[Federal Register Volume 62, Number 62 (Tuesday, April 1, 1997)]
[Notices]
[Pages 15555-15559]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-8231]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-38439; File No. SR-CHX-96-31]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Chicago Stock Exchange, Inc., To Amend Articles IV, VII, 
and XII of the Exchange's Rules To Modify the Exchange's Disciplinary 
Procedures

March 25, 1997.
    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 December 
9, 1996,\1\

[[Page 15556]]

the Chicago Stock Exchange, Inc. (``CHX'' or ``Exchange'') filed with 
the Securities and Exchange Commission (``Commission'') the proposed 
rule change 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 comments on the proposed rule 
change from interested persons.
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    \1\ The Exchange filed Amendment No. 1 with the Commission on 
February 18, 1997, the substance of which is incorporated into this 
notice. See letter from David Rusoff, Attorney, Foley & Lardner, to 
Katherine England, Assistant Director, Market Regulation, 
Commission, dated February 17, 1997.
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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 Articles IV, VII, and XII of the 
Exchange's Rules to modify the Exchange's disciplinary procedures.

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, which makes substantive 
changes to some portions of the disciplinary procedures, is to provide 
a balanced process for managing disciplinary matters by bringing peer 
review into the disciplinary process while at the same time including 
independent review and participation by public members of the Board of 
Governors or other individuals not connected to the Exchange during 
each stage of the disciplinary process. The proposed rule change is 
also meant to harmonize Exchange practice with that of other exchanges 
by separating key management personnel who have overall responsibility 
for the ``business'' areas of the Exchange from the disciplinary 
process. To accomplish this goal, the proposed rule change eliminates 
the active role the President has played in the disciplinary process. 
The Exchange feels that it is more appropriate for the President, who 
runs the daily business of the Exchange, to be separated from the 
disciplinary process. The Exchange notes that no other exchange has its 
chief executive officer involved in the disciplinary process.
    Additionally, as described more fully below, the proposed rule 
change eliminates one level of internal appeal after a hearing. Rather 
than permitting respondents to appeal to the Judiciary Committee and 
then the Executive Committee, the decision of a reconstituted Judiciary 
Committee will be final. The Exchange believes that the prior system of 
double review was an inefficient use of CHX resources.
    The Exchange believes that the proposal is timely. The Governance 
Committee of the CHX has, for some time, been examining several 
governance issues affecting the Exchange. For example, the Governance 
Committee was instrumental in developing the recent proposal to create 
a class of ``approved lessors'' on the Exchange.\2\ Another area that 
the Governance Committee focused on is disciplinary procedures and the 
proposal contained herein is, in large part, the completion of the 
Governance Committee's efforts.
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    \2\ See SR-CHX-96-30.
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    The proposal extensively amends Article XII, dealing with 
discipline and hearing procedures, and the rules thereunder. Proposed 
Rule 1(a) provides that Exchange staff will investigate potential 
disciplinary matters brought to their attention and make a report to an 
Initial Determination Panel, rather than to the President, if the staff 
decides to recommend changes. Proposed Rule 1(b) provides for a new 
Hearing Pool, a standing body of individuals appointed jointly by the 
Chairman and the Vice Chairman, with the approval of the Executive 
Committee or the Board of Governors. The Hearing Pool will consist of 
not less than twelve and not more than twenty-five members. The 
Exchange feels that this range is appropriate, based on its analysis of 
the historical number of disciplinary procedures brought before the 
Exchange, together with the complexity of those proceedings. At least 
four Hearing Pool members must be public governors of the Exchange or 
other individuals not affiliated with the Exchange or with any broker 
or dealer. These Hearing Pool members are referred to as ``Unaffiliated 
Panelists.'' These unaffiliated panelist members of the Hearing Pool 
may be individuals other than public governors, in part, because of the 
limited number of public governors on the CHX. Moreover, the use of 
such ``outside'' Hearing Pool members will permit the Exchange to take 
advantage of outside expertise that is often useful in conducting 
disciplinary proceedings. Continued use of such expertise would assist 
in assuring efficient and fair disciplinary procedures. The remaining 
members of the Hearing Pool shall be chosen from among members of the 
Exchange and partners, officers, and directors of member firms.
    The Exchange intends to require each member of the Hearing Pool to 
complete a questionnaire upon such member's appointment to either an 
Initial Determination Panel or a Hearing Panel. The purpose of such 
questionnaire will be to assist in identifying any potential conflicts 
of interest. In addition, under the proposed rule change, each Hearing 
Pool member has an affirmative obligation to bring actual and potential 
conflicts of interest to the attention of the Chairman and the Vice 
Chairman.
    Under proposed Rule 1(c), reports of staff investigations of 
possible disciplinary violations will be made to an Initial 
Determination Panel selected for that disciplinary matter, consisting 
of three disinterested individuals, chosen from the Hearing Pool, 
appointed jointly by the Chairman and the Vice Chairman with the 
approval of the Executive Committee or the Board. For purposes of 
proposed Rule 1(c) and related proposed Rule 1(g), ``disinterested'' 
means that the individual cannot have any direct or indirect interest 
in the disciplinary matter, or any other conflict of interest, which 
might preclude the individual from rendering an objective and impartial 
determination. the Exchange will determine if an individual is 
disinterested using the questionnaire described above and the 
provisions in proposed Rule 1(c) and proposed Rule 1(g) that put an 
affirmative obligation on the individual to report any actual or 
potential conflicts of interest to the Chairman or Vice Chairman. Each 
Initial Determination Panel will include at least one Hearing Pool 
member who is an Unaffiliated Panelist.
    All decisions of the Initial Determination Panel will be made by 
majority vote. Each Initial Determination Panel will have the authority 
to determine the manner in which it will proceed, consistent with the 
other disciplinary rules. An Initial Determination Panel will be 
automatically dissolved once it completes all of its duties, either 
immediately if no charges are brought by the Initial Determination 
Panel (or by

