the Act requires, among other things, that the rules of an exchange be
designed, in general, to protect investors and the public interest.
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\15\15 U.S.C. 78f(b) (1988).
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In the Commission's opinion, changes in the composition of the
board of governors of a national securities exchange typically raise
difficult regulatory issues, due to the board's special role and
responsibilities in managing the business of an exchange and in
ensuring that the exchange fulfills its obligations under the Act.\16\
Accordingly, before the Commission can approve a proposed board
reorganization, the Commission must be satisfied that all exchange
constituencies, including the public, are fairly represented in its
governance.\17\
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\16\For discussion of the powers of the CHX Board, see supra,
notes 4-5 and accompanying text.
\17\The Commission previously has indicated that allowing a
single constituency to dominate exchange governance may be
inconsistent with the requirements of the Act. See, e.g., Securities
Exchange Act Release No. 22058 (May 21, 1985), 50 FR 23090 (May 30,
1985) (File Nos. SR-CBOE-84-15 and SR-CBOE-84-16) (disapproving
proposed rule change to increase the minimum number of floor
directors on the Board of the Chicago Board Options Exchange
(``CBOE'') and approving proposed rule change to provide for
election of a floor member to be the CBOE's Executive Committee
Chairman) (``CBOE Order''). See also Securities Exchange Act Release
Nos. 31633 (December 22, 1992), 57 FR 62402 (December 30, 1992)
(File Nos. SR-MSE-92-12 and SR-MSE-92-13) (approving proposed rule
change to increase diversity of representation on the Exchange's
Nominating Committee, Executive Committee and Audit Committee, to
limit the position of Vice Chairman to floor members and to revise
the duties of the Exchange's other senior officers) (``1992 Exchange
Order''); and 33901 (April 12, 1994), 59 FR 18586 (April 19, 1994)
(File No. SR-CHX-93-28) (approving proposed rule change to provide,
among other things, more flexibility in the appointment of Governors
to the Executive and Finance Committees).
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After careful review, the Commission believes that the CHX proposal
should allow the Exchange and its subsidiaries to operate more
efficiently. In addition, the Commission has concluded that the
proposed rule change strikes an appropriate balance between the various
constituencies of the CHX\18\ and, therefore, is consistent with the
Act's requirements. The Commission's reasons for reaching these
conclusions are set forth in more detail below.
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\18\For purposes of this order, the Commission has limited its
discussion to the adequacy of representation of Exchange
constituencies (i.e., the public, floor members and ``upstairs''
members). For further discussion of the adequacy of representation
of participants, see MCC/MSTC Proposal, supra note 8.
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The Commission recognizes that the CHX and its clearing corporation
and trust company subsidiaries generally are viewed as parts of one
``Exchange complex.'' Among other things, the CHX, MCC and MSTC share
certain facilities, systems and financial services.\19\ Under the
current governance structure, however, the CHX has found that having
different Governors serve on the Board of each organization can
complicate strategic planning for the ``complex'' and may create
certain inefficiencies in the development and implementation of
policy.\20\ In order to address these issues, the proposed rule change
will enable the same individuals to serve on the Board of the CHX and
its subsidiaries.\21\ The Commission therefore believes that the CHX
proposal should foster greater coordination in decision making among
the Exchange, MCC and MSTC.
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\19\Telephone conversation between David T. Rusoff, Attorney,
Foley & Lardner, and Beth A. Stekler, Attorney, Division of Market
Regulation, SEC, on August 17, 1994.
\20\Id.
\21\As noted above, however, the exchange, the clearing
corporation and the trust company will continue to be separate legal
entities and to hold separate Board meetings. See supra, note 9.
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More importantly for purposes of the Act's requirements, the
Commission finds that the new Board will continue to be representative
of the CHX and its various constituencies.\22\ Specifically, the
Commission has concluded that, as a practical matter, the proposed rule
change should maintain existing levels of public participation on the
CHX Board and should prevent floor domination of the governance of the
Exchange.\23\
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\22\As noted above, see supra note 18, the Commission's analysis
herein is limited to the impact of the proposed rule change on the
relative representation of the public, floor members and
``upstairs'' members on the CHX Board.
