[Federal Register Volume 61, Number 185 (Monday, September 23, 1996)]
[Notices]
[Pages 49803-49805]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-24299]



[[Page 49803]]

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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37690; File No. SR-CHX-96-11]


Self-Regulatory Organizations; Chicago Stock Exchange, Inc.; 
Order Granting Approval to Proposed Rule Change Relating to 
Examinations

September 17, 1996.

I. Introduction

    On March 6, 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, on March 18, 1996, filed 
Amendment No. 1 to the proposed rule change,\3\ and on April 4, 1996, 
filed Amendment No. 2 to the proposed rule change,\4\ 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 proposed 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 
Outlines'').\5\ The proposed rule change, Amendment No. 1, and 
Amendment No. 2 were published for comment in Securities Exchange Act 
Release No. 37067 (April 4, 1996), 61 FR 16274 (April 12, 1996). One 
comment was received on the proposal.\6\ On June 3, 1996, in response 
to Comment Letter No. 1, the Exchange submitted to the Commission 
Amendment No. 3 to the proposed rule change.\7\ Amendment No. 3 
clarifies the proposed amendments to Rule 2 of Article VI. Amendment 
No. 3 was published for comment in Securities Exchange Act Release No. 
37324 (June 18, 1996), 61 FR 32872 (June 25, 1996). One comment was 
received on the proposal.\8\ The CHX submitted a response letter 
supporting its proposal and responding to Comment Letter No. 2.\9\ For 
the reasons discussed below, the Commission has decided to approve the 
CHX's proposal.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Letter from David T. Rusoff, Foley & Lardner, to Elisa 
Metzger, SEC dated March 14, 1996 (``Amendment No. 1'').
    \4\ See Letter from Charles R. Haywood, Foley & Lardner, to 
Elisa Metzger, SEC dated April 4, 1996 (``Amendment No. 2'').
    \5\ The Exchange will use the Series 7A Examination and the 
respective Content Outline that was approved in Securities Exchange 
Act Release No. 32698 (July 29, 1993), 58 FR 41539 (File No. SR-
NYSE-93-10). The Exchange will use the Series 7B Examination and the 
Respective Content Outline that was approved in Securities Exchange 
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'').
    \6\ See Letter from C. Philip Curley, Robinson Curley & Clayton, 
P.C., to Jonathan G. Katz, Secretary, SEC dated May 2, 1996 
(``Comment Letter No. 1'').
    \7\ See Letter from David Rusoff, Foley & Lardner, to Elisa 
Metzger, SEC dated May 31, 1996 (``Amendment No. 3'').
    \8\ See Letter from C. Philip Curley, Robinson Curley & Clayton, 
P.C., to Jonathan G. Katz, Secretary, SEC dated July 15, 1996 
(``Comment Letter No. 2'').
    \9\ See Letter from David Rusoff, Foley & Lardner, to Elisa 
Metzger, SEC dated July 24, 1996.
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II. Description of the Proposals

    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 office 
managers and registered representatives of member firms and member 
corporations. Pursuant to this Rule, in 1987 the Commission approved 
the use of the General Securities Registered Representative Examination 
(``Series 7 Exam'') 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 Exam; (2) allow members located on the 
floor of the CHX to accept orders directly from professional customers 
\10\ 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; \11\ (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.
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    \10\ 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.
    \11\ 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 
examination without unnecessary business disruptions. The phase-in 
period is as follows: Members who were not required to successfully 
complete the Series 7 or Series 7A exam 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.
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    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 members and member organizations must be acceptable to the 
Exchange. A ``control person'' is defined as:

[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 5% or more of a 
class of a voting security or having the power to sell or direct the 
sale of 5% 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, 5% or more of the capital.\12\
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    \12\ In the original filing, the proposed amendment required 
that all control persons and certain shareholders be acceptable to 
the Exchange. Amendment No. 3 deleted the reference to ``certain 
shareholders'' and amended the definition of ``control person'' to 
include those persons who directly or indirectly have the right to 
vote or sell 5% or more of a class of voting security, as opposed to 
10% or more of a class of voting security. Amendment No. 3 also 
clarified that in the case of a partnership, a ``control person'' 
would include those persons who have the right to receive upon 
dissolution, as having contributed 5%, as opposed to 10%, or more of 
the capital.

