[Federal Register Volume 61, Number 157 (Tuesday, August 13, 1996)]
[Notices]
[Pages 42079-42080]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-20576]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37532; File No. SR-CHX-96-15]


Self-Regulatory Organizations; the Chicago Stock Exchange, Inc.; 
Order Approving Proposed Rule Change Relating to Assignment and 
Reassignment of Nasdaq National Market Issues

August 6, 1996.

I. Introduction

    On May 16, 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 to amend Interpretation and 
Policy .01 of Rule 1 of Article XXX relating to assignments and 
reassignments of Nasdaq Market (``NM'') securities.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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    The proposed rule change was published for comment in the Federal 
Register on June 25, 1996.\3\ No comments were received on the 
proposal.
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    \3\ See Securities Exchange Act Release No. 37327 (June 19, 
1996), 61 FR 32870 (June 25, 1996) (notice of File No. SR-CHX-96-15) 
(``Notice'').
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II. Background

    In 1987, the Commission approved the trading of Nasdaq/NM 
Securities (previously known as NASDAQ/NMS Securities) on the Exchange 
on a pilot basis.\4\ When these stocks were initially allocated, the 
Exchange's Committee on Specialist Assignment and Evaluation (``CSAE'') 
established certain guidelines for assignment of Nasdaq/NM stocks. 
These guidelines required a firm that desired to trade these stocks to 
assign a separate co-specialist that only trades Nasdaq/NM stocks. As a 
result, only a small number of firms could receive allocations of 
Nasdaq/NM stocks. In part because of this limitation, the CSAE also 
determined to re-post any Nasdaq/NM stocks when they list on an 
exchange.
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    \4\ See Securities Exchange Act Release Nos. 24407 (April 29, 
1987), 52 FR 17349 (May 7, 1987) (order approving proposed Reporting 
Plan for National Market System Securities traded on an exchange); 
24406 (April 29, 1987), 52 FR 17495 (May 8, 1987) (order granting 
Unlisted Trading Privileges (``UTP'') in 25 issues).
    Prior to the enactment of the UTP Act of 1994 (``UTP Act''), 
Section 12(f) of the Act required exchanges to apply to the 
Commission, and receive Commission approval of the exchange's 
application, before extending UTP to a particular security. When an 
exchange ``extends UTP'' to a security, the exchange allows its 
members to trade the security as if it were listed on the exchange. 
The Commission was required to provide interested parties with at 
least ten days notice of the application and the Commission had to 
determine whether the extension of UTP to each security named met 
certain criteria. If so, the Commission published an approval order 
in the Federal Register. Accordingly, Exchange Interpretation and 
Policy .01 of Rule 1 of Article XXX reflects this statutory scheme 
in that it references ``obtaining'' UTP from the Commission. The UTP 
Act, however, removed the application, notice, and Commission 
approval process from Section 12(f) of the Act. For this reason, as 
requested in the Notice, the Commission again requests that the 
Exchange submit a rule proposal that appropriately amends Exchange 
Interpretation and Policy .01 of Rule 1 to reflect the current 
statutory scheme.
    In addition, the Commission noted in the Notice that NASDAQ/NMS 
Securities are now known as Nasdaq/NM Securities. In response, the 
Exchange submitted a rule proposal that amends all appropriate 
Exchange Rules and Interpretations to reflect this new terminology. 
See File No. SR-CHX-96-22 (received by the Commission on July 29, 
1996).
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    Because of the recent expansion of the number (from 100 to 500) of 
Nasdaq/NM securities that are eligible for trading on the CHX,\5\ the 
Exchange believes that a more equitable balance is needed between the 
ability of the current specialist firm in the Nasdaq stock to continue 
to trade the stock after it lists on an exchange and other specialists 
that desire to trade the stock. Thus, the purpose of the proposed rule 
change is to amend the Exchange's allocation policy in order to achieve 
this equitable balance.
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    \5\ See Securities Exchange Act Release Nos. 28146 (Jun. 26, 
1990), 55 FR 27917 (July 6, 1990) (order expanding the number of 
eligible securities to 100); 36102 (August 14, 1995), 60 FR 43626 
(August 22, 1995) (order expanding the number of eligible securities 
to 500).
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III. Description of Proposal

    As discussed in the Notice, the proposal would amend Interpretation 
and Policy .01 of Rule 1 of Article XXX to provide new guidelines for 
the reassignment of Nasdaq/NM securities currently assigned to a CHX 
specialist when they become a Dual Trading System Issue. Under the 
proposed policy, the 500 Nasdaq/NM stocks that are eligible for trading 
on the CHX would be divided into two groups: the 100 original issues 
and the 400 recently added issues.

