[Federal Register Volume 63, Number 24 (Thursday, February 5, 1998)]
[Notices]
[Pages 5982-5985]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-2886]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-39603; File No. SR-CHX-97-36]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Chicago Stock Exchange, Inc. and Amendment No. 1 to the 
Proposed Rule Change Relating to the Structure and Composition of the 
Board of Governors

January 30, 1998.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on December 16, 1997, the 
Chicago Stock Exchange, Incorporated (``CHX'' or ``Exchange'') filed 
with the Securities and Exchange Commission (``Commission'' or ``SEC'') 
the proposed rule change, as described In Items I, II, and III below, 
which Items have been prepared by the self-regulatory organization. 
Amendment No. 1 to the proposed rule change was received by the 
Commission on January 20, 1998.\2\ The Commission is publishing this 
notice to solicit comments on the proposed rule change, as amended, 
from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ Letter from Joseph M. Klauke, Foley & Lardner to Katherine 
A. England, Assistant Director, Division of Market Regulation, 
Commission dated January 16, 1998. Several additional non-
substantive changes to the proposed rule change are also included in 
this Notice. Telephone call between Joseph M. Klauke, Foley & 
Lardner and Mandy S. Cohen, Division of Market Regulation, 
Commission dated January 27, 1998.
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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, III, IV and V of its 
Constitution and Article IV, Rules 7, 8 and 10 of its Rules relating to 
the structure and composition of its Board of Governors.

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

[[Page 5983]]

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 amend the Exchange's 
Constitution and Rules to promote an enhanced governance structure for 
the Exchange. The proposed changes are based upon recommendations made 
by the Exchange's Governance Committee, whose purpose it is to review 
and make recommendations regarding the Exchange's governance structure, 
including the operations of the Exchange and the composition of its 
Board, committees, and other entities involved in the Governance of the 
Exchange.
    The most significant proposed changes to the Constitution and Rules 
concern reducing the size of the Board and changing its composition. 
The Constitution currently provides for a Board composed of twenty-
seven Governors. The proposed changes would reduce that number to 
twenty-four. Reducing the size of the Board will make deliberations 
more efficient and manageable. Given the Exchange's withdrawal from the 
clearance and settlement and securities depository businesses, and 
recent sale of the Exchange's remaining operating subsidiary, a smaller 
Board is appropriate.
    The Board currently consists of the Vice Chairman of the Board, the 
President, sixteen Governors who are members, general partners of 
member firms or officers of member corporations (``Member Governors'') 
and nine Governors who are unaffiliated with the Exchange or any broker 
or dealer in securities (``Non-member Governors''). The proposed 
changes would reduce the number of Member governors to ten and increase 
the number of Non-member Governors to twelve (and re-categorize them as 
``Non-Industry'' as described below). The result would be a fifty 
percent representation of Non-Industry Governors on the board.
    The amendments include a series of new definitions. Currently, 
there are no definitions of the terms ``Non-Industry'' and ``Public.'' 
The definitions set forth in the amendments preclude the possibility 
that someone with other than a nominal connection with the securities 
industry could be considered Non-Industry.
    The definition of Non-Industry encompasses one who is a Public 
governor or committee member, an officer or employee of an issuer of 
securities listed exclusively on the Exchange, or any other individual 
who:
     Is not, or has not served in the prior three years (or 
such lesser period as deemed appropriate by the Exchange, in its 
discretion, but not less than one year), as an officer, director, or 
employee of a broker or dealer and has not had (within the same time 
period specified above) an ownership interest in a broker or dealer 
that permits him or her to be engaged in the day-to-day management of a 
