[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

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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