\23\Prior Commission decisions regarding corporate governance,
see supra note 17, largely have turned on these principles. See,
e.g., CBOE Order and 1992 Exchange Order.
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First, although the Commission would be concerned by a significant
increase in the proportion of securities professionals on an exchange's
board, the Commission does not believe that the CHX proposal favors
professionals at the expense of the public. The Commission notes that
the CHX Board presently consists of sixteen member (i.e., industry)
Governors and eight non-members (i.e., public) Governors. As amended,
four participant Governors and one non-member Governor will be added to
the Board, for a total of twenty industry and nine public
representatives. On that basis, the Commission agrees with the
Exchange's argument that the proposed rule change will, in effect,
maintain the current balance between those constituencies.\24\ The
Commission therefore finds that the CHX proposal is consistent with the
fair representation and the protection of investors and the public
interest.
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\24\Under the proposed reorganization, public Governors will
constitute 31% of the CHX Board, as opposed to 33% of the existing
Board, which is a minor change.
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Similarly, based on certain commitments made by the CHX, the
Commission is satisfied that the proposed rule change will not be used
as an indirect means to achieve floor domination of the Board. The
Commission recognizes that many MCC or MSTC participants are also CHX
members and, in that capacity, may be active on the floor of the
Exchange. Due to the Commission's long-standing concerns, Exchange
management has committed to use its best efforts to ensure that the
participant Governor positions will not be filled by floor members upon
implementation of the proposed rule change or in the future.\25\ The
Commission believes that these commitments should be sufficient to
prevent floor members' interests from being over-represented in the
governance of the Exchange. Finally, although the proposal will allow
Governors to be recategorized, the Commission expects the CHX to
exercise its discretion in a manner which is consistent with the above
commitments.\26\ On the conditions set forth above, the Commission is
satisfied that the Board composition should be sufficiently diverse for
it to carry out its obligations under the Act.
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\25\See July 8 letter, supra, note 13. In the event that a floor
member is elected to fill a participant Governor position, the
Exchange has stated that it will promptly notify the Commission. In
addition, if the Exchange's best efforts do not succeed in ensuring
that floor members do not fill participant Governor position, the
Exchange is committed to revisit this issue. Id.
\26\According to the CHX, because both positions must be in the
same class, see supra note 14, the recategorization of a Governor
will not affect (i.e., increase or decrease) the length of his or
her term. Telephone conversation between David T. Rusoff, Attorney,
Foley & Lardner, and Beth A. Stekler, Attorney, Division of Market
Regulation, SEC, on August 18, 1994. If the Board fills a vacancy
among the Governors, however, that individual only serves until the
next annual election meeting. See Art. III, Sec. 1 of the CHX
Constitution. If a recategorization creates a vacancy and that
vacancy is filled by the Board, the Exchange membership will retain
the right to elect a Governor to serve the remainder of that term.
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The Commission finds good cause for approving the proposed rule
change, including Amendment No. 1, prior to the thirtieth day after the
date of publication of the notice of filing thereof. The CHX proposal
is designed to achieve a more coherent governance structure while
maintaining fair representation of Exchange constituencies and
protecting investors and the public interest. Accelerated approval
thereof will allow these benefits to be realized as soon as possible.
In addition, the proposed rule change was published in the Federal
Register for the full statutory period and no comments were received on
any aspect of the proposal.
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\27\ that the proposed rule change (SR-CHX-94-15), including
Amendment No. 1, is approved on an accelerated basis.
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\27\15 U.S.C. 78s(b)(2) (1988).
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\28\
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\28\17 CFR 200.30-3(a)(12) (1992).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-21060 Filed 2-25-94; 8:45 am]
BILLING CODE 8010-01-M
