[Federal Register Volume 69, Number 139 (Wednesday, July 21, 2004)]
[Notices]
[Pages 43647-43648]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-16558]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-50024; File No. SR-CHX-2004-10]


Self-Regulatory Organizations; Order Granting Approval of 
Proposed Rule Change and Amendment No. 1 Thereto by the Chicago Stock 
Exchange, Inc. Relating to Co-Specialist Assignments and Evaluations

July 15, 2004.
    On February 3, 2004, the Chicago Stock Exchange, Inc. (``CHX'') 
filed with the Securities and Exchange Commission (``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 
relating to co-specialist assignments and evaluations. On May 12, 2004, 
CHX submitted Amendment No. 1 to the proposal.\3\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See letter from Ellen J. Nelly, Senior Vice President and 
General Counsel, CHX, to Nancy J. Sanow, Assistant Director, 
Division of Market Regulation, Commission, dated May 11, 2004 
(``Amendment No. 1''). Amendment No. 1 superseded and replaced the 
original rule filing in its entirety.
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    The proposed rule change, as amended, was published for notice and 
comment in the Federal Register on May 24, 2004.\4\ The Commission 
received no comment letters on the proposal.
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    \4\ See Securities Exchange Act Release No. 49721 (May 18, 
2004), 69 FR 29592.
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    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 \5\ and, in 
particular, the requirements of Section 6(b)(5) of the Act.\6\ Section 
6(b)(5) requires, among other things, that the rules of the exchange be 
designed to promote just and equitable principles of trade, 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.
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    \5\ In approving this proposed rule change, the Commission notes 
that it has considered the proposed rule's impact on efficiency, 
competition, and capital formation. 15 U.S.C. 78c(f).
    \6\ 15 U.S.C. 78f(b)(5).
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    The Commission notes that the proposed rule change, among other 
things, seeks to modify the co-specialist assignment and evaluation 
processes to shift the emphasis from evaluation questionnaire responses 
to execution quality data results (specifically, data on effective 
spread and speed of

[[Page 43648]]

execution). Currently, execution quality data is not a factor for 
consideration during either the co-specialist assignment or evaluation 
processes. Instead such processes rely on the results of the co-
specialist questionnaire, with substantial weight given to the 
questionnaire in the assignment process. Under the proposed rule 
change, the co-specialist questionnaire, while still a factor in the 
assignment process, would not be given substantial weight in the 
assignment process and would no longer be a factor in the evaluation 
process. Order execution quality data would be introduced as a factor 
in both the co-specialist assignment and evaluation processes and would 
be given substantial weight in the assignment process. The Commission 
believes that this change should help improve the quality of co-
specialists serving on the CHX because it would require the CHX's 
Committee on Specialist Assignment and Evaluation (``CSAE'') to make 
assignment and reallocation decisions based on objective, quantifiable 
performance criteria, rather than relying on the more subjective co-
specialist questionnaire answers.
    The proposed rule change also establishes a new process for 
evaluating co-specialists. Under this proposed evaluation process, on a 
quarterly basis, each co-specialist would be given an order execution 
quality score (derived from the execution quality data reported 
pursuant to Rule 11Ac1-5 under the Act \7\) and those co-specialists 
whose scores rank in the bottom 5% of all co-specialist scores would be 
required to participate in a special performance meeting with the CSAE. 
In the course of the special performance meeting, the CSAE would be 
permitted to take a variety of informal actions to encourage or assist 
the affected co-specialist. A special performance meeting could also be 
triggered by any of the factors considered in the assignment process 
(except the co-specialist questionnaire). If the informal actions from 
the special performance meeting do not result in improved co-specialist 
performance, the CSAE may conduct a formal hearing on the co-
specialist's performance to determine whether to take action to 
reallocate the co-specialist's securities or suspend or terminate the 
co-specialist's registration in accordance with Rule 3, Article XVII of 
the CHX rules. In this regard, the Commission notes that a co-
specialist may appeal the CSAE's decision by filing a request for 
review with the CHX's Executive Committee under Rule 4, Article XVII of 
the CHX rules.
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    \7\ 17 CFR 240.11Ac1-5.
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    The Commission also notes that the proposed rule change strives to 
streamline the co-specialist questionnaire by reducing the range of 
rating scores and eliciting further responses for negative performance 
ratings. The Commission believes this change should make the 
questionnaires easier for brokers to complete and the responses to the 
questionnaires more useful to the CSAE. Therefore, the Commission finds 
that the proposed rule change is consistent with the Act.
    It is Therefore Ordered, pursuant to Section 19(b)(2) of the 
Act,\8\ that the proposed rule change (SR-CHX-2004-10), as amended by 
Amendment No. 1, be, and hereby is, approved.
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    \8\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\9\
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    \9\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 04-16558 Filed 7-20-04; 8:45 am]
BILLING CODE 8010-01-P