[Federal Register Volume 59, Number 75 (Tuesday, April 19, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-9318]


[[Page Unknown]]

[Federal Register: April 19, 1994]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-33901; File No. SR-CHX-93-28]

 

Self-Regulatory Organizations; Chicago Stock Exchange, Inc.; 
Order Granting Approval to Proposed Rule Change and Notice of Filing 
and Order Granting Accelerated Approval to Amendment No. 1 to Proposed 
Rule Change Relating to Corporate Governance Issues

April 12, 1994.

I. Introduction

    On October 21, 1993, 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 the Exchange's Charter, 
Constitution, and rules relating to corporate governance issues. On 
March 29, 1994, the CHX submitted Amendment No. 1 to the rule 
filing.\3\ Specifically, the changes concern: (i) The limitation of 
Governor monetary liability under Delaware law, (ii) providing more 
flexibility in setting the dates for the annual meeting and election, 
(iii) providing more flexibility in the number of Governors who can 
serve on the Executive and Finance Committees, and (iv) granting the 
President full voting powers on the Executive Committee.
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    \1\15 U.S.C. Sec. 78s(b)(1) (1988).
    \2\17 CFR 240.19b-4 (1993).
    \3\Letter from J. Craig Long, Foley & Lardner, to Katherine 
Simmons, Attorney, SEC, dated March 28, 1994. Amendment No. 1 
clarified certain language in the proposal.
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    The proposed rule change was published for comment in Securities 
Exchange Act Release No. 33318 (December 10, 1993), 58 FR 66042 
(December 17, 1993). No comments were received on the proposal. This 
order approves the proposed rule change as amended.

II. Description of the Proposal

Liability of Governors

    Delaware's General Corporation Law permits the adoption of a 
provision in the Certificate of Incorporation of a Delaware corporation 
that limits or eliminates the potential monetary liability of directors 
to the corporation or its shareholders by reason of their conduct as 
directors under certain circumstances. Such a provision does not apply 
to acts or omissions of directors occurring prior to the approval of 
the provision by shareholders and the filing of the amendment to the 
Certificate of Incorporation with the Secretary of State of Delaware.
    Because the CHX is a Delaware Corporation, the amendment to Article 
Eleventh of its Certificate of Incorporation is based on section 
102(b)(7) of the Delaware Corporations Code.\4\ Section 102(b)(7) 
permits corporations to include in their certificates of incorporation 
a provision limiting or eliminating the personal liability of directors 
to the corporation and its shareholders for monetary damages for a 
breach of their fiduciary duty. The statute does not permit the 
limitation or elimination of director's liability under the following 
circumstances: (1) A breach of the director's duty of loyalty, (2) acts 
or omissions not in good faith or which involve intentional misconduct 
or a knowing violation of the law, (3) unlawful payment of dividends or 
unlawful stock purchases or redemptions, or (4) any transaction from 
which the director derives an improper personal benefit.\5\ In 
addition, the statute does not permit the adoption of any provision 
that would eliminate or limit the liability of a director for any act 
or omission occurring prior to the date when such provision becomes 
effective.\6\
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    \4\Del. Code Ann. title 8, Sec. 102(b)(7) (1993).
    \5\Id.
    \6\Id.
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    The Delaware statute does not eliminate a director's fiduciary 
duty, but rather prevents the imposition of monetary damages in the 
event of a breach of that duty. Other legal remedies for breach of 
fiduciary duty, such as rescission and injunction, remain available 
under the Delaware provision.
    The amendment to the CHX's Certificate of Incorporation limits the 
liability of Governors to the fullest extent of Delaware Law. The 
amendment includes the exclusions from limited liability enumerated in 
Delaware section 207(b)(7) and adds an exclusion where liability arises 
directly or indirectly as a result of a violation of a federal 
securities laws. The amendment also eliminates Governor monetary 
liability for acts occurring after the amendment becomes effective to 
the fullest extent from time to time permitted by Delaware law, thus 
automatically incorporating any future statutory revisions limiting 
Governor liability.\7\
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    \7\A similar amendment to the Constitution was approved by the 
Board, the membership and the Securities and Exchange Commission in 
late 1989 and early 1990. Securities Exchange Act Release No. 27625 
(January 16, 1989), 55 FR 2470 (January 24, 1990). However, the 
requisite number of membership votes was not obtained to amend the 
Certificate of Incorporation under the then existing voting 
requirement. The CHX put the 1989 proposal to a vote of its members 
in 1990. At that time, the Exchange's rules requiring only a 
majority of the members present at a meeting to approve a change to 
the Constitution, while requiring a majority of the entire 
membership to approve changes to the Certificate of Incorporation. 
The Exchange was able to pass the amendment to the Constitution, but 
did not have sufficient votes to amend its Certificate of 
Incorporation. The discrepancy in the number of votes needed to 
amend the Constitution and the Certificate of Incorporation was 
removed in the Exchange's corporate restructuring which the 
Commission approved in 1992. Securities Exchange Act Release No. 
31633 (December 22, 1992), 57 FR 62402 (December 30, 1992). The 
standard for amending both the CHX's Constitution and Certificate of 
Incorporation is now a majority of the members present at a meeting.
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Annual Meeting and Election

