[Federal Register Volume 63, Number 100 (Tuesday, May 26, 1998)]
[Notices]
[Pages 28533-28535]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-13816]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-39998; File No. SR-CHX-98-06]


Self-Regulatory Organizations; Order Approving Proposed Rule 
Change and Notice of Filing and Order Granting Accelerated Approval to 
Amendment Nos. 2 and 3 to the Proposed Rule Change by the Chicago Stock 
Exchange, Inc. Relating to Registration Requirements

May 18, 1998.

I. Introduction

    On February 18, 1998, the Chicago Stock Exchange, Inc. (``CHX'' or 
``Exchange'') filed with 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 proposal to amend its rules to clarify the persons 
required to register with the CHX. On March 18, 1998, the CHX filed 
Amendment No. 1 to the proposal.\3\ The proposed rule change and 
Amendment No. 1 were published for comment in the Federal Register on 
April 1, 1998.\4\ On May 7, 1998, the CHX filed Amendment No. 2 to the 
proposal.\5\ On May 15, 1998, the CHX filed Amendment No. 3 to the 
proposal.\6\ No comments were received regarding the proposal. This 
order approves the proposed rule change, as amended.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Letter from Patricia L. Levy, Senior Vice President and 
General Counsel, CHX, to Katherine A. England, Division of Market 
Regulation (``Division''), Commission, dated March 17, 1998 
(``Amendment No. 1''). Amendment No. 1 revises CHX Article VI, Rule 
2(a) to state that registered persons, as defined in CHX Article VI, 
Rule 2(b), must register with the CHX.
    \4\ See Securities Exchange Act Release No. 39804 (March 25, 
1998), 63 FR 15906.
    \5\ See Letter from Patricia L. Levy, Senior Vice President and 
General Counsel, CHX, to Yvonne Fraticelli, Attorney, Division, 
Commission, dated May 6, 1998 (``Amendment No. 2''). Amendment No. 2 
revises CHX Article VI, Rule 2(b) to include members in the CHX's 
definition of registered persons.
    \6\ See Letter from Patricia L. Levy, Senior Vice President and 
General Counsel, CHX, to Yvonne Fraticelli, Division, Commission, 
dated May 15, 1998 (``Amendment No. 3''). Amendment No. 3 revises 
Interpretation and Policy .01 to CHX Article VI, Rule 2, to indicate 
that amendments to Form U-4 and Form BD regarding any registered 
person must be filed within 30 days after the registered person 
learns the facts or circumstances requiring the forms to be revised 
or, if the revision involves a statutory disqualification, as 
defined in the Act, within 10 days after the statutory 
disqualification occurs. The CHX's original proposal did not include 
the 10-day limit for the filing of amendments involving a statutory 
disqualification.
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II. Description of the Proposal

    CHX Article VI, ``Restriction and Requirements,'' Rule 2, 
``Registration and Approval of Member and Member Organization 
Personnel,'' governs the registration and approval of member and member 
organization personnel and other associated persons. The CHX proposes 
to replace the current text to CHX Article VI, Rule 2 with new text in 
order to clarify those persons who are required to register with the 
Exchange. Specifically, new CHX Article VI, Rule 2(a), 
``Registration,'' will require all registered persons, as defined in 
CHX Article VI, Rule 2(b), to register with the CHX.\7\ The CHX may 
waive the registration requirement or permit a short-form registration 
or notification for an individual who is properly registered with 
another self-regulatory organization (``SRO'').
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    \7\ See Amendment No. 1, supra note 3.
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    New CHX Article VI, Rule 2(b), ``Definition of Registered 
Persons,'' defines ``registered persons'' as all members and persons 
associated with a member or member organization who are engaged or will 
be engaged in the securities business of a member or

[[Page 28534]]