[[Page 15557]]

the Executive Committee on appeal of the Initial Determination) or, if 
the disciplinary matter proceeds, after the Hearing Panel has issued a 
decision or has otherwise completed its work. If a member of the 
Initial Determination Panel is unable to continue serving on the Panel 
without causing undue delay, or is not qualified to continue serving on 
the panel, a new member of the Hearing Pool will be selected to replace 
him or her and will be given adequate opportunity to review the 
proceedings of the Initial Determination Panel and familiarize him or 
herself with the evidence and documents. The Exchange has determined 
that a period of two weeks or less will not constitute ``undue delay.''
    Under proposed Rule 1(d), the Initial Determination Panel, rather 
than the President, as is the case under the current rules, determines 
whether or not to bring charges. The Exchange staff may appeal the 
decision of the Initial Determination Panel not to bring charges to the 
Executive Committee or the Board, not including Executive Committee 
members, if any, who have been involved in that particular disciplinary 
proceeding up to that time. Review by the Executive Committee or Board 
will be de novo review and that decision will be final. Proposed Rule 
1(e) provides that if either the Initial Determination Panel (or the 
Executive Committee or Board on appeal) decides that it appears that 
the accused has committed a default or other offense in violation of 
the Exchange's Constitution or rules, the Initial Determination Panel 
(or Executive Committee or Board on appeal) shall direct the Exchange 
staff to bring charges, a copy of which shall be served in writing on 
the accused. The proposed rule change modifies the title of proposed 
Rule 1(f) from ``Serving Instruments on the Accused'' to ``Serving 
Charges.''
    Proposed Rule 1(g) provides for the appointment of a Hearing Panel 
by the Chairman and Vice-Chairman, with the approval of the Board. The 
Hearing Panel will consist of three persons chosen from the Hearing 
Pool and one member of the Hearing Panel must be an Unaffiliated 
Panelist. The Hearing Panel may not include any Hearing Pool members 
who were members of the Initial Determination Panel for that particular 
matter. Hearing Panel members must be disinterested \3\ and will be 
required to report any actual or potential conflicts of interest to the 
Chairman or Vice Chairman.
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    \3\ See supra discussion relating to the definition of 
``disinterested.''
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    Under proposed Rule 1(g), the Hearing Panel will consider the 
charges, will conduct a hearing if requested, and will decide whether 
the accused has committed the violations alleged and, if so, what 
sanction should be imposed. As with the Initial Determination Panel, 
all decisions of the Hearing Panel will be made by majority vote; the 
Hearing Panel will automatically dissolve after completing its duties 
and notifying the Secretary in writing of its decision. Each Hearing 
Panel will have the authority to determine the manner in which it 
proceeds consistent with these Rules. If a member of the Hearing Panel 
is unable to continue serving on the Panel without causing an undue 
delay, or is not qualified to continue serving on the Panel because of 
the existence of a relationship between him or her and the person or 
persons involved in the matter, a new member of the Hearing Pool will 
be selected to replace him or her and will be given adequate 
opportunity to review the proceedings of the panel and familiarize 
himself or herself with the evidence and documents so far presented to 
the Hearing Panel.
    As mentioned above, all Initial Determination Panels and Hearing 
Panels will have the authority under the proposed rule change to 
determine their own procedures. The Exchange believes that this is 
appropriate, given the limited number of disciplinary cases brought by 
the CHX. The Exchange believes that this is appropriate, given the 
limited number of disciplinary cases brought by the CHX. The Exchange 
believes that flexibility in procedures is necessary because each case 
differs in the complexity of issues and the need for particular 
procedures. For example, a very complex case may require a lengthy 
briefing schedule to adequately address all issues raised. On the other 
hand, a simple case with few contested issues may be conducted much 
more efficiently on an expedited basis. Therefore, the Exchange does 
not believe that it would be appropriate to establish one set of 
procedures that would necessarily apply to all disciplinary procedures.
    The Exchange proposed to modify current Rules 2(a) (Minor 
Infractions) and 2(b) (Summary Hearing and Sanction) to make those 
parts of these summary proceedings that were formerly the 
responsibility of the President the responsibility of an Initial 
Determination Panel. Summary proceedings for minor infractions under 
Rule 2(a) and for summary hearings and sanctions under Rule 2(b) will 
be used only if the investigation and report provided for in Rule 1(a) 
expressly recommend that the Initial Determination Panel proceed 
according to Rule 2(a) or Rule 2(b). Appeals of summary proceedings 
under Rule 2(a) will now be made to a Judiciary Committee, rather than 
the Executive Committee, in order to harmonize the minor infraction 
proceedings appeals process with the regular disciplinary proceedings 
appeals process. The Exchange believes that because the maximum fine 
that can be imposed pursuant to Rule 2(a) has not been changed in many 
years, and inflation has eroded the desired impact of the fine, the 
maximum fine amount should be increased. As a result, the proposed rule 
change will increase the fine amount that the Initial Determination 
Panel may impose pursuant to Rule 2(a) will be increased from $500 to 
$5,000.
    The Exchange also proposes to amend Rule 2(b) to remove all 
references to Midwest Clearing Corporation and Midwest Securities Trust 
Company, and replace the term ``penalty'' with ``sanction'' whenever it 
occurs. The proposed changes to Rule 2(b) also make clear that Rule 
2(b) may only be used upon the agreement by the accused to have his 
proceeding heard by an Initial Determination Panel, rather than the 
President, as the rule currently states.
    The proposed rule change renumbers current Rule 2(c), relating to 
settlement procedure, as Rule 3. Under proposed Rule 3, the Initial 
Determination Panel will assume the role the President previously held 
under this section. Proposed Rule 3 will explicitly permit the accused 
to propose an offer of settlement to the Initial Determination Panel at 
any time before a judgment is rendered by a Hearing Panel. In addition, 
the Initial Determination Panel may accept an offer of settlement up 
until a judgment is rendered by the Hearing Panel hearing the case as 
long as the offer is not otherwise withdrawn. The accused cannot 
withdraw an offer of settlement once the Initial Determination Panel 
has accepted it. An offer of settlement must contain a proposed 
sanction and a waiver of appeal rights. If the offer of settlement is 
submitted within fifteen days from the date of service of the charges, 
the accused will receive an additional ten-day period from the time of 
the receipt of the Initial Determination Panel's non-acceptance of the 
offer of settlement to file any response required by proposed Rule 
7(a).\4\
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    \4\ Proposed Rule 7(a), current Rule 5, deals with the conduct 
of the disciplinary hearing.
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    The proposed rule change renumbers current Rule 2(d), relating to 
actions by other self regulatory organizations, as

[[Page 15558]]