    Instead of holding one annual meeting, the amendment to Article IV, 
section 2 of the CHX's Constitution provides for two annual meetings to 
be held in April: An annual election meeting and an annual report 
meeting. The Board will have the flexibility to annually determine on 
which business days in April to hold the meetings. The annual election 
meeting will be held to vote for Governors and the Nominating 
Committee. The annual report meeting will be held to provide 
management, the Board, and members an opportunity to discuss the 
previous year's results and current issues facing the Exchange. The 
Board could determine to have these meetings on the same day or 
different days in April.

Composition of the Executive and Finance Committees

    The amendment to Article V, Section 4 of the CHX's Constitution and 
Article IV, Rule 2 of its Rules provides that the specified number of 
Governors who may serve on the Executive and Finance Committees are 
minimums. Currently the Executive Committee is composed of 7 Board 
members plus the President and Chairman of the Board as ex-officio 
members.\8\ The Finance Committee is composed of 5 Board members plus 
the two ex-officio members. The number of Committee members could be 
increased if the Vice Chairman and the Board so determine.
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    \8\An ex-officio member is one who is the member of a board or 
committee by virtue of his or her title to a certain office.
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Voting Powers of the President and Chairman

    Article VI, Section 4 of the CHX's Constitution provides that the 
President is ``a member of the Board of Governors and an ex-officio 
member, without the right to vote, of all committees except the 
Nominating, Audit, and Compensation Committees.'' The rule change 
grants the president voting power on the Exchange's Committees of which 
he is an ex-officio member if so designated in the CHX's Constitution 
or Rules. The rule change to Article V, Section 4 of the CHS's 
Constitution grants the President full voting powers on the Executive 
Committee. In addition, the rule change adds Judiciary Committees and 
the Committee on Organization and Governance to the list of committees 
of which the president is not an ex-officio member.
    Article VI, Section 2 of the CHX's Constitution provides that the 
Chairman of the Board of Governors is ``an ex-officio member, without 
the right to vote except as otherwise designated in this Constitution, 
of all committees except the Nominating Committee.'' The rule change 
allows to Exchange to designate the Chairman's right to vote on 
committees in the Exchange's Rules as well as the Constitution. The 
rule change to Article IV, Rules 7 and 9 of the Exchange's Rules grants 
the Chairman of the Board full voting powers on the Committee on 
Organization and Governance and the Compensation Committee. In 
addition, the rule change to Article VI, Section 2 of the Constitution 
specifies that the Chairman is not a member of any Judiciary Committee.

Miscellaneous

    Finally, the rule change replaces the term ``Public Governor'' with 
``non-member Governor'' and provides the definition of the term in 
Article IV, Rule 7 of the CHX's Rules to state that ``the term non-
member Governor shall mean a Governor who is unaffiliated with the 
Exchange or any broker or dealer in securities, as defined in Article 
III, Section 2 of the Exchange's Constitution.'' The rule change also 
adds the term ``non-member Governor'' to Article IV, Rule 8.

