[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