broker or dealer. However, an outside director or a director not 
engaged in the day-to-day management of a broker or dealer may be 
considered ``Non-Industry;''
     is not an officer, director (not including an outside 
director), or employee of an entity that owns more than ten percent of 
the equity of a broker or dealer that accounts for more than five 
percent of the entity's gross revenues;
     does not own more than five percent of the equity 
securities of any broker or dealer, whose investments in brokers or 
dealers do not exceed ten percent of his or her net worth, or whose 
ownership interest does not otherwise permit him or her to be engaged 
in the day-to-day management of a broker dealer;
     does not provide and whose firm does not provide 
professional services to brokers or dealers that constitute twenty 
percent or more of his or her professional revenues or twenty percent 
or more of the gross revenues received by the individual's firm;
     does not provide and whose firm does not provide 
professional services to a director, officer, or employee, in their 
professional capacities, or a broker, dealer, or corporation that owns 
fifty percent or more of the voting stock of a broker or dealer, and 
which constitute twenty percent or more of his or her professional 
revenues or twenty percent or more of the gross revenues received by 
the individual's firm; and
     has not had a consulting or employment relationship with 
and has not provided professional services to the Exchange at any time 
within the last three years.
    The definition of ``Public'' is an individual who has no material 
business relationship with a broker or dealer, or the Exchange. At 
least five of the Non-Industry Governors must be ``Public,'' and 
therefore unaffiliated with the brokerage industry in any material way.
    Specific definitions of the types of Member Governors will also be 
included. ``On Floor'' when used in the context of Governors and 
committee members will mean members who are primarily engaged in 
business on the Exchange's trading floor or persons associated with 
member organizations primarily engaged in business on the Exchange's 
trading floor.\3\ ``Off-Floor'' when used in the context of Governors 
and committee members, will mean members and persons associated with 
member organizations who are not ``On-Floor.'' In addition, the 
proposed amendments will require a minimum of four On-Floor Member 
Governor positions and four Off-Floor Member Governor positions.
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    \3\ The current Constitution and Rules refer to those persons 
who are ``active on the floor of the Exchange'' as floor Governors, 
although a specific definition is not included. These persons have 
been interpreted to include floor members acting as, i.e., floor 
brokers, market makers or specialists. The definition of ``On-
Floor'' is somewhat broader in scope, and will include all persons 
associated with floor members under the current interpretation.
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    Also the rules currently require nine of the Member Governors to be 
from the Chicago area and seven to be from elsewhere. The proposed 
amendments will eliminate the distinction.
    In addition to requiring a balanced Board, the proposed amendments 
also require that not less than fifty percent of the members of the 
Executive Committee, the Compensation Committee and the Audit Committee 
be ``Non-Industry'' (including at least one Public Governor on the 
Compensation Committee and the Audit Committee), and that the 
Nominating Committee be composed of fifty percent Non-Industry and 
fifty percent Member representatives. Currently, the Audit, Executive, 
and Compensation Committees have this balance, but such balance is not 
required. The Nominating Committee currently has five members, two of 
which are Non-Industry. The change to require balanced committees would 
be effective upon SEC approval of the proposed rule change for these 
committees, except the Nominating Committee. One additional Non-
Industry person would be added to the Nominating Committee to achieve 
balance in conjunction with the 1999 Annual Election.
    Currently there are no provisions in the Exchange's Constitution or 
Rules which specify the Member/Non-Industry makeup of a quorum. The 
current quorum requirement for the Board and the Compensation and Audit 
Committees is one-half of their

