[Federal Register Volume 61, Number 72 (Friday, April 12, 1996)]
[Notices]
[Pages 16274-16277]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-9146]



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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37067; File No. SR-CHX-96-11]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Chicago Stock Exchange, Inc. Relating to Examinations

April 4, 1996.
    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 March 6, 
1996, the Chicago Stock Exchange, Inc. (``CHX'' or ``Exchange'') filed 
with the Securities and Exchange Commission (``Commission'' or ``SEC'') 
the proposed rule change, on March 18, 1996, filed Amendment No. 1 to 
the proposed rule change,\1\ and on April 4, 1996, filed Amendment No. 
2 to the proposed rule change,\2\ 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

[[Page 16275]]

comments on the proposed rule change from interested persons.
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    \1\ See Letter from David T. Rusoff, Foley & Lardner, to Elisa 
Metzger, SEC dated March 14, 1996 (``Amendment No. 1'').
    \2\ See Letter from Charles R. Haywood, Foley & Lardner, to 
Elisa Metzger, SEC dated April 4, 1996 (``Amendment No. 2'').
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes 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 proposes 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 Outline'').\3\
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    \3\ The Exchange will use the Series 7A Examination that was 
approved in Sec. Exch. Act Release No. 32698 (July 29, 1993), 58 FR 
41539 (File No. SR-NYSE-93-10). The Exchange will use the Series 7B 
Examination that was approved in Sec. Exch. 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'').
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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 statement 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
    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 officer 
managers and registered representatives of member firms and member 
corporations. Pursuant to this Rule, in 1987 the Commission approved 
the use of the Series 7 examination 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 examination; 
(2) allow members located on the floor of the CHX to accept orders 
directly from professional investors 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, (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, all as 
more fully described below.

Series 7

    All floor members that accept orders directly from non-broker-
dealer will be deemed to be transacting business with the public. As 
such, except as provided below, any person accepting such orders must 
successfully complete the Series 7 examination. This requirement is in 
proposed interpretation and policy .01(d) to Rule 3 of Article VI of 
the CHX Rules.

Series 7A

    The level of knowledge, skills and abilities required to perform 
the activities engaged in by Exchange members who conduct a public 
business that is limited to accepting orders from professional 
investors is less than needed to conduct a full service business with 
retail customers. As a result, the NYSE has developed the Series 7A 
Examination as a module of the General Securities Registered 
Representative Examination (``Series 7'') to test the knowledge of 
relevant securities laws and Exchange rules required of members who 
accept orders from professional customers \4\ for execution on the 
trading floor. The CHX proposes to amend its Interpretations and 
Policies to Rule 3, Article VI to establish a new limited registration 
category for floor members who have successfully completed the Series 
7A examination.
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    \4\ 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.
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    This new limited registration will simplify the procedure for CHX 
members to conduct business with non-broker-dealer professional 
customers. The Exchange believes that the new examination is 
appropriate, in lieu of the Series 7, because it nevertheless tests 
knowledge relevant to conducting a public business. For example, the 
rules governing customer accounts including rules on excessive trading, 
approval of accounts and discretionary transactions would be covered by 
the new exam.
    Conducting a professional customer business from off the CHX 
trading floor would still require a full Series 7 registration. Of 
course, persons who are Series 7 registered need not take or pass the 
Series 7A exam in order to conduct a professional customers business.

Series 7B

    The Exchange is adopting the Series 7B examination as a subset of 
the Series 7 examination to test the knowledge of relevant securities 
laws and Exchange rules required of floor clerks/floor employees of 
members who accept public orders only from professional customers for 
execution on the trading floor. These orders may only be accepted if 
the member with whom the floor clerk/floor employee works has 
successfully completed the Series 7 or Series 7A examination. A floor 
clerk/floor employee that seeks to deal with customers who are not 
professional customers must successfully complete the Series 7 
examination. Any person who has successfully completed the Series 7 
examination will not be required to complete the Series 7B examination.

Implementation

    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 examinations without 
unnecessary business disruptions. The phase-in

[[Page 16276]]

period is as follows: (a) Members who were not required to successfully 
complete the Series 7 or Series 7A examination 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.

Floor Membership Exam

    All new applicants for membership on the Exchange that request a 
floor presence will be required to successfully complete a revised 
Floor Membership Exam. This exam tests basic trading knowledge and 
ability and tests familiarity with the Exchange's trading rules.

Market Maker Exam

    In order for a member to become qualified as a market maker after 
the approval date of this proposed rule change, the member must 
successfully complete the revised Floor Membership Examination and the 
revised Market Maker Examination. The revised Market Maker Exam tests 
the member's understanding of a market maker's duties and obligations. 
Co-specialists registered as such are exempt from the Market Maker 
Exam, even if they act as a market maker.

Co-Specialist Exam

    In order for a member to be qualified as a co-specialist after the 
approval date of this proposed rule change, the member must 
successfully complete the revised Co-Specialist Exam. A member is 
eligible to take the exam if the member has successfully completed the 
Floor Membership Exam and has been recognized by the Floor Procedure 
Committee as a Member/Relief Specialist under supervision for at least 
90 days. Upon passing the Co-Specialist Exam, the co-specialist may 
petition the Floor Procedure Committee to be removed from supervision 
and to function as a co-specialist.

Registration of Personnel

    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, as well as certain other shareholders of, members and 
member organization must be acceptable to the Exchange.\5\ 
Additionally, the proposed change clarifies that nominees of member 
firms must be registered with the Exchange.
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    \5\ A ``control person'' is 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 10% or more of a class of a voting security or having the power 
to sell or direct the sale of 10% 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, 10% or more of the 
capital.
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    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.\6\ The filing moves Interpretation and Policy. 01, 
.02, and .03 from Rue 3 of Article VI to Rule 2 of that Article \7\ 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.
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    \6\ The term ``self-regulatory organization'' is to have the 
statutory meaning. See Amendment No. 2.
    \7\ 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.
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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.
2. Statutory Basis
    The proposed rule change is consistent with Section 6 of the Act in 
general, and in particular, with Section 6(b)(5), in that it is 
designed to promote just and equitable principles of trade, remove 
impediments to and perfect the mechanism of a free and open market and 
a national market system, as well as to protect investors and the 
public interest. The examination requirements are intended to protect 
investors and the public interest.
    The proposed rule change is also consistent with Section 6(c)(3)(B) 
of the Act, which 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. Finally, the Exchange also believes that the proposed rule 
change is consistent with Section 15(b)(7) in that it is designed to 
ensure that a registered broker or dealer, prior to effecting any 
transaction in, or inducing the purchase or sale of, any security, meet 
certain standards of operational capability, training, experience, or 
competence.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purposes of the Act.

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.

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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 longer 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 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, N.W., Washington, D.C. 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 form 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-96-11 and should be 
submitted by May 3, 1996.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-9146 Filed 4-11-96; 8:45 am]
BILLING CODE 8010-01-M