III. Discussion

    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 with the 
requirements of Section 6(b) of the Act.\9\ In particular, the 
Commission believes that the proposal is consistent with sections 
6(b)(1), (3), and (5) of the Act.\10\ Section 6(b)(1) 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, among other things, that the rule of an exchange 
assures a fair representation of its members in the selection of its 
directors and administration of its affairs. Section 6(b)(5) 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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    \9\15 U.S.C. 78f(b) (1988).
    \10\15 U.S.C. 78f(1), (3), and (5) (1988).
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    The Commission believes that the proposed rule change to limit 
Governor monetary liability to the Exchange and its members is 
consistent with the requirements of the Act.\11\ In reaching its 
determination to approve this rule change, the Commission has 
considered the potential impact that the proposal will have on the 
special role and responsibilities of the Board of Governors of a 
registered national securities exchange under the Act.\12\
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    \11\The Commission approved the same rule change for the CHX in 
Securities Exchange Act Release No. 27625 (January 16, 1989), 55 FR 
2470 (January 24, 1990); the Pacific Stock Exchange, Inc. in 
Securities Exchange Act Release No. 27466 (November 22, 1989), 54 FR 
49380 (November 30, 1989); and the Midwest Clearing Corp. in 
Securities Exchange Act Release No. 27446 (November 16, 1989), 54 FR 
48707 (November 24, 1989).
    \12\The Powers and responsibilities of the CHX's Board of 
Governors are set out in the Exchange's Constitution. Under Article 
III, Section 1, the Board of Governors is authorized to manage the 
business of the Exchange and is vested with all powers necessary for 
the government of the Exchange, including the regulation of the 
business conduct of members and member organizations and the 
promotion of the welfare, objects and purposes of the Exchange. 
Furthermore, Section 1 provides that the Board may establish Rules 
governing the qualifications for membership and the requirements for 
remaining a member in good standing. The Board is also given the 
power to fill vacancies in any office, including the Board of 
Governors, but excluding the Nominating Committee, until the next 
annual meeting. The Board also has the power to interpret the 
Constitution and Rules of the Exchange, and any interpretation made 
by it remains final and conclusive.
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    The Board of Governors of a national securities exchange has a 
crucial role in ensuring that the exchange meets its responsibilities 
as a self-regulatory organization under the Act. In view of this, the 
CHX proposal is limited so that the exemption from monetary damages is 
not available where liability is based, directly or indirectly, on a 
violation of the federal securities laws.
    At the same time, the Commission recognizes that national 
securities exchanges, such as the CHX, are incorporated under state law 
and, as such, are generally entitled to take advantage of provisions 
under state corporation codes to the extent they are consistent with 
the federal securities laws. The proposed rule change adequately 
balances the need to retain the special responsibilities of directors 
of national securities exchanges with the desire of the Exchange to 
adopt state law provisions pertaining to its corporate structure. The 
rule change allows the Exchange to take advantage of section 102(b)(7) 
of the Delaware Corporations Code as would any other organization 
incorporated in Delaware, except where the imposition of monetary 
actions involves a violation of the federal securities laws. 
Accordingly, Governors of the CHX will still be subject to the full 
panoply of damages in actions involving violations of the federal 
securities laws.\13\
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    \13\To the extent there is any concern that the imposition of 
monetary damages against Board members for violations of federal 
securities laws would deter persons from acting on CHX's Board of 
Governors, the Commission notes that Article X of the CHX's 
Constitution and Article Eleventh of the CHX's Certificate of 
Incorporation allows the Exchange to provide indemnification to 
members of its Board of Governors, within the limits permitted by 
Delaware law, to safeguard them from expense and liability for 
actions that they take in such capacity in good faith in furtherance 
of, or without belief that such actions are opposed to, the best 
interests of the CHX and is members.
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    The Commission believes that the CHX's proposal to split its annual 
meeting and provide for an annual election meeting and an annual report 
meeting will allow Exchange members to better concentrate on the 
respective issues. The annual election meeting will be held to vote for 
Governors and the Nomination Committee. The annual report meeting will 
be held to provide management, the Board, and members an opportunity to 
discuss the previous year's results and current issues facing the 
Exchange. Because each of these meetings is of extreme importance and 
may involve lengthy discussions, the Commission believes holding two 
separate meetings is appropriate and consistent with section 6(b)(3) of 
the Act which requires that the rules of the exchange assures a fair 
representation of its members in the selection of its directors and 
administration of its affairs.\14\
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    \14\The Commission notes that the proposal could allow the 
annual election meeting to take place prior to the annual report 
meeting. Before setting the meeting times, the Exchange should 
consider that the report meeting may provide information to members 
that is relevant to their election of Governors at the annual 
election meeting.
