[Federal Register Volume 61, Number 46 (Thursday, March 7, 1996)]
[Notices]
[Pages 9213-9215]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-5302]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-36912; File No. SR-CHX-96-08]
Self-Regulatory Organizations; Notice of Filing and Immediate
Effectiveness of Proposed Rule Change by the Chicago Stock Exchange,
Incorporated Relating to the Adoption of a Monthly Examinations Fee and
the Rebilling of Certain Other Costs
February 29, 1996.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ notice is hereby given that on February 7, 1996 the
Chicago Stock Exchange, Incorporated (``CHX'' or ``Exchange'') filed
with the Securities and Exchange Commission (``SEC'' or ``Commission'')
the proposed rule change as described in Items I, II, and III below,
which Items have been prepared by the self-regulatory organization. On
February 22, 1996, the Exchange filed Amendment No. 1 to the proposal
with the Commission.\2\ The Commission is publishing this notice to
solicit comments on the proposed rule change from interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ Amendment No. 1 changed the effective date for the new fee
and added a detailed explanation of the new fee. See Letter dated
February 21, 1996 from David T. Rusoff, Attorney, Foley & Lardner,
to Anthony P. Pecora, Attorney, SEC.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
In order to compensate for the extensive staff time and costs
associated with examining off-floor firms that are not active
participants in the CHX market, the Exchange is proposing to adopt an
examinations fee of $1,000 per month, which would be applicable to CHX
members and member organizations for which the Exchange is the
Designated Examining Authority (``DEA''). This fee would be effective
February 7, 1996. The following CHX members and member organizations
would be exempt from the examinations fee: (1) inactive organizations;
(2) organizations that operate from the Exchange's trading floor; (3)
organizations that incur transaction or clearing fees charged directly
to them by the Exchange or by its registered clearing subsidiary,
provided, however, that such exemption shall only apply on
[[Page 9214]]
a month-by-month basis and shall only apply to the extent the fees
exceed the examinations fee for that month; \3\ and (4) organizations
affiliated with an organization exempt from this fee due to the second
or third category.\4\
---------------------------------------------------------------------------
\3\ The $1,000 threshold is required in order for a firm to be
exempt from the examinations fee. For example, a firm with $600 in
transaction fees for a month is still required to pay the full
amount of the $1,000 examinations fee.
\4\ For purposes of the foregoing exemption, affiliated firms
would be permitted to aggregate their respective transaction fees to
meet the $1,000 threshold, i.e., each firm would not be required to
meet a separate threshold.
---------------------------------------------------------------------------
Affiliation includes an organization that is a wholly owned
subsidiary of, as well as an organization controlled by or under common
control with, an ``exempt'' member or member organization. An inactive
organization is one that had no securities-related transaction revenue,
as determined by annual FOCUS reports, as long as the organization
continues to have no revenue each month.\5\
---------------------------------------------------------------------------
\5\ It is the policy of the Exchange to require its inactive
organizations to file an annual FOCUS report, Securities and
Exchange Commission Form X-17A-5, Financial and Operational Combined
Uniform Single Report. Telephone conversation between David T.
Rusoff, Attorney, Foley & Lardner, and Glen P. Barrentine, Senior
Counsel, SEC (February 28, 1996).
---------------------------------------------------------------------------
The CHX also proposes to amend its fee schedule to pass through the
cost of providing the CHX Rule Book, printed by Commerce Clearing
House, Inc. (``CCH, Inc.''), to members and member organizations.
Currently, the Exchange absorbs the cost of providing the Rule Book,
printed by CCH, Inc., and monthly amendments thereto, to members and
member organizations. The Exchange proposes to rebill members and
member organizations the Exchange's cost in providing this service.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing 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
Rule 15b2-2(b) requires that broker-dealers designated to a self-
regulatory organization (``SRO'') be examined for compliance with
applicable financial responsibility rules within six months of
registration with the Commission.\6\ In addition, the examining SRO
must conduct an examination within twelve months of Commission
registration to review compliance with all other Commission rules.