[[Page 5984]]

members, and for the Executive and Nominating Committees, a majority of 
their members. Under the proposed amendments, a quorum for the 
transaction of business on the Board of Governors, the Nominating 
Committee, the Executive Committee, the Compensation Committee and the 
Audit Committee would also require not less than fifty percent of the 
number of Non-Industry Board members or committee members, as 
applicable. To lessen the possibility that the Exchange would not be 
able to transact business because at least half of the Non-Industry 
Board or Committee members cannot attend a meeting, the proposed 
amendment would allow the Exchange to obtain pre-meeting waivers of 
attendance from the Non-Industry Board or Committee members. If at 
least fifty percent of the Non-Industry Board or Committee members are 
either present at a meeting or have waived their attendance for the 
meeting after receiving notice of, and an agenda for, such meeting, 
then the requirement that at least fifty percent of the Non-Industry 
Board or Committee members be present to constitute a quorum will be 
deemed satisfied.
    Term limits for Governors will also be changed under the proposed 
amendments. Currently, Member Governors who have served all or part of 
two terms must be off the Board for a minimum of one year before they 
may again serve in such capacity. Non-member Governors currently have 
no term limit. The proposed changes impose a three term limit on both 
Non-Industry and Member Governors. In addition, partial terms will no 
longer count towards the term limit. After serving three complete 
terms, Governors would have to remain off the Board in such capacity 
for a minimum of two years (an increase from the current one year 
hiatus requirement).
    The proposed rule changes also impose an attendance requirement on 
Governors. It will require a Board member to attend seventy-five 
percent of the full Board meetings on an annual basis (e.g., four out 
of five Board meetings) or face removal from the Board. The CHX 
believes that Board member participation is extremely important and 
should be required in order for a Governor to continue on the Board.
    Taken as a whole, the changes brought about the proposed amendments 
will have a beneficial impact on the Board and the Exchange. Changing 
the composition of the Board to increase the number and percentage of 
Non-Industry Governors will help diversify the Board and broaden its 
perspective. Requiring a Member/Non-Industry balance for the Board and 
certain committees in terms of membership and quorums will ensure that 
diverse and representative bodies are participating in the Exchange's 
business and decision-making processes. Eliminating the geographical 
distinction for Member Governors will provide the Nominating Committee 
with more flexibility and will eliminate an arbitrary distinction in 
recognition of the Exchange's national constituency. Imposing term 
limits on all Governors will foster a healthy influx of fresh 
perspectives on the Board. Setting attendance requirements will promote 
attendance and thus enhance participation in Board meetings.
    To prevent undue disruption of the Board, the transition from the 
Board as currently constituted to the Board required by the proposed 
amendments will occur over the course of the next three years. It will 
involve normal attrition due to Governors reaching the end of term 
limits as currently set, necessitating an adjustment in the phase-in of 
the three term limit. Member Governors completing their second full or 
partial term in the Classes expiring in 1998 and 1999 would continue to 
have a two term limit (and thus would not be eligible for re-election 
at that time) and Non-Industry Governors completing their third full 
term (or more) in those two classes would be permitted to serve out 
their existing term plus be eligible for one additional term. These 
transition-related rules are designed to facilitate the changes in 
board size and composition described above.
    The transition will also require adjustments to the sizes of the 
Classes of Governors. The Governors will still be divided into three 
Classes, but the size and composition will be adjusted as follows: At 
the 1998 annual election, Class I will be reduced by two Member 
Governors. At the 1999 annual election, Class II will be reduced by 
four Member Governors. At the 2000 annual election, Class III will be 
reduced by one Member Governor and Class II will be increased by one 
Member Governor. The Board of Governors will be increased by three Non-
Industry Governors by the 1999 annual election to serve for staggered 
terms so as to balance the Classes as determined by the Nominating 
Committee.
    Also proposed are certain technical changes to the Constitution. 
The first would codify a current practice that the Chairman cannot be 
an On-Floor Member. In approving changes to the Exchange's Constitution 
in 1992 to require a floor member Vice Chairman, the SEC, in its 
approval order, stated its view that the Chairman's position should not 
also be held by a floor member.\4\ The proposed amendment explicitly 
states this in the Constitution.
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    \4\ Securities Exchange Act Release No. 31633 (December 22, 
1992), 57 FR 62402 (December 30, 1992) (File Nos. SR-MSE-92-12 and 
SR-MSE-92-13).
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    In addition, the proposed changes would amend the Constitution so 
that no person shall participate in the ``determination'' as opposed to 
``adjudication'' (as currently worded) of any matter in which he or she 
is personally interested. This change would expand the coverage of this 
provision, which pertains to disqualification of Governors from 
participation in Board actions. In order to prevent the scope of the 
provision from being too broad, language has been added that makes it 
clear that Member Governors are not precluded (by being deemed 
personally interested) from participating in decisions in the normal 
course of business that affect members of classes of members in 
general.
    Finally, a number of other revisions to the Constitution and Rules 
are proposed for the sake of organization or accuracy. For instance, 
the term ``member,'' when used in Article IV, Sections 3 and 4 of the 
Constitution (regarding the Nominating Committee) to refer to a member 
of the committee or a Class and not necessarily a member of the 
Exchange is being changed to ``person'' or otherwise modified whenever 
necessary for clarification. In addition, the reference to ``member'' 
in Article IV, Section 14 of the Constitution (regarding voting 
designees) is being clarified to specifically refer to a member of the 
Exchange. Further, Article IV, Rules 7 and 8 of the Rules (regarding 
the Compensation Committee and the Audit Committee) are being amended 
to reflect the use of the terms Non-Industry and On-Floor.
2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
Section 6(b)(3) of the Act \5\ in that more Governors shall be 
representative of investors and not associated with a member of the 
Exchange, broker or dealer while promoting the opportunity to assure 
fair representation of CHX members in the selection of nominees for 
Governors and the administration of the affairs of the Exchange. 
Additionally, the Exchange believes it is consistent with Section 
6(b)(5) of the Act \6\ as it is designed to prevent fraudulent and 
manipulative acts and practices, to promote just and equitable

[[Page 5985]]

principles of trade and in general to protect investors and the public 
interest.
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    \5\ 15 U.S.C. 78s(b)(3).
    \6\ 15 U.S.C. 78s(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 burden on competition.

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

    The Exchange has neither solicited nor received written comments on 
the proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within thirty-five days of the date of publication of this notice 
in the Federal Register or within such other period (i) as the 
Commission may designate up to ninety 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 such 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, including whether the proposed rule 
change is consistent with the Act. 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 submissions, 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 five U.S.C. 552, will be available for inspection and copying at the 
Commission's Public Reference Section, 450 Fifth Street, N.W., 
Washington, D.C. 20549. Copies of such filing will also be available 
for inspection and copying at the principal office of the CHX. All 
submissions should refer to File No. SR-CHX-97-36 and should be 
submitted by February 26, 1998.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\7\
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    \7\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-2886 Filed 2-4-98; 8:45 am]
BILLING CODE 8010-01-M