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    The CHX's Constitution provides that appointments to the Executive 
Committee are made by the Vice Chairman of the Board with the approval 
of the Board of Governors.\15\ In December 1992, the Commission 
approved changes to the CHX's organization and governance,\16\ 
including changes to the Exchange's Executive Committee. Before that 
rule change, the Executive Committee was comprised of six Governors and 
the Chairman, Vice Chairman, and President. The rule change removed the 
Vice Chairman from the Executive Committee and provided instead for 
seven Governors. In addition, the Chairman was designated as the 
Committee's Chairman with full voting powers. The President, however, 
remained an ex-officio member of the Committee without the power to 
vote.
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    \15\See Article V, Section 4 of the CHX's Constitution.
    \16\See Securities Exchange Act Release No. 31633 (December 22, 
1992), 57 FR 62402 (December 30, 1992).
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    In approving the 1992 changes to the Exchange's Executive 
Committee, the Commission emphasized concerns about floor domination of 
the governance of the Exchange.\17\ When appointing the Executive 
Committee members the CHX's Constitution directs the Vice Chairman to 
assure the geographic diversity of the Governors appointed to that 
Committee.\18\ Consistent with this directive, the Executive Committee 
has traditionally consisted of two public Governors, two ``upstairs'' 
member Governors, and two floor member Governors.\19\ The Exchange 
represented at the time of the 1992 changes that it continued to 
support such diversity in the Executive Committee and expected its 
future composition to be consistent with past practices.\20\
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    \17\Section 6(b)(3) of the Act requires that the rules of an 
exchange assure a 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. The Executive Committee wields most of the powers of the 
full Board between Board meetings. As a result, floor domination of 
the Executive Committee (like floor domination of the Board) may 
violate Section 6(b)(3)'s requirement of fair representation.
    \18\Art. V., Sec. 4 of the CHX's Constitution.
    \19\The Exchange indicated that the seventh Governor member of 
the Executive Committee (created by the departure of the Vice 
Chairman) would be appointed ad hoc, depending on the strengths and 
weaknesses of individual Board members and the needs of the 
Exchange. Telephone conversation between J. Craig Long, Vice 
President, General Counsel and Secretary, MSE, and Beth Stekler, 
Staff Attorney, SEC, on December 18, 1992.
    \20\See letter from John L. Fletcher, Vice Chairman, and Homer 
J. Livingston, President-Designate, MSE, to Brandon C. Becker, 
Deputy Director, Division of Market Regulation, SEC, dated December 
17, 1992.
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    The rule change now under consideration provides that the Executive 
Committee will be comprised of at least seven floor governors. This 
change allows the Vice Chairman, with Board approval, to expand the 
number of governors serving on the Executive Committee. While the 
Commission believes that the Exchange should be able to expand the 
number of Governors serving on the Committee if such expansion is 
necessary for the efficient administration of Exchange business, the 
Commission expects the Exchange to maintain the relative representation 
of the various geographic groups on the Committee and would be 
concerned if the Committee was dominated by a particular group (e.g., 
floor members). The CHX has represented that it will continue to 
support diversity in the Executive Committee. Specifically, the CHX has 
indicated that the Vice Chairman will appoint additional governors, 
should the number be increased from seven, in a manner which will 
continue fair representation of public Governors, ``upstairs'' member 
Governors, and floor member Governors as required by the CHX's 
Constitution.\21\ The Commission therefore believes that the proposal 
is consistent with section 6(b)(3) of the Act.
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    \21\Telephone conversation between Craig Long, Foley & Lardner, 
and Katherine Simmons, Division of Market Regulation, SEC (January 
26, 1994).
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    For the reasons discussed below, the Commission also is approving 
changes to the Exchange's Executive Committee, Finance Committee, 
Committee on Organization and Governance, and Compensation Committee. 
The Commission notes that although there is no provision in the CHX's 
Constitution specifically directing geographic diversity in the 
Governors appointed to committees other than the Executive 
Committee,\22\ Section 6(b)(3) of the Act requires that the rules of an 
exchange assure a fair representation of its members in the 
administration of its affairs. The Commission believes that the fair 
representation provision of Section 6(b)(3) requires the Exchange to 
ensure that all of its committees have a diversity of governors (i.e., 
public Governors, ``upstairs'' member Governors, and floor member 
Governors).
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    \22\ See Art. V., Sec. 4 of the CHX's Constitution and text 
accompanying note 14, supra.
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    Preliminarily, the Commission believes the rule change to Article 
VI, Sections 2 (Chairman) and 4 (President) to provide that the 
Chairman and President are ex-officio members of all Executive 
Committees (except those specified in the provisions) without the right 
to vote unless ``otherwise designated in the Constitution or the 
Rules'' is consistent with the Act. The rule change allows the Exchange 
to indicate if the Chairman or President has the right to vote on a 
particular Committee in the Section or Rule pertaining to each 
Committee.
    The Commission believes that giving the President full voting 