Rule 4. The proposed rule change modifies proposed Rule 4 to harmonize 
the language in proposed Rule 4 with the definition of statutory 
disqualification contained in the Act by adding ``person associated 
with a member'' to the list of those entities affected by proposed Rule 
4 and by replacing the phrase ``exchange or association'' with the 
phrase ``self-regulatory organization.'' The proposed rule change to 
proposed Rule 4 also adjusts internal cross-references to the Rule.
    The proposed rule change renumbers current Rule 2(d)(1) as Rule 
4(a) and amends proposed Rule 4(a) to provide that if an entity is the 
subject of an action by another self-regulatory organization and as a 
result falls within proposed Rule 4(a), the staff may so advise an 
Initial Determination Panel, instead of the President. The Initial 
Determination Panel may then proceed under proposed Rule 4(b) (current 
Rule 2(d)(2)). If the staff recommends to the Initial Determination 
Panel that it proceed under Rule 4(b) but the Initial Determination 
Panel elects not to proceed, the staff will have the right to appeal 
the Initial Determination Panel's decision to the Board; provided, 
however, that the Chairman, the Vice Chairman, the President, and any 
other member of the Initial Determination Panel that denied the staff's 
request who is also on the Board shall not hear any such appeal. The 
Board will review de novo the decision of the Initial Determination 
Panel; the decision of the Board as to whether to proceed under 
proposed Rule 4(b) will be final.
    The existing language in current Rule 2(d)(1) regarding 
commencement of sanctions being concurrent with and no greater than the 
sanctions of other sanctioning bodies upon whose action the Exchange's 
action is based has been moved to new Rule 4(b). The proposed rule 
change also modifies proposed Rule 4(a) to clarify that nothing in Rule 
4(a) precludes the taking of any action against any person against whom 
action may be taken under any other Section of this Article or Rule of 
the Exchange. The current rule language states that nothing in the Rule 
(prior to Rule 2(d)(1), proposed Rule 4(a)) precludes the Exchange from 
proceeding against any person, as opposed to the taking of any action 
against any person. Proposed Rule 4(b) will state that the Initial 
Determination Panel will occupy the role previously occupied by the 
President. Additionally, the proposed rule change renumbers current 
rule 2(d)(3) as proposed Rule 4(c) and amends it to replace the word 
``penalty'' with the word ``sanction'' and the word ``President'' with 
the phrase ``Initial Determination Panel.''
    The proposed rule change renumbers current Rule 3 as Rule 5 and 
adjusts internal cross-reference to the Rule accordingly. The proposed 
rule change renumbers current Rule 4 as Rule 6 and replaces the phrase 
``the President'' with the phrase ``the Initial Determination Panel'' 
and the word ``penalty'' with the word ``sanction.''
    The proposed rule change renumbers current Rule 5, relating to the 
conduct of hearing, as Rule 7 and replaces the term ``trial'' with the 
word ``hearing'' whenever it occurs. Proposed Rule 7(a) states that 
hearings will be conducted by a Hearing Panel appointed in accordance 
with Rule 1 instead of by a Hearing Examiner appointed by the 
President. Under proposed Rule 7(a), the Initial Determination Panel, 
rather than the President, will have the authority to grant extensions 
of time for answering charges. In addition, the proposed rule change 
replaces the word ``should'' with the word ``shall'' when describing 
what is required in an answer to the charges.
    Proposed Rule 7(b) eliminates the role of the Hearing Examiner and 
the President in determining guilt and sanctions. Under proposed Rule 
7(b), the Hearing Panel will render its judgment, and may find that the 
accused has committed all or some of the violations as charged, or that 
the accused has committed none of the violations charged. Under 
