[Federal Register Volume 61, Number 185 (Monday, September 23, 1996)]
[Notices]
[Pages 49803-49805]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-24299]
[[Page 49803]]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37690; File No. SR-CHX-96-11]
Self-Regulatory Organizations; Chicago Stock Exchange, Inc.;
Order Granting Approval to Proposed Rule Change Relating to
Examinations
September 17, 1996.
I. Introduction
On March 6, 1996, 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, on March 18, 1996, filed
Amendment No. 1 to the proposed rule change,\3\ and on April 4, 1996,
filed Amendment No. 2 to the proposed rule change,\4\ to amend Rules 2
and 3 of Article VI (and the interpretations and policies thereunder)
to clarify existing rules, adopt a new Floor Membership Exam, adopt a
new Market Maker Exam, adopt a new Co-Specialist Exam, and adopt
examinations applicable to persons conducting a customer business from
the CHX trading floor. The Exchange also proposed to adopt the Content
Outline for the Examination Module for Floor Members Engaged in a
Public Business with Professional Customers and the Content Outline for
the Examination Module for Floor Clerks of Members engaged in a Public
Business with Professional Customers (collectively, the ``Content
Outlines'').\5\ The proposed rule change, Amendment No. 1, and
Amendment No. 2 were published for comment in Securities Exchange Act
Release No. 37067 (April 4, 1996), 61 FR 16274 (April 12, 1996). One
comment was received on the proposal.\6\ On June 3, 1996, in response
to Comment Letter No. 1, the Exchange submitted to the Commission
Amendment No. 3 to the proposed rule change.\7\ Amendment No. 3
clarifies the proposed amendments to Rule 2 of Article VI. Amendment
No. 3 was published for comment in Securities Exchange Act Release No.
37324 (June 18, 1996), 61 FR 32872 (June 25, 1996). One comment was
received on the proposal.\8\ The CHX submitted a response letter
supporting its proposal and responding to Comment Letter No. 2.\9\ For
the reasons discussed below, the Commission has decided to approve the
CHX's proposal.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Letter from David T. Rusoff, Foley & Lardner, to Elisa
Metzger, SEC dated March 14, 1996 (``Amendment No. 1'').
\4\ See Letter from Charles R. Haywood, Foley & Lardner, to
Elisa Metzger, SEC dated April 4, 1996 (``Amendment No. 2'').
\5\ The Exchange will use the Series 7A Examination and the
respective Content Outline that was approved in Securities Exchange
Act Release No. 32698 (July 29, 1993), 58 FR 41539 (File No. SR-
NYSE-93-10). The Exchange will use the Series 7B Examination and the
Respective Content Outline that was approved in Securities Exchange
Act Release No. 34334 (July 8, 1994) 59 FR 35964 (File No. SR-NYSE-
94-13). The Series 7A and 7B Examinations for CHX members will be
administered by the National Association of Securities Dealers, Inc.
(``NASD'').
\6\ See Letter from C. Philip Curley, Robinson Curley & Clayton,
P.C., to Jonathan G. Katz, Secretary, SEC dated May 2, 1996
(``Comment Letter No. 1'').
\7\ See Letter from David Rusoff, Foley & Lardner, to Elisa
Metzger, SEC dated May 31, 1996 (``Amendment No. 3'').
\8\ See Letter from C. Philip Curley, Robinson Curley & Clayton,
P.C., to Jonathan G. Katz, Secretary, SEC dated July 15, 1996
(``Comment Letter No. 2'').
\9\ See Letter from David Rusoff, Foley & Lardner, to Elisa
Metzger, SEC dated July 24, 1996.
