[Federal Register Volume 62, Number 66 (Monday, April 7, 1997)]
[Notices]
[Pages 16632-16634]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-8793]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-38445; File No. SR-CHX-96-30]
Self-Regulatory Organizations; Chicago Stock Exchange,
Incorporated; Order Granting Approval to Proposed Rule Change Relating
to Standards for Approved Lessors of Exchange Memberships
March 26, 1997.
I. Introduction
On November 12, 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 create standards for approved
lessors of exchange memberships.
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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 January 9, 1997.\3\ No comments were received on the
proposal. This order approves the proposal.
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\3\ Securities Exchange Act Release No. 38114 (January 3, 1997),
62 FR 1348 (January 9, 1997).
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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 organization
(``lessee''). A lessor that registers with and is
[[Page 16633]]
approved by the CHX will be an Approved Lessor.\4\
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\4\ Article I, Rule 6 of the CHX Rules has been amended,
reducing the Executive Committee vote required to approve a
membership or approved lessor application from a \2/3\ majority to a
simple majority. Securities Exchange Act Release No. 38187 (January
21, 1997), 62 FR 4367 (January 29, 1997) (order approving File No.
CHX 96-29).
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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 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 a ``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 the 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 the 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 an 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 the 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
objection 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, non-substantive
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.
III. Discussion
As discussed above, the proposal creates a new Approved Lessor
membership category on the CHX. This new category will permit entities
who are not registered broker-dealers to purchase a CHX membership for
the purpose of leasing that seat to a qualified CHX member.
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).\5\ In particular,
the Commission believes the proposal is consistent with the Section
6(b)(5) \6\ requirements that the rules of an exchange be designed to
promote just and equitable principles of trade, to prevent fraudulent
and manipulative acts, and, in general, to protect investors and the
public interest. The Commission also believes that the proposal is
consistent with the Section 6(b)(7) \7\ requirements that the rules of
an exchange provide a fair procedure for the disciplining of members,
the denial of membership to any person seeking membership therein, and
the prohibition or limitation by an exchange of a person's access to
services offered by the exchange. Finally, the Commission believes that
the proposal is consistent with the Section 6(b)(8) \8\ requirement
that the rules of an exchange not impose any burden on competition not
necessary or
[[Page 16634]]
appropriate in furtherance of the purposes of the Act.
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\5\ 15 U.S.C. 78f(b).
\6\ 15 U.S.C. 78f(b)(5).
\7\ 15 U.S.C. 78f(b)(7).
\8\ 15 U.S.C. 78f(b)(8).
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Section 6(b)(5) requires the rules of an exchange to be designed to
remove impediments and to perfect the mechanism of a free and open
market. This proposal seeks to remove those barriers to exchange
membership imposed by both the cost of an equity interest on the
Exchange and the current availability of seats for purchase. The
proposal further removes impediments to the mechanism of a free and
open market by providing members with more alternatives in how they
will structure their membership affiliations. Further, Section 6(b)(8)
states that the rules of an exchange may not impose any burden on
competition not necessary or appropriate in furtherance of the purposes
of the Act. The CHX proposal would remove a burden on competition in
that broker-dealers who are unable to purchase a seat on the CHX may
enter into a leasing agreement and thus enhance their ability to
compete with other CHX broker-dealers.
The Commission also believes that the proposed rule change is
consistent with previous no action positions taken by the Commission
construing the requirements of Section 6(c)(1) (A) and (B) of the Act
and the definition of ``member'' under Section 3(a)(3)(A) of the
Act.\9\ We have interpreted those provisions to allow an exchange to
permit a natural person to own an exchange membership, under
circumstances like those required under the proposed CHX rule change,
where that person has either inherited the membership or purchased it
solely for the purpose of leasing that membership, where that person is
not an associated person of the lessee, and where that person is not
and has not been engaged in securities activities for which broker-
dealer registration is required.
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\9\ See letter from Jeffrey L. Steel, Special Counsel, Division
of Market Regulation, SEC to Arne R. Rode, Associate General
Counsel, Chicago Board Options Exchange, dated January 2, 1980.
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IV. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\10\ that the proposed rule change (SR-CHX-96-30) is approved.
\10\ 15 U.S.C. 78s(b)(2).
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For the Commission, by the Division of Market Regulation,
Pursuant to delegated authority.\11\
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\11\ 15 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-8793 Filed 4-4-97; 8:45 am]
BILLING CODE 8010-01-M