1. 100 Original Issues

    Under the proposal, a specialist unit that trades one or more of 
the original 100 Nasdaq/NM issues would be permitted to designate up to 
five of these issues as ``Non-Reassignment Issues.'' In the event that 
a Non-Reassignment Issue became listed, i.e., a Dual Trading System 
Issue,\6\ CSAE under normal circumstances would not post the issue for 
reassignment. Instead, the existing Nasdaq/NM specialist unit would be 
permitted to continue to trade the issue assuming the proposed co-
specialist for the issue is qualified. A specialist unit could change 
the issues it designates as Non-Reassignment Issues no more than once a 
year. Every time a Non-Reassignment Issue becomes a Dual Trading System 
Issue, however, the total number of stocks that the specialist unit can 
designate as a Non-Reassignment Issue is decremented. For example, if 
two Non-Reassignment Issues become Dual Trading Issues, the specialist 
will only be able to designate a total of three issues as Non-
Reassignment Issues going forward.
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    \6\ According to the Exchange, Dual Trading System Issues are 
issues that are traded on the CHX and listed on either the New York 
Stock Exchange or American Stock Exchange. Telephone conversation on 
June 5, 1996 between David T. Rusoff, Attorney, Foley & Lardner, and 
George A. Villasana, Attorney, Division of Market Regulation, SEC.
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    For all other Nasdaq/NM issues that are part of the initial 100 
issues, a specialist unit can nonetheless designate its interest to 
continue trading the issue as a Dual Trading System Issue. This 
designation can only be made at the time that an issue becomes a Dual 
Trading System Issue and can only be made for one out of every three 
issues that the specialist unit trades that becomes a Dual Trading 
System Issue. If this designation is made, the CSAE, under normal 
circumstances, will not post the issue or initiate reassignment 
proceedings. If a designation is not made, the CSAE will post the issue 
and initiate reassignment proceedings. The specialist unit that traded 
the issue will not be eligible to apply for the security in these 
proceedings. Finally, if the specialist unit does not make this 
designation for any of three consecutive issues that become Dual 
Trading System

[[Page 42080]]

Issues, he or she cannot carry forward the unused designation.

2. Other Nasdaq/NM Securities

    Under the proposal, if a Nasdaq/NM security that is not part of the 
original 100 issues becomes a Dual Trading System Issue within one year 
of the date that the specialist began trading the security, the 
security will be posted and the CSAE will initiate a reassignment 
proceeding for the security. If a Nasdaq/NM security that is not part 
of the original 100 issues becomes a Dual Trading System Issue more 
than one year after the date that the specialist began trading the 
security, a specialist unit that trades that security would be 
permitted to designate 20% of the Nasdaq/NM securities assigned to that 
specialist unit (excluding the original 100 Nasdaq/NM securities) as 
Non-Reassignment Issues every year. A specialist unit could change the 
issues it designates as Non-Reassignment Issues no more than once a 
year.
    For all other Nasdaq/NM securities, the specialist can designate 
its interest to continue trading the issue as a Dual Trading System 
issue. As is the case for the 100 original issues, this designation can 
also only be made at the time an issue becomes a Dual Trading System 
Issue and can also only be made for one out of every three issues that 
the specialist unit trades that becomes a Dual Trading System Issue. 
This designation will operate in the same manner as the similar 
designation described above for the original 100 issues.
    Finally, this proposed rule change does not limit or modify the 
authority of the CSAE granted to the CSAE under any other provision of 
Rule 1 of Article XXX.

IV. 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, in 
particular, with the requirements of Section 6(b).\7\ 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, to remove impediments 
and to perfect the mechanism of a free and open market and a national 
market system, and, in general, to protect investors and the public 
interest for the reasons set forth below.
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    \7\ 15 U.S.C. 78f(b).
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    In 1987, when the Commission approved on a pilot basis the trading 
of Nasdaq/NM securities on the CHX, the CSAE established guidelines for 
the assignment of Nasdaq/NM stocks. These guidelines required a firm 
interested in trading these stocks to assign a separate co-specialist 
that only trades Nasdaq/NM stocks. As a result, only a limited number 
of firms received allocations of Nasdaq/NM stocks. To achieve a more 
equitable allocation of these securities, the CSAE determined that once 
a Nasdaq/NM issue became listed on an exchange, the CSAE would post the 
issue for reassignment. As a result, specialist units that were 
originally allocated Nasdaq/NM securities may not be allocated that 
security despite their investment of capital, time, and effort to make 
a market in the security.
    The Commission notes that specialists play a crucial role in 
providing stability, liquidity and continuity to the trading of 
securities. Among the obligations imposed upon specialists by the Act 
and the rules thereunder, is the maintenance of fair and orderly 
markets in their designated securities. To ensure that specialists 
fulfill these obligations, it is important that securities be allocated 
in an equitable and fair manner and that all specialists have a fair 
opportunity for allocations based on established criteria and 
procedures. The Commission believes that the proposed rule is 
consistent with the specialists' obligations and provides for the 
allocation of securities in an equitable and fair manner.
    Specifically, the Commission agrees with the CHX that it is 
important to balance the interests of competition for the allocation of 
Nasdaq/NM issues that become listed, with providing incentives to 
specialists to continue to expend capital, time, and effort to make a 
market in that Nasdaq/NM security before it becomes listed. The 
Commission believes, therefore, that it is not unreasonable for a 
specialist who has been allocated a security for more than one year to 
be able to designate it as a Non-Reassignment Issue subject to certain 
limitations. Moreover, it is not unreasonable for a specialist who has 
been allocated a security for more than one year also to designate its 
interest to continue trading issues as a Dual Trading System Issue 
subject to certain conditions.

V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\8\ that the proposed rule change (SR-CHX-96-15) is approved.

    \8\ 15 U.S.C. 78s(b)(2).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\9\
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    \9\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-20576 Filed 8-12-96; 8:45 am]
BILLING CODE 8010-01-M