member organization, or the management of such securities business, 
including those persons whose functions include supervision, 
solicitation, conduct or business and the training of other persons 
associated with the member or member organization for any of these 
functions. CHX Article VI, Rule 2(b) also enumerates, without 
limitation, specific persons who are within the definition of 
registered persons, including: (i) Sole proprietors; (ii) officers; 
(iii) partners; (iv) principal stockholders (as defined in CHX Article 
II, Rule 4); (v) directors; (vi) branch office managers; (vii) 
nominees; (viii) representatives (including any persons performing the 
duties customarily performed by a salesperson or registered 
representative); (ix) persons whose functions include (a) underwriting, 
trading or sales of securities; (b) research or investment advice, 
other than general economic information or advice, with respect to the 
activities described in the preceding clause (a); and (c) activities 
other than those specifically mentioned that involve communication, 
directly or indirectly, with public investors in securities in 
connection with the activities described in the preceding clauses (a) 
and (b); and (x) persons listed on Schedule A, B, or C of the member's 
or member organization's Form BD.\8\
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    \8\ Schedule A of Form BD requests information concerning direct 
owners and executive officers; Schedule B requests information 
concerning indirect owners; and Schedule C is used to amend 
Schedules A and B.
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    With regard to independent contractors associated with members and 
member organizations, the CHX notes that it has been the long-standing 
policy of the Commission to characterize and treat independent 
contractors whose actions are controlled by a member or member 
organization as employees for purposes of the Act.\9\ This 
characterization and treatment applies irrespective of whether such 
persons might be deemed employees in an unrelated statutory context 
(e.g., for purposes of IRS regulations). Accordingly, an independent 
contractor, as well as any other person associated with a member or 
member organization, must register with the CHX if he or she falls 
within the definition of registered person.
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    \9\ See Letter from Douglas Scarff, Director, Division, 
Commission, to Gordon S. Macklin, President, National Association of 
Securities Dealers, Inc., dated June 18, 1982 (``1982 Letter''). In 
its 1982 Letter, the Division noted that the Act requires that a 
person selling securities be registered with the Commission as a 
broker-dealer under Section 15(a) unless he or she is an associated 
person as defined in Section 3(a)(18) of the Act. With regard to 
securities salespersons designated as independent contractors, the 
Division stated that unless an independent contractor's activities 
are subject to control by a broker-dealer within the scope of 
Section 3(a)(18) of the Act, the salesperson must be registered 
individually as a broker-dealer. The Division noted that an 
independent contractor salesperson whose activities are subject to 
control by a broker-dealer must be registered with an SRO and should 
be covered by the employer broker-dealer's fidelity bond. Finally, 
the Division stated that a firm is responsible for ensuring either 
that an independent contractor is registered as a broker-dealer or 
assuming the supervisory responsibilities attendant to a 
relationship with an associated person.
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    New CHX Article VI, Rule 2(c), ``Persons Exempt from 
Registration,'' exempts from registration persons associated with a 
member or member organization (i) whose functions are solely and 
exclusively ministerial; or (ii) who are not actively engaged in the 
securities business.\10\
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    \10\ Persons in this category may include, for example, senior 
officers in a division of a broker-dealer that does not participate 
in the member's securities business. Telephone conversation between 
Patricia L. Levy, Senior Vice President and General Counsel, CHX, 
and Yvonne Fraticelli, Attorney, Division, Commission, on March 13, 
1998 (``March 13 Conversation'').
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    The sole new provision in CHX Article VI, Rule 2(d), ``Other 
Registration Requirements,'' prohibits members from making application 
for the registration of any associated person where there is no intent 
to employ such person in the member's securities business.\11\ The 
CHX's proposal also amends Interpretation and Policy .01 to CHX Article 
VI, Rule 2 to state that amendments to Form U-4 and Form BD regarding 
any registered person must be filed within 30 days after the registered 
person learns the facts or circumstances requiring the forms to be 
amended or, if the amendment involves a statutory disqualification, as 
defined in the Act, within 10 days after the statutory disqualification 
occurs.\12\
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    \11\ The current version of CHX Article VI, Rule 2 contains the 
other requirements listed in new CHX Article VI, Rule 2(d). In 
general, these provisions include the requirements that members: (1) 
terminate their relationship with an associated person for whom the 
CHX has withdrawn or withheld registration or approval; (2) obtain 
CHX approval before allowing a person subject to a statutory 
disqualification to become associated with the member; (3) take 
reasonable care to determine the existence of a statutory 
disqualification prior to employing an associated person; and (4) 
promptly notify the CHX if an associated person becomes subject to a 
statutory disqualification.
    \12\ See Amendment No. 3, supra note 6.
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III. Discussion

    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, the requirements of Section 6(b)(5) \13\ in that it is 
designed to prevent fraudulent and manipulative acts and practices, to 
promote just and equitable principles of trade, and to protect 
investors and the public interest.\14\ In addition, the Commission 
finds that the proposal is consistent with Section 6(c)(3)(B) \15\ of 
the Act, which allows a national securities exchange to require that 
any person associated with a member, or any class of such persons, 
register with the exchange in accordance with procedures established by 
the rules of the exchange.
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    \13\ 15 U.S.C. 78f(b)(5)(1998).
    \14\ In approving this rule, the Commission has considered the 
proposed rule's impact on efficiency, competition, and capital 
formation. 15 U.S.C. 78c(f).
    \15\ 15 U.S.C. 78f(c)(3)(B).
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    New CHX Artidle VI, Rule 2(a) will require all registered persons, 
as defined in CHX Article VI, Rule 2(b), to register with CHX.\16\ New 
CHX Article VI, Rule 2(b) generally defines registered persons as 
members and persons associated with a member who are engaged or will be 
engaged in the securities business of a member, or in the management of 
such business, including the functions of supervision, solicitation, 
conduct of business or the training of associated persons for any of 
these functions. New CHX Article VI, Rule 2(b) also enumerates, without 
limitation, specific persons who are within the definition of 
registered person. In addition to the persons required to register 
under the CHS's current rule, new CHX Article VI, Rule 2(b) also will 
require that the following persons register with the CHX: sole 
proprietors; principal stockholders (as defined in CHX Article III, 
Rule 4); persons listed on Schedules A, B, or C of a member's Form BD; 
\17\ and persons engaged on behalf of a member in underwriting, 
trading, or sales of securities, research or investment advice, or 
other activities involving communication with the public in connection 
with underwriting, trading, sales of securities, or research or 
investment advice.
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    \16\ However, the CHX may waive the registration requirement or 
permit a short-form registration or notification for an individual 
who is properly registered with another SRO.
    \17\ See note 8, supra.
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    The Commission believes that new CHX Article VI, Rules 2(a) and 
2(b) will clarify the persons who are required to register with the 
Exchange, thereby facilitating compliance with the CHX's registration 
requirements and helping to ensure that all persons who are or will be 
engaged in a member's securities business are registered with the CHX. 
Because register persons and persons seeking to register are subject to 
the