proposed Rule 7(b), the Hearing Panel will have the authority to impose 
appropriate sanctions. The decision of the Hearing Panel will be in 
writing, three copies of which will be signed by the Chairman of the 
Hearing Panel.
    Proposed Rule 7(c) provides that prosecution of charges will be the 
responsibility of senior Exchange staff members who will no longer 
necessarily be appointed by the President. Proposed Rule 7(c) also 
states that Exchange counsel shall be present as counsel to the Hearing 
Panel. Proposed Rule 7(d) provides all members of a Hearing Panel must 
be impartial and independent of the staff members who prepared and 
prosecuted the charges. Proposed rule 7(d) also provides that Exchange 
counsel may assist the Hearing Panel in preparing its judgment.\5\
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    \5\ The Commission notes that the Exchange has stated that the 
Exchange staff prosecuting the charges are different from Exchange 
counsel that is counsel to the Hearing Panel. Phone conversation 
between David Rusoff, Foley & Lardner, Craig Long, Foley & Lardner, 
Katherine England, Assistant Director, Market Regulation, 
Commission, and Heather Seidel, Attorney, Market Regulation, 
Commission, on January 22, 1997.
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    The proposed rule change renumbers current Rule 6, the review 
section, as Rule 8. Under proposed Rule 8 the accused and the Exchange 
staff will have fifteen days from the date of service of any judgment 
imposed under Rules 4(b), 6(b), or Rule 7, rather than from the date of 
notice of a penalty imposed, to demand review of the judgment. Appeals 
under these sections will be made to a reconstituted Judiciary 
Committee.\6\ The standard of review on appeal will be similar to what 
it currently is; the Judiciary Committee may not reverse or modify the 
judgment under review unless the majority of the Judiciary Committee 
finds that the applicable panel's decision (either the Initial 
Determination Panel or the Hearing Panel) is not supported by 
substantial evidence or that the decision is arbitrary, capricious or 
an abuse of discretion.\7\ Proposed Rule 8 provides that the Judiciary 
Committee's decision will be final and deletes current Rules 6(b) and 
6(c), which provide for appeal to the Executive Committee and the Board 
of Governors. The Exchange notes that this change will eliminate the 
system of double review. Proposed Rule 8 also make clear that all final 
determinations by the Judiciary Committee are appealable to the 
commission in accordance with applicable Commission Rules.
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    \6\ See infra amendments to Article IV, Rule 5, relating to the 
manner or appointment of the Judiciary Committee.
    \7\ The language of current Rule 6 states that ``[t]he Judiciary 
Committee may not reverse, or modify, in whole or in part, the 
decision of the Hearing Examiner and Final Judgment of the President 
under paragraph (b) of Rule 4 or under Rule 5 if the factual 
conclusions in the decision are supported by substantial evidence 
and such decision is not arbitrary, capricious or an abuse of 
discretion.''
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    The proposed rule change renumbers current Rule 7 as Rule 9 and 
deletes references to appeals to the Executive Committee or the Board 
of Governors. The proposed rule change also renumbers current Rule 8 as 
Rule 10, current Rule 9 as Rule 11, and current Rule 10 as Rule 12. 
Proposed Rule 11, Minor Rule Violations, corrects internal cross-
references to the rules amended by this rule filing and provides that 
reports of a Minor Rule Violation Panel recommending that disciplinary 
charges be brought will now be made to an Initial Determination Panel, 
rather than the President.
    The proposed rule change amends Article IV, Rule 5 to modify the 
manner of appointment of a Judiciary Committee. The Chairman, rather 
than the President, will appoint five members of the Board of 
Governors, excluding the Chairman, Vice