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II. Description of the Proposals
CHX Rule 3, Article VI authorizes the Exchange to require the
successful completion of an examination in connection with the
registration of partners, officers, options principals, branch office
managers and registered representatives of member firms and member
corporations. Pursuant to this Rule, in 1987 the Commission approved
the use of the General Securities Registered Representative Examination
(``Series 7 Exam'') by the CHX to qualify persons seeking registration
as general securities representatives. The purpose of the proposed rule
change is to: (1) Adopt the requirement that members located on the
floor of the CHX who wish to accept orders directly from the public
must take and pass the Series 7 Exam; (2) allow members located on the
floor of the CHX to accept orders directly from professional customers
\10\ for execution on the trading floor without taking the Series 7
Exam so long as they take and pass the Series 7A Exam; (3) allow floor
clerks/floor employees to accept orders from professional customers in
support of members or member organizations previously approved to
conduct a public business so long as they take and pass the Series 7B
Exam; \11\ (4) codify the existing requirement that all potential floor
members successfully complete a ``Floor Membership Exam''; (5) codify
the existing requirement that all potential market makers successfully
complete a ``Market Maker Exam'' in addition to the Floor Membership
Exam; and (6) codify the existing requirement that all potential co-
specialists successfully complete a ``Co-Specialist'' Exam in addition
to the Floor Membership Exam.
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\10\ The proposal defines a professional customer to include: A
bank; trust company; insurance company; investment trust; state or
political subdivision thereof; charitable or nonprofit educational
institution regulated under the laws of the United States or any
state or pension or profit sharing plan subject to ERISA or of an
agency of the United States or of a state or a political subdivision
thereof; or any person who has, or has under management, net
tangible assets of at least sixteen million dollars. As used in this
definition, the term ``person'' would not include natural persons.
\11\ To minimize any burden imposed by the Series 7, Series 7A
and Series 7B exam requirements, the Exchange will phase-in these
new requirements over a designated period of time after the proposed
rule change has been approved. This will provide persons subject to
the exam with an opportunity to study for and take the new
examination without unnecessary business disruptions. The phase-in
period is as follows: Members who were not required to successfully
complete the Series 7 or Series 7A exam prior to approval of this
rule change and floor clerks/floor employees subject to the Series
7B exam will have 180 days from the effective date of this proposed
rule change to take the appropriate exam. In the event the member or
floor clerk/floor employee fails such examination, such member or
floor clerk/floor employee must, nonetheless, successfully complete
such examination within 270 days from the effective date of this
proposed rule change.
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The proposed rule change also clarifies current Exchange
requirements for registering personnel and makes technical changes to
the registration procedure. The proposed rule change adds a definition
of ``control person'' to Article VI, Rule 2 and specifies that all such
persons at members and member organizations must be acceptable to the
Exchange. A ``control person'' is defined as:
[A] person with the power, directly or indirectly, to direct the
management or policies of a company whether through ownership of
securities, by contract or otherwise, and at a minimum, means all
directors, general partners or officers exercising executive
responsibility (or having similar status or functions), all persons
directly or indirectly having the right to vote 5% or more of a
class of a voting security or having the power to sell or direct the
sale of 5% or more of a class of voting securities, or in the case
of a partnership, having the right to receive upon dissolution, as
having contributed, 5% or more of the capital.\12\
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\12\ In the original filing, the proposed amendment required
that all control persons and certain shareholders be acceptable to
the Exchange. Amendment No. 3 deleted the reference to ``certain
shareholders'' and amended the definition of ``control person'' to
include those persons who directly or indirectly have the right to
vote or sell 5% or more of a class of voting security, as opposed to
10% or more of a class of voting security. Amendment No. 3 also
clarified that in the case of a partnership, a ``control person''
would include those persons who have the right to receive upon
dissolution, as having contributed 5%, as opposed to 10%, or more of
the capital.
Additionally, the proposed change clarifies that nominees of member
firms must be registered with the Exchange.
Rule 2 of Article VI requires members of member organizations that
know or in
[[Page 49804]]
the exercise of reasonable care should know that any prospective
employee is subject to one or more statutory disqualifications to
submit details on such prospective employee to the Exchange and receive
Exchange approval before such person becomes associated with the member
or member organization. Rule 2 also requires that each member or member
organization take reasonable care to determine the existence of a
statutory disqualification prior to employing any prospective employee.