Thereafter, examinations are conducted on a periodic basis. In
accordance with Commission rules, the CHX administers an examinations
program conducting reviews of organizations for which the Exchange is
the DEA. The examinations focus on an organization's compliance with
applicable financial and record keeping requirements, including net
capital, books and records maintenance, Regulation T and financial
reporting, of the CHX as well as the Commission.
---------------------------------------------------------------------------
\6\ 17 CFR 240.15b2-2(b).
---------------------------------------------------------------------------
The Market Regulation Department incurs certain costs in the course
of conducting these examinations, including travel and staff costs. Of
course, such costs rise when the offices of the organization being
reviewed are located outside of the Chicago area. The staff time
required to conduct an examination is substantially longer when the
businesses of the firm are atypical of those firms for which the CHX
has historically served as DEA. Because of the familiarity that
inherently results from repeatedly conducting similar examinations, CHX
Market Regulation staff has accumulated substantial experience
regarding where to focus and locate information revealing potential
areas of concern.
The Exchange, however, is currently the DEA for approximately seven
firms that engage in CHX-atypical businesses from remote locations, and
trade products not available on the CHX. For instance, two member
organizations registered as CHX market makers for whom the CHX is the
DEA derive over ninety percent of their revenue from commodities
futures transactions. Yet these two member organizations generated less
than two hundred dollars in total revenue on the CHX during 1995. Five
other member organizations for which the CHX is the DEA engage in off-
floor proprietary trading whereby transactions are entered and executed
via floor brokers or principally through automated execution systems
located at market centers other than the CHX. The majority of their
revenue also is derived from non-CHX traded instruments. Two additional
firms are seeking applications for CHX membership with a similar type
of business operation. The heightened costs of examining these firms,
which include both money as well as valuable staff time, may be due to
an atypically lengthy examination, travel and specific training
regarding non-CHX trading instruments.
In addition to actual costs incurred in conducting required
examinations, the Exchange notes that, as the DEA for a firm, the CHX,
similar to other SROs, also frequently performs an advisory role
respecting the regulatory obligations of its members and member
organizations. This ``service'' function may take the form of answering
telephone calls and other questions of such firms regarding Exchange
and Commission rules, as well as the types of procedures such firm
should have in place. Initially, in becoming a member or member
organization of the CHX, the Exchange assists in the firm's set-up of
its financials and communicates with the firm, providing sample forms
and general guidance. Thereafter, a firm may require periodic follow-up
advice. These advisory costs to the Exchange of serving as the DEA are
greater for the CHX-atypical firms.
These heightened costs, however, may be offset by transaction
charges and related revenues received by the Exchange if such firms
trade in CHX markets. In reviewing these costs, the Exchange notes that
CHX members and member organizations may be required to pay various
fees and transaction charges, which usually constitute a large part of
the revenue collected by the Exchange. Organizations not trading on the
CHX do not pay these fees, while the Exchange remains obligated to
administer various regulatory functions, including costlier
examinations. In the area of examinations, the factor of staff time is
particularly pronounced. Without this income source, the Exchange has
determined to adopt an examinations fee in order to alleviate certain
costs of conducting examinations. Currently, the CHX charges a minimal
field examination fee that is only applicable under certain
circumstances.\7\ In contrast, most other
[[Page 9215]]
SROs in the U.S. impose direct examinations fees.\8\ For the above
reasons, therefore, the CHX is proposing such a fee for those
organizations for which it serves as DEA, with certain exceptions. The
proposed examinations fee would apply primarily to those members and
member organizations that do not execute trades on the CHX.
---------------------------------------------------------------------------
\7\ See CHX Membership Dues and Fees Schedule Sec. (i)
(charging $85 per day for professional fees, plus actual living
expenses up to a maximum of $35 per day, plus actual travel expenses
for field examinations in excess of one per year). Firms subject to
the Designated Examining Authority Fee are also subject to the Field
Examinations Fee. February 22, 1996 telephone conversation between
David T. Rusoff, Attorney, Foley & Lardner, and Anthony P. Pecora,
Attorney, SEC.