[[Page 15559]]

Chairman, President, and all governors who have already served on the 
Initial Determination Panel or Hearing Panel convened in connection 
with a disciplinary matter to be reviewed. Two of the five members of 
the Judiciary Committee will be non-member (public) governors. The 
proposed rule change also amends Article VII, Rule 5(a) in order to 
clarify that the President's power of emergency suspension extends to 
persons associated with members, in addition to members and member 
organizations. The Exchange believes that this change codifies the 
Exchange's authority, as set forth in Section 6(b)(6) of the Act, in 
CHX rules.
    The Exchange proposes that the proposed rule change become 
effective sixty days after approval by the Commission. This time period 
will give the Exchange adequate time to implement the new procedures 
and appoint a Hearing Pool. The Exchange proposes that, in general, if 
a disciplinary action has commenced and is pending as of the date of 
effectiveness of the proposed rule change, all of the new rules and 
procedures should apply. However, if a Hearing Officer has already been 
appointed pursuant to the old rules then the old hearing rules should 
apply. In any event, so long as no appeal has been filed by the date of 
effectiveness of the proposal, the new appellate rules and procedures 
shall apply except that, if a Hearing Officer presided at the hearing, 
references in the appeal rules to decisions of the Initial 
Determination panel or Hearing Panel, as the case may be, should be 
changed to ``hearing officer and final judgment of the President.''
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b)(5) of the Act \8\ in that it is designed to promote 
just and equitable principles of trade, to foster cooperation and 
coordination with persons engaged in regulating securities 
transactions, 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. The proposed rule change is 
also consistent with Section 6(b)(7) of the Act \9\ in that it provides 
a fair procedure for the disciplining of members and persons associated 
with members.
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    \8\ 15 U.S.C. 78f(b)(5).
    \9\ 15 U.S.C. 78f(b)(7).
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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 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 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 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-CHX-96-31 and 
should be submitted by April 22, 1997.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-8231 Filed 3-31-97; 8:45 am]
BILLING CODE 8010-01-M