Further, if any person already employed by a member or member
organization thereafter becomes subject to a statutory
disqualification, notice must be sent to the Exchange promptly.
Amendment No. 3 clarifies that these provisions are applicable to
control persons as well as employees of members or member
organizations.
Rule 2 of Article VI states that ``[e]very other employee of a
member or member organization must also be acceptable to the
Exchange.'' Amendment No. 3 explains the application of the standard
``acceptable to the Exchange'' to control persons. In the proposed rule
change, the Exchange states that the ``acceptable to the Exchange''
standard will apply to control persons in the same manner as it has
applied that standard to employees of members or member organizations
in the past since the rule was first adopted.\13\ The filing also makes
technical changes to Rule 2 of Article VI. In this regard, the filing
changes the term ``Form B/D'' to ``Form BD,'' changes ``Schedule D'' to
Schedule DRP,'' and changes ``Series VII'' to ``Series 7'' to conform
to recent changes in the names of those forms. In addition, the filing
changes the term ``exchange'' to ``self-regulatory organization'' in
order to include within the language of the rule self-regulatory
organizations that do not meet the statutory definition of
``exchange,'' such as the National Association of Securities
Dealers.\14\ The filing moves Interpretation and Policy .01, .02, and
.03 from Rule 3 of Article VI to Rule 2 of that Article \15\ and moves
the location of a portion of Interpretation and Policy .02(b) of Rule 2
relating to options to another location in the same interpretation. The
proposed rule change revises Interpretation and Policy .01 (2) of Rule
2, Article VI to delete the requirement that a Notice of Acceptance of
Registration Form from the NASD be submitted to the Exchange because
this form no longer exists. The proposed rule change also deletes
Interpretation and Policy .01(3) of Rule 2, Article VI because revised
Interpretation and Policy .01 gives the Exchange the authority to
permit firms to submit revised forms directly to any SRO. Thus, the
carve-out for NYSE member firms provided for in this interpretation is
no longer needed.\16\
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\13\ While the Exchange has not had to apply this standard in
recent years, the Exchange might apply it if, for example, a
prospective employee or control person is subject to a statutory
disqualification or if the person, while not subject to a statutory
disqualification, is barred from the banking industry because he or
she stole from customers. See supra note 7.
\14\ The term ``self-regulatory organization'' is to have the
statutory meaning. See Amendment No. 2.
\15\ In Interpretation and Policy .02, the change from ``would
be'' to ``are'' is a stylistic change intended to make no
substantive alteration in the rule. See Amendment No. 2.
\16\ In the original filing, the proposed amendments to Rule 2
of Article VI stated that upon notice to a member or member
organization that the President of the Exchange has withheld or
withdrawn approval of the employment of any other person, the
relationship between the member or member organization and such
person shall be terminated. Amendment No. 3 deletes the reference to
``the employment of'' any such other person.
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The proposed rule change also revises Rule 2 of Article VI,
Interpretation and Policy .01 to clarify the procedures to be followed
when registering persons with the Exchange. Specifically, a member firm
that registers persons with the Exchange must submit, among other
things, a completed Form U-4 for such individual to the Exchange (or to
another SRO designated by the Exchange). The member firm must also
submit an amended Form BD for the firm if the individual's registration
requires the Form BD to be amended. Additionally, the member firm must
update its Form BD and Form U-4s whenever information on those Forms
becomes inaccurate or incomplete.
Finally, the filing proposes to amend Rule 3 of Article VI to
clarify that the examinations and training courses required by the rule
apply to individual members as well as persons at member firms and
member organizations.