[[Page 28535]]

CHX's jurisdiction,\18\ the proposal also will facilitate the CHX's 
oversight of such persons by ensuring that the CHX has the authority to 
enforce its rules and the federal securities laws against such persons.
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    \18\ Registered persons submit to the authority of the 
organizations or states to which they apply for registration on the 
Form U-4.
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    The CHX's proposal also protests investors and the public interest 
by noting that a person characterized as an independent contractor must 
register with the CHX if he or she falls within the definition of 
registered person. This position is consistent with the 1982 
Letter,\19\ which stated, among other things, that an independent 
contractor salesperson whose activities are subject to control by a 
broker-dealer must be registered with a SRO. By providing a clear 
statement of the CHX's policy regarding the registration of independent 
contractors, the CHX's proposal should help to ensure that independent 
contractors who come within the CHX's definition of registered person 
register with the CHX.
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    \19\ See 1982 Letter, supra note 9.
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    CHX Article VI, Rule 2(c), ``Person Exempt from Registration,'' 
provides exemptions from registration for associated persons who 
functions are solely and exclusively clerical or ministerial or who are 
not actively engaged in the securities business.\20\ The Commission 
notes that the rules of the National Association of Securities Dealers, 
Inc. (``NASD'') also provide these exemptions from registration.\21\ 
Accordingly, the Commission believes that these exemptions from 
registration are reasonable and raise no new regulatory issues.
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    \20\ As noted above, persons in this category may include, for 
example, for example, senior officers in a division of a broker-
dealer that does not participate in the member's securities 
business. See March 13 Conversation, supra note 10.
    \21\ See NASD Rule 1060(a)(1) and (2).
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    New CHX Article VI, Rule 2(d), ``Other Registration Requirements,'' 
prohibits members from making application for the registration of any 
associated person when there is no intent to employ such person in the 
member's securities business. NASD Rule 1031(a) also contains this 
prohibition. Accordingly, the Commission believes that this provision 
of the CHX's proposal is reasonable and raises no new regulatory 
issues.
    The Commission believes that it is reasonable for the CHX to amend 
Interpretation and Policy .01 to indicate that amendments to Forms U-4 
and BDA regarding any registered person must be submitted to the CHX 
within 30 days after the registered person learns the facts or 
circumstances requiring the forms to be revised, or, if the amendment 
involves a statutory disqualification, as defined in the Act, within 10 
days after the disqualification occurs.\22\ The Commission notes that 
the rules of the NASD contain a similar provision.\23\ Accordingly, the 
Commission believes that the CHX's amendment to Interpretation and 
Policy .01 is reasonable and raises no new regulatory issues.
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    \22\ See Amendment No. 3, supra note 6.
    \23\ See NASD By-Law Article V, Section 2(c).
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    The Commission finds good cause for approving Amendment Nos. 2 and 
3 to the proposal prior to the thirtieth day after the date of 
publication of notice of filing thereof in the Federal Register. 
Amendment No. 2 clarifies new CHX Article VI, Rule 2(b) by indicating 
that members, as well as associated persons, are registered persons 
under CHX Article VI, Rule 2(b). This change reflects the inclusion of 
sole proprietors within CHX Article VI, Rule 1(b)'s enumerated list of 
registered persons and eliminates an inconsistency that would arise if 
the CHX defined registered persons to include only persons associated 
with members and member organizations. Amendment No. 3 strengthens the 
CHX's proposal by requiring the filing of amendments to Forms U-4 and 
BD that involve a statutory disqualification within 10 days after the 
statutory disqualification occurs. Accordingly, the Commission believes 
that it is consistent with Sections 6 and 19(b) of the Act to approve 
Amendment Nos. 2 and 3 on an accelerated basis.

 IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning Amendment Nos. 2 and 3, including whether 
Amendment Nos. 2 and 3 are 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 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 persons, 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 in the Commission's Public Reference Room. 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 
number SR-CHX-98-06 and should be submitted by June 16, 1998.

V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\24\ that the proposed rule change (SR-CHX-98-06) is approved.

    \24\ 15 U.S.C. 78s(b)(2).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\25\
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    \25\ 17 CFR 200.30-3(a)(12).
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[FR Doc. 98-13816 Filed 5-22-98; 8:45 am]
BILLING CODE 8010-01-M