[Federal Register Volume 62, Number 6 (Thursday, January 9, 1997)]
[Notices]
[Pages 1348-1350]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-443]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-38114; File No. SR-CHX-96-30]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Chicago Stock Exchange, Incorporated Relating to 
Standards for Approved Lessors of Exchange Memberships

January 3, 1997.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on November 12, 1996, the Chicago Stock Exchange, Incorporated (``CHX'' 
or ``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change. On December 11, 1996, the 
Exchange filed Amendment No. 1 \3\ to the proposed rule change, on 
December 17, 1996, the Exchange filed Amendment No. 2 \4\ and on 
December 30, 1996, filed Amendment No. 3 \5\ to the proposed rule 
change as described in Items I and II 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 
from interested persons.
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    \1\ 15 U.S.C. Sec. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Letter from David T. Rusoff, Foley & Lardner to David 
Sieradzki, SEC, dated December 11, 1996 (``Amendment No. 1''). 
Amendment No. 1 changes the period of time for an Approved Lessor to 
lease a seat on the exchange from ``a reasonable time'' to within 60 
days after becoming an Approved Lessor. The Exchange will have the 
authority to extend the 60 day time period upon the request of an 
Approved Lessor for good cause shown. In addition, Article IA, Rule 
1, Interpretation and Policy .01 is amended to reduce the percentage 
ownership required to be considered a control person from 10% to 5%. 
This is consistent with recent changes to Article VI, Rule 2, where 
the 5% standard was used.
    \4\ See Letter from David T. Rusoff, Foley & Lardner to David 
Sieradzki, SEC, dated December 17, 1996 (``Amendment No. 2''). 
Amendment No. 2 adds language describing the amendment to Article 
XIV, Rule 2, relating to the imposition of transaction fees.
    \5\ See Letter from David T. Rusoff, Foley & Lardner to 
Katherine England, SEC, dated December 30, 1996 (``Amendment No. 
3''). Amendment No. 3 changes language in Article I, Rule 10 
relating to the ability of the Exchange to waive the requirement 
that no person own or have voting power for more than ten percent of 
the outstanding memberships. The former language, which provided 
that the requirement may be waived by the Exchange ``under 
appropriate circumstances,'' has been replaced by ``for good cause 
shown.'' In addition, the Amendment makes several technical, non-
substantive changes to the filing.
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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 Article I, Article VIII and Article 
XIV of, and add a new Article IA to, the CHX's Rules, to create 
standards for Approved Lessors (as defined below) of Exchange 
memberships.

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
    The purpose of the proposed rule change is to create a new form of 
membership known as an ``Approved Lessor.'' An Approved Lessor will be 
an individual or entity that desires to purchase a membership in the 
CHX for the sole purpose of providing a financing mechanism for another 
person or entity that desires to become a member or member organization 
(``lessee''). A lessor that registers with and is approved by the CHX 
will be an Approved Lessor.
    When an Approved Lessor has entered into this financing 
relationship (or lease) with a lessee, the Approved Lessor will not be 
considered a ``member'' or ``member organization'' of the CHX for 
purposes of the Act, or for purposes of the CHX's Certificate of 
Incorporation, Constitution and Rules except that an Approved Lessor 
will have the right to vote on proposals to liquidate or dissolve the 
Exchange and shall possess liquidation rights, as set forth in Article 
IX, Sec. 2 of the Constitution, upon such dissolution. In addition, an 
Approved Lessor shall be

[[Page 1349]]