III. Summary of Comments
The Commission received two comment letters regarding the
amendments to Article VI, Rule 2, regarding the registration
requirements for personnel. As stated above, in the original filing,
the proposed amendment to Article VI, Rule 2, would have required that
``Every other employee of, any control person, and certain shareholders
of, a member or member organization must also be acceptable to the
Exchange.'' In Comment Letter No. 1, the commenter stated that the term
``certain shareholders'' was not defined. In addition, the commeter
stated that the phrase ``acceptable to the Exchange'' was too vague a
standard. In response, the CHX amended the original filing and deleted
the term ``certain shareholders.'' In the amended filing, the CHX
provided examples of circumstances in which an individual would not
meet the ``acceptable to the Exchange'' requirement.\17\
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\17\ See supra note 13.
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In comment Letter No. 2, the commenter re-asserted its comment that
the ``acceptable to the Exchange'' language is too vague. In response
to Comment Letter No. 2, the CHX claims that Comment Letter No. 2
restates some of the same concerns that were raised in Comment Letter
No. 1 and that the CHX believes it fully addressed those comments in
the amended filing.
Dissussion
After careful consideration of the comments and the CHX response
thereto, the Commission has determined to approve the proposed rule
change. For the reasons discussed below, 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
Sections 6(b)(5) and 6(c)(3)(B) of the Act.\18\ In particular, 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, remover impediments to and perfect
the mechanism of a free and open market and a national market system,
to prevent fraudulent and manipulative acts, and, in general, to
protect investors and the public. Section (6)(c)(3)(B) provides that a
national securities exchange may examine and verify the qualifications
of an applicant to become a person associated with a member in
accordance with procedures established by the rules of the exchange,
and require any person associated with a member, or any class of such
persons, to be registered with the exchange in accordance with
procedures so established.
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\18\ 15 U.S.C. 78f(b)(5) and (c)(3)(B).
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The Commission also believes that the proposed rule changes are
consistent with Section 15(b)(7) of the Act,\19\ which stipulates that
prior to effecting any transaction in, or inducing the purchase or sale
of, any security, a registered broker or dealer must meet certain
standards of operational capability, and that such broker or dealer
(and all natural persons associated with such broker or dealer)
[[Page 49805]]
must meet certain standards of training, experience, competence, and
such other qualifications as the Commission finds necessary or
appropriate in the public interest or for the protection of investors.
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\19\ 15 U.S.C. 78o(b)(7).
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Series 7, Series 7A, and Series 7B Exams
The proposed interpretation and policy to Rule 3 of Article VI will
clarify and put all persons on notice that any person who conducts a
public business is required to be registered and qualified as a
registered representative. Such registration would require, among other
things, that a person complete the Series 7 Exam, as described in
Interpretation and Policy .01(d) to Rule 3 of Article VI. Likewise, the
proposed interpretation and policy will put all persons on notice that
any person who accepts orders directly from professional customers for
execution on the trading floor is required to complete a Series 7A Exam
or Series 7B Exam.
The Commission believes that the Series 7A Exam and Series 7B Exam
requirements should help to ensure that only those floor members and
floor clerks/floor employees with a comprehensive knowledge of Exchange
rules, as well as an understanding of the Act, will be able to conduct
a public business limited to accepting orders directly from
professional customers for execution on the trading floor. The
Commission has determined that the Content Outlines for the Series 7A
Exam and the Series 7B Exam are sufficiently detailed and cover the
appropriate information so as to provide an adequate basis for studying
the topics covered on the Exam.\20\ These outlines should help to
ensure that those persons taking the Series 7A Exam or Series 7B Exam
fully understand the subject matter of those exams.
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\20\ See supra note 5.