Additionally, the proposed change clarifies that nominees of member 
firms must be registered with the Exchange.
    Rule 2 of Article VI requires members of member organizations that 
know or in

[[Page 49804]]

the exercise of reasonable care should know that any prospective 
employee is subject to one or more statutory disqualifications to 
submit details on such prospective employee to the Exchange and receive 
Exchange approval before such person becomes associated with the member 
or member organization. Rule 2 also requires that each member or member 
organization take reasonable care to determine the existence of a 
statutory disqualification prior to employing any prospective employee. 
Further, if any person already employed by a member or member 
organization thereafter becomes subject to a statutory 
disqualification, notice must be sent to the Exchange promptly. 
Amendment No. 3 clarifies that these provisions are applicable to 
control persons as well as employees of members or member 
organizations.
    Rule 2 of Article VI states that ``[e]very other employee of a 
member or member organization must also be acceptable to the 
Exchange.'' Amendment No. 3 explains the application of the standard 
``acceptable to the Exchange'' to control persons. In the proposed rule 
change, the Exchange states that the ``acceptable to the Exchange'' 
standard will apply to control persons in the same manner as it has 
applied that standard to employees of members or member organizations 
in the past since the rule was first adopted.\13\ 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.\14\ The filing moves Interpretation and Policy .01, .02, and 
.03 from Rule 3 of Article VI to Rule 2 of that Article \15\ 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.\16\
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    \13\ While the Exchange has not had to apply this standard in 
recent years, the Exchange might apply it if, for example, a 
prospective employee or control person is subject to a statutory 
disqualification or if the person, while not subject to a statutory 
disqualification, is barred from the banking industry because he or 
she stole from customers. See supra note 7.
    \14\ The term ``self-regulatory organization'' is to have the 
statutory meaning. See Amendment No. 2.
    \15\ 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.
    \16\ In the original filing, the proposed amendments to Rule 2 
of Article VI stated that upon notice to a member or member 
organization that the President of the Exchange has withheld or 
withdrawn approval of the employment of any other person, the 
relationship between the member or member organization and such 
person shall be terminated. Amendment No. 3 deletes the reference to 
``the employment of'' any such other person.
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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.

III. Summary of Comments

    The Commission received two comment letters regarding the 
amendments to Article VI, Rule 2, regarding the registration 
requirements for personnel. As stated above, in the original filing, 
the proposed amendment to Article VI, Rule 2, would have required that 
``Every other employee of, any control person, and certain shareholders 
of, a member or member organization must also be acceptable to the 
Exchange.'' In Comment Letter No. 1, the commenter stated that the term 
``certain shareholders'' was not defined. In addition, the commeter 
stated that the phrase ``acceptable to the Exchange'' was too vague a 
standard. In response, the CHX amended the original filing and deleted 
the term ``certain shareholders.'' In the amended filing, the CHX 
provided examples of circumstances in which an individual would not 
meet the ``acceptable to the Exchange'' requirement.\17\
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    \17\ See supra note 13.
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    In comment Letter No. 2, the commenter re-asserted its comment that 
the ``acceptable to the Exchange'' language is too vague. In response 
to Comment Letter No. 2, the CHX claims that Comment Letter No. 2 
restates some of the same concerns that were raised in Comment Letter 
No. 1 and that the CHX believes it fully addressed those comments in 
the amended filing.

Dissussion

    After careful consideration of the comments and the CHX response 
thereto, the Commission has determined to approve the proposed rule 
change. For the reasons discussed below, 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 
Sections 6(b)(5) and 6(c)(3)(B) of the Act.\18\ 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, remover impediments to and perfect 
the mechanism of a free and open market and a national market system, 
to prevent fraudulent and manipulative acts, and, in general, to 
protect investors and the public. Section (6)(c)(3)(B) 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.
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    \18\ 15 U.S.C. 78f(b)(5) and (c)(3)(B).
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    The Commission also believes that the proposed rule changes are 
consistent with Section 15(b)(7) of the Act,\19\ which stipulates that 
prior to effecting any transaction in, or inducing the purchase or sale 
of, any security, a registered broker or dealer must meet certain 
standards of operational capability, and that such broker or dealer 
(and all natural persons associated with such broker or dealer)

[[Page 49805]]

must meet certain standards of training, experience, competence, and 
such other qualifications as the Commission finds necessary or 
appropriate in the public interest or for the protection of investors.
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    \19\ 15 U.S.C. 78o(b)(7).
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Series 7, Series 7A, and Series 7B Exams