subject to the Exchange's member arbitration rules. Among other things, 
this means that an Approved Lessor will be inactive with respect to CHX 
activities. For example, Approved Lessors will not be permitted to vote 
(except as stated above) or trade on the CHX as a member or have any 
access to the CHX trading floor unless an Approved Lessor is also a 
``member'' (i.e., is a registered broker-dealer and has been approved 
by the Exchange as as ``member'' or ``member organization'') pursuant 
to another membership.
    A lessee will be deemed a ``member'' or ``member organization,'' 
and, as a result, a lessee must satisfy all the requirements to become 
a member or member organization currently set forth in CHX Certificate 
of Incorporation, Constitution, Rules and the federal securities laws. 
A lessee will not, however, be entitled to vote on a proposal to 
dissolve or liquidate the Exchange and will not have any liquidation 
rights.
    Because Approved Lessors will not be ``members'' of the CHX, they 
will not be required to be registered as broker-dealers. However, to 
prevent inappropriate persons or entities from having indirect dealings 
on the CHX, Approved Lessors will be required to submit information to 
the CHX on Form BD and/or Form U-4. The CHX will be permitted to 
disapprove registration as an Approved Lessor if the lessor is the 
subject of a statutory disqualification or fails to meet other pre-
requisites set forth in the rule. For example, a lessor may be denied 
registration as an Approved Lessor if, among other things, it or its 
employees or control persons are subject of or a party to a 
disciplinary proceeding, are or have been, suspended, barred or 
expelled by a regulatory entity (including a self-regulatory 
organization) described in the rule, have been convicted of certain 
criminal offenses set forth in the rule, or have not paid dues, fines, 
charges or other debts to a regulatory entity.
    In addition, an Approved Lessor will be required to enter into a 
financing arrangement (or lease) with a lessee within sixty days (this 
time period may be extended upon request of an Approved Lessor for good 
cause shown) after becoming approved as an Approved Lessor or the 
termination of an earlier financing arrangement (or lease). If a 
financial arrangement (or lease) is not entered into, the Approved 
Lessor will be required to promptly dispose of the membership. If not 
promptly disposed of, the CHX will be permitted to sell the membership 
on the Approved Lessor's behalf. This provision will prevent Approved 
Lessors from acquiring one or more memberships purely to speculate on 
the price of the membership and will ensure that memberships do not sit 
idle.
    Until the Approved Lessor enters into a financing arrangement (or 
lease) with a lessee, or, after such financing arrangement (or lease) 
has been terminated and the seat transferred to Approved Lessor, the 
Approved Lessor will still not be a ``member'' for purposes of the 
federal securities laws or the Exchange's Certificate of Incorporation, 
Constitution and Rules (except with respect to voting on dissolution, 
rights to net proceeds on dissolution, and the Exchange's member 
arbitration rules). During this time, the membership shall be viewed as 
inactive, but the dues shall continue to accrue and will be the 
obligation of the Approved Lessor.
    Current CHX rules protect the CHX and other CHX members by 
providing that the proceeds received in the transfer of a membership 
are first to be applied to satisfy the debts owed by the transferor 
member to the Exchange or certain other persons. However, because 
Approved Lessors are not ``members'' of the Exchange, the Exchange will 
require Approved Lessors, and their lessees, to enter into a standard 
subordination and sale agreement with the CHX that provides that the 
CHX is authorized to sell the membership under certain circumstances 
when obligations are owed to the CHX or certain other creditors by the 
lessee and whereby the Approved Lessor agrees to be bound by CHX rules 
relating to Approved Lessors, among other things.
    The proposed rule change also makes technical, nonsubstantive 
changes to improve the clarity of Article I, Rule 17.
    The proposed rule change sets forth specific provisions that the 
CHX will require in any financing agreement or lease. The CHX will 
require that these agreements be filed with, and approved by, the CHX. 
Additionally, the transfer of the title to the membership to a lessee 
will be posted in the same manner as all other transfers of 
memberships.
    Furthermore, the proposed rule change prohibits members and 
Approved Lessors from owning or controlling 10% or more of the 
outstanding memberships on the Exchange.
    Finally, the proposed rule change amends Article XIV, Rule 2, 
relating to the imposition of transaction fees to reflect present 
practice. The rule currently provides that the rate of these fees shall 
be fixed before the close of each fiscal year. The proposed rule 
provides that they are fixed from time to time.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b) of the Act \6\ in general and furthers the objectives 
of Section 6(b)(5) \7\ in particular in that it is designed to promote 
just and equitable principles of trade, to remove impediments to and 
perfect the mechanism of a free and open market and a national market 
system and, in general, to protect investors and the public interest.
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    \6\ 15 U.S.C. Sec. 78f(b).
    \7\ 15 U.S.C. Sec. 78f(b)(5)
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any inappropriate burden on competition.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    No written comments were either solicited or 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 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

[[Page 1350]]

those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. Sec. 552, will be available for inspection and 
copying at the Commission's Public Reference Room. Copies of such 
filing will also be available for inspection and copying at the 
principal office of the Exchange. All submissions should refer to File 
No. SR-CXH-96-30 and should be submitted by January 30, 1997.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority. \8\
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    \8\ 17 C.F.R. 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-443 Filed 1-8-97; 8:45 am]
BILLING CODE 8010-01-M