powers on the Executive Committee is consistent with the President's 
voting powers on the Board. The Commission notes that the Executive 
Committee has full Board authority to act between Board meetings on 
most issues. In addition, because the Exchange's Constitution requires 
that the president not be a member of the Exchange or affiliated in any 
way with a member organization during his incumbency,\23\ granting the 
President voting powers does not change the presentation on the 
Executive Committee of any particular group. Therefore, this rule 
change is consistent with sections 6(b) (1) and (3) of the Act.
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    See article IV, Section 4 of the CHX's Constitution.
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    The Commission also believes that the Exchange's proposal to allow 
the Vice Chairman, with Board Approval, to expand the number of 
Governors serving on the Finance Committee is consistent with the 
requirements of Section 6(b)(1) of the Act because the rule change is 
designed to enhance the governance process of the Exchange. The Finance 
Committee reviews annual profit plans and budgets for the Exchange and 
its subsidiaries, reviews the financial condition of the Exchange and 
its subsidiaries, reviews the performance of Exchange investments, 
formulates investment policy, and makes recommendations to the 
management or Board. Because this Committee has an important function 
involving a wide range of financial issues, the Commission believes it 
is reasonable that the Exchange may decide that additional Governors 
are necessary for the Committee to fulfill its duties.
    Additionally, the Commission believes that the rule change to give 
the Chairman full voting rights as a member of the Compensation 
Committee and the Committee on Organization and Governance is 
consistent with Sections 6(b) (1) and (3) of the Act. The Compensation 
Committee is responsible for establishing the compensation of the 
President and for coordinating with the President to determine a 
comprehensive corporate compensation and benefits policy.\24\ The 
Committee on Organization and Governance is responsible for 
periodically reviewing the organization and governance structure of the 
Exchange and its subsidiaries, and for making recommendations to the 
Board of Governors with respect thereto.\25\ The Chairman is appointed 
by the Board of Governors from among the 24 Governors, and may 
accordingly be an ``up-stairs'' member, a floor member, or a public 
governor. Granting the Chairman voting rights on the Compensation 
Committee and the Committee on Organization and Governance, therefore, 
may change the relative representation of one of these constituencies. 
The Commission expects that the Exchange will ensure fair 
representation on these Committees consistent with section 6(b)(3) of 
the Act.
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    \24\See Article IV, Rule 7 of the CHX's Rules.
    \25\See Article IV, Rule 9 of the CHX's Rules.
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    The Commission believes that the rule change providing that neither 
the Chairman nor the President are ex-officio members of any Judiciary 
Committee also is consistent with Sections 6(b)(1) and (5) of the Act. 
Article IV, Rule 5 of the Exchange's Rules states that ``the President 
shall appoint five disinterested members of the Exchange and/or general 
partners or officers of member organizations as a Judiciary Committee'' 
whenever a disciplinary matter is to be reviewed in accordance with the 
Rules. The rule change specifies that the Chairman and President are 
not ex-officio members of any Judiciary Committee.
    Finally, the Commission believes that the rule change replacing 
``Public Governor'' with ``non-member Governor'' and defining the term 
as a ``Governor who is unaffiliated with the Exchange or any broker or 
dealer in securities, as defined in Article III, Section 2 of the 
Exchange's Constitution,'' serves to provide consistency within the 
CHX's Constitution and Rules, and has no substantive effect. The 
Commission notes, however, that ``non-member Governors'' are intended 
to be representatives of the public and that the term is synonymous 
with the Commission's use of the term ``public Governor'' in general, 
and in this order and the order approving the 1992 changes to the CHX's 
organization and governance.\26\ This interpretation is consistent with 
Section 6(b)(3) of the Act, which requires that the Exchange provide 
that one or more directors be representatives of issuers and investors 
and not be associated with a member of the exchange, broker, or dealer.
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    \26\See supra note 15 and accompanying text.
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    The Commission finds good cause for approving Amendment No. 1 to 
the rule change prior to the thirtieth day after publication of notice 
of filing thereof. Amendment No. 1 made a non-substantive change to the 
proposal by including in the rules the Constitutional definition that a 
non-member Governor is unaffiliated with the Exchange or any broker or 
dealer in securities.\27\ The CHX's proposed rule change was published 
in the Federal Register for the full statutory period and no comments 
were received.\28\
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    \27\See supra note 3.
    \28\See Securities Exchange Act Release No. 33318 (December 10, 
1993), 58 FR 66042 (December 17, 1993).
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning Amendment No. 1. 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-93-28 and should be 
submitted by May 10, 1994.

V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\29\ that the proposed rule change (SR-CHX-93-28) is approved.

    \29\15 U.S.C. 78S(B)(2) (1988).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\30\
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    \30\17 CFR 200.30-3(a)(12) (1993).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-9318 Filed 4-18-94; 8:45 am]
BILLING CODE 8010-01-M