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The Commission has determined that the proposed limited
registration requirements for floor members and floor clerks/floor
employees who accept orders from professional customers is reasonable
and is consistent with the requirements of Sections 6(b)(5) and
6(c)(3)(B) of the Act. These new categories of registration would
permit only those floor members and floor clerks/floor employees who
have demonstrated adequate skills and knowledge to conduct a public
business which is generally limited to accepting orders directly from
professional customers, as defined in the interpretation and
policy,\21\ for execution on the trading floor. The CHX has argued that
the level of knowledge, skills and abilities necessary to conduct such
business is less than that needed to conduct a full service business
with retail customers. The Commission believes that, because the CHX
will ensure that floor members handling professional customer business
are adequately qualified through the use of either the Series 7 Exam,
Series 7A Exam, or Series 7B Exam, it is consistent with the CHX's
regulatory responsibilities to establish this category of limited
registration.
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\21\ See supra note 10.
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General Membership, Market Maker, and Co-specialist Exams
The Commission believes that codification of the existing
requirements that all: (1) Potential floor members successfully
complete the Floor Membership Exam; (2) potential market makers
successfully complete the Market Maker Exam in addition to the Floor
Membership Exam; and (3) co-specialists successfully complete the Co-
specialist Exam, will clarify and put all such persons on notice of
such requirements. In addition, the Commission believes that these
exams will help to ensure that only those members with basic trading
knowledge and ability will have a floor presence. Similarly, the Market
Maker Exam and the Co-specialist Exam should help to ensure that only
those members that have an understanding of market makers' and co-
specialists' duties and obligations will be permitted to conduct such
functions.
Registration of Personnel
The Commission has determined that the proposal that nominees of
member firms must be registered with the Exchange is consistent with
Section 6(c)(3)(B) of the Act, which permits a national securities
exchange to examine and verify the qualifications of an applicant to
become a person associated with a member, and require any such person
to be registered with the exchange in accordance with procedures so
established.
The Commission also believes that the requirement that any
``control person'' must be acceptable to the Exchange is consistent
with Section 15(b)(7) of the Act \22\ which stipulates that all natural
persons associated with a registered broker or dealer must meet certain
standards of training, experience, competence, and such other
qualifications as the Commission finds necessary or appropriate in the
public interest or for the protection of investors. While Comment
Letters No. 1 and 2, assert that this is too vague a standard, all
employees of members or member organizations currently are subject to
this standard. Amendment No. 3 would hold control persons to the same
standard as other employees. Further in Amendment No. 3, the Exchange
described the parameters of this standard. For example, the Exchange
would find a person unacceptable if such person was barred from the
banking industry because he or she stole from customers. The Commission
has determined that the Exchange has adequately addressed the
commenter's criticism of this provision.
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\22\ 15 U.S.C. 78o(b)(7).
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The proposal also requires that a member or member organization
must take reasonable care to determine the existence of a statutory
disqualification of any prospective control person, report any such
statutory disqualifications of prospective control persons to the
Exchange, submit details on the statutory disqualification of the
prospective control person to the Exchange, and receive Exchange
approval before such person becomes associated with the member or
member organization. Further, if any control person already employed by
a member or member organization becomes subject to a statutory
disqualification, notice must be sent to the Exchange promptly. The
Commission believes this is consistent with Section 6(c)(3)(B) of the
Act in that the CHX is verifying the qualifications of a person
associated with a member or member organization.
The Commission has determined that the technical changes to Rules 2
and 3 of Article VI are consistent with the requirements of Section
6(b)(5) of the Act in that such changes merely update the rules to
conform to current industry practice. For example, the filing changes
the term ``Form B/D'' to ``Form BD,'' and changes ``Schedule D'' to
``Schedule DRP'' to conform to recent changes in the names of those
forms.
V. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\23\ that the proposed rule change (SR-CHX-96-11), including
Amendments No. 1, 2, and 3, is approved.
\23\ 15 U.S.C. 78s(b)(2).
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For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\24\
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\24\ 17 CFR 200.30-3(a)(12).
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Jonathan G. Katz,
Secretary.
[FR Doc. 96-24299 Filed 9-20-96; 8:45 am]
BILLING CODE 8010-01-M