\8\ The Chicago Board Options Exchange imposes a fee equal to
$0.40 per $1,000 in gross revenues. Other exchanges similarly impose
revenue-based examinations fees. In addition, the Philadelphia Stock
Exchange recently adopted a $1,000 examination fee that is
substantially the same as the one proposed here. See Securities
Exchange Act Release No. 35091 (Dec. 12, 1994), 59 FR 65558
(approving File No. SR-Phlx-94-66).
---------------------------------------------------------------------------
In order to fairly allocate the proposed examinations fee, the
Exchange has determined to exempt those members and member
organizations that actively trade on the Exchange, thereby
counterbalancing examination costs with transaction fees. Organizations
that for any month incur transaction or clearing fees charged directly
to them by the Exchange or by its registered clearing subsidiary would
be exempt from the fee, provided that the fees exceed the examinations
fee for that month. Inactive organizations would be exempt because
examinations are not customarily conducted for such organizations.
Compliance with the inactive status will be determined by gross
securities-related transaction revenues reported on the organization's
most recent annual FOCUS report. In addition, the organization must
continue to lack such revenues, as determined monthly, in order to be
exempt from the examinations fee.
Similarly, a member or member organization that is wholly owned by,
controlled by, or under common control with an organization operating
from the CHX trading floor or generating counterbalancing CHX
transaction or clearing fees would be exempt from this fee, because the
affiliated organization is generating transaction or clearing fees to
help offset examination costs.
Finally, the CHX proposes to institute an additional fee because it
feels that it is appropriate to charge its members and member
organizations its costs in providing the Rule Book, as printed by CCH,
Inc., to members. Members are obligated to be familiar with the CHX
rules and should bear this cost directly. Currently, the CHX bears this
cost.
2. Statutory Basis
The proposed rule change is consistent with Section 6(b) of the Act
\9\ in general and furthers the objectives of Section 6(b)(4) \10\ in
particular in that it provides for the equitable allocation of
reasonable dues, fees, and other charges among the Exchange's members
and other persons using its facilities. The Exchange believes that the
proposed examinations fee of $1,000 per month is reasonable in view of
the Exchange's costs in conducting examinations of non-CHX-trading
organizations, especially in terms of staff time.
---------------------------------------------------------------------------
\9\ 15 U.S.C. 78f(b).
\10\ 15 U.S.C. 78f(b)(4).
---------------------------------------------------------------------------
The Exchange also believes that structuring the fee to exempt
organizations that transact business on the Exchange represents an
equitable allocation of the Exchange's examination costs among members
by focusing on those member organizations that generally do not
otherwise continually contribute to compensating for, and usually, in
fact, increase Exchange examination costs.
Finally, the Exchange also believes that the proposed fee for
providing its members and member organizations with a Rule Book is
reasonable in that it will be applied equally to members and member
organizations that utilize the CHX's service of providing a Rule Book
to members.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange believes the proposed rule change imposes no burden on
competition.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
The Exchange has neither solicited nor received written comments on
the proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
The foregoing rule change constitutes or changes a due, fee, or
other charge imposed by the Exchange and, therefore, has become
effective pursuant to Section 19(b)(3)(A) of the Act \11\ and
subparagraph (e) of Rule 19b-4 thereunder.\12\
---------------------------------------------------------------------------
\11\ 15 U.S.C. 78s(b)(3)(A).
\12\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
At any time within sixty days of the filing of such proposed rule
change, the Commission may summarily abrogate such rule change if it
appears to the Commission that such action is necessary or appropriate
in the public interest, for the protection of investors, or otherwise
in furtherance of the purposes of the Act.
IV. Solicitation of Comments
Interested persons are invited to submit written data, 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 also will be available for
inspection and copying at the principal office of the CHX. All
submissions should refer to File No. SR-CHX-96-08 and should be
submitted by March 28, 1996.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\13\
---------------------------------------------------------------------------
\13\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
Jonathan G. Katz,
Secretary.
[FR Doc. 96-5302 Filed 3-6-96; 8:45 am]
BILLING CODE 8010-01-M