    The proposed interpretation and policy to Rule 3 of Article VI will 
clarify and put all persons on notice that any person who conducts a 
public business is required to be registered and qualified as a 
registered representative. Such registration would require, among other 
things, that a person complete the Series 7 Exam, as described in 
Interpretation and Policy .01(d) to Rule 3 of Article VI. Likewise, the 
proposed interpretation and policy will put all persons on notice that 
any person who accepts orders directly from professional customers for 
execution on the trading floor is required to complete a Series 7A Exam 
or Series 7B Exam.
    The Commission believes that the Series 7A Exam and Series 7B Exam 
requirements should help to ensure that only those floor members and 
floor clerks/floor employees with a comprehensive knowledge of Exchange 
rules, as well as an understanding of the Act, will be able to conduct 
a public business limited to accepting orders directly from 
professional customers for execution on the trading floor. The 
Commission has determined that the Content Outlines for the Series 7A 
Exam and the Series 7B Exam are sufficiently detailed and cover the 
appropriate information so as to provide an adequate basis for studying 
the topics covered on the Exam.\20\ These outlines should help to 
ensure that those persons taking the Series 7A Exam or Series 7B Exam 
fully understand the subject matter of those exams.
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    \20\ See supra note 5.
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    The Commission has determined that the proposed limited 
registration requirements for floor members and floor clerks/floor 
employees who accept orders from professional customers is reasonable 
and is consistent with the requirements of Sections 6(b)(5) and 
6(c)(3)(B) of the Act. These new categories of registration would 
permit only those floor members and floor clerks/floor employees who 
have demonstrated adequate skills and knowledge to conduct a public 
business which is generally limited to accepting orders directly from 
professional customers, as defined in the interpretation and 
policy,\21\ for execution on the trading floor. The CHX has argued that 
the level of knowledge, skills and abilities necessary to conduct such 
business is less than that needed to conduct a full service business 
with retail customers. The Commission believes that, because the CHX 
will ensure that floor members handling professional customer business 
are adequately qualified through the use of either the Series 7 Exam, 
Series 7A Exam, or Series 7B Exam, it is consistent with the CHX's 
regulatory responsibilities to establish this category of limited 
registration.
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    \21\ See supra note 10.
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General Membership, Market Maker, and Co-specialist Exams

    The Commission believes that codification of the existing 
requirements that all: (1) Potential floor members successfully 
complete the Floor Membership Exam; (2) potential market makers 
successfully complete the Market Maker Exam in addition to the Floor 
Membership Exam; and (3) co-specialists successfully complete the Co-
specialist Exam, will clarify and put all such persons on notice of 
such requirements. In addition, the Commission believes that these 
exams will help to ensure that only those members with basic trading 
knowledge and ability will have a floor presence. Similarly, the Market 
Maker Exam and the Co-specialist Exam should help to ensure that only 
those members that have an understanding of market makers' and co-
specialists' duties and obligations will be permitted to conduct such 
functions.

Registration of Personnel

    The Commission has determined that the proposal that nominees of 
member firms must be registered with the Exchange is consistent with 
Section 6(c)(3)(B) of the Act, which permits a national securities 
exchange to examine and verify the qualifications of an applicant to 
become a person associated with a member, and require any such person 
to be registered with the exchange in accordance with procedures so 
established.
    The Commission also believes that the requirement that any 
``control person'' must be acceptable to the Exchange is consistent 
with Section 15(b)(7) of the Act \22\ which stipulates that all natural 
persons associated with a registered broker or dealer must meet certain 
standards of training, experience, competence, and such other 
qualifications as the Commission finds necessary or appropriate in the 
public interest or for the protection of investors. While Comment 
Letters No. 1 and 2, assert that this is too vague a standard, all 
employees of members or member organizations currently are subject to 
this standard. Amendment No. 3 would hold control persons to the same 
standard as other employees. Further in Amendment No. 3, the Exchange 
described the parameters of this standard. For example, the Exchange 
would find a person unacceptable if such person was barred from the 
banking industry because he or she stole from customers. The Commission 
has determined that the Exchange has adequately addressed the 
commenter's criticism of this provision.
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    \22\ 15 U.S.C. 78o(b)(7).
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    The proposal also requires that a member or member organization 
must take reasonable care to determine the existence of a statutory 
disqualification of any prospective control person, report any such 
statutory disqualifications of prospective control persons to the 
Exchange, submit details on the statutory disqualification of the 
prospective control person to the Exchange, and receive Exchange 
approval before such person becomes associated with the member or 
member organization. Further, if any control person already employed by 
a member or member organization becomes subject to a statutory 
disqualification, notice must be sent to the Exchange promptly. The 
Commission believes this is consistent with Section 6(c)(3)(B) of the 
Act in that the CHX is verifying the qualifications of a person 
associated with a member or member organization.
    The Commission has determined that the technical changes to Rules 2 
and 3 of Article VI are consistent with the requirements of Section 
6(b)(5) of the Act in that such changes merely update the rules to 
conform to current industry practice. For example, the filing changes 
the term ``Form B/D'' to ``Form BD,'' and changes ``Schedule D'' to 
``Schedule DRP'' to conform to recent changes in the names of those 
forms.

V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\23\ that the proposed rule change (SR-CHX-96-11), including 
Amendments No. 1, 2, and 3, is approved.

    \23\ 15 U.S.C. 78s(b)(2).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\24\
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    \24\ 17 CFR 200.30-3(a)(12).
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Jonathan G. Katz,
Secretary.
[FR Doc. 96-24299 Filed 9-20-96; 8:45 am]
BILLING CODE 8010-01-M