Self-Regulatory Organizations; Cincinnati Stock Exchange, Inc.; Notice of Filing of Proposed Rule Change Concerning Chinese Wall Procedures for Designated Dealers

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-34215; File No. SR-CSE-94-04]

Self-Regulatory Organizations; Cincinnati Stock Exchange, Inc.;

Notice of Filing of Proposed Rule Change Concerning Chinese Wall

Procedures for Designated Dealers

June 15, 1994.

Pursuant to Section 19(b)(1) of the Securities Exchange Act of

1934, 15 U.S.C. 78s(b)(1), notice is hereby given that on March 17,

1994, the Cincinnati Stock Exchange, Incorporated (``CSE or Exchange'')

filed with the Securities and Exchange Commission (``Commission'') the

proposed rule change as described in Items I, II and III below, which

Items have been prepared by the CSE. The Commission is publishing this

notice to solicit comments on the proposed rule change from interested

persons.

I. Self-Regulatory Organization's Statement of the Terms of Substance

of the Proposed Rule Change

The Cincinnati Stock Exchange, Inc. proposes to adopt Chinese Wall

procedures relating to the activity of the Exchange's Designated

Dealers (``specialists''). The text of the proposal follows; the

proposed additions are italicized.

The Cincinnati Stock Exchange, Incorporated

Chapter V

Supervision

Rule 5.5. Chinese Wall Procedures

(a) An Exchange Designated Dealer (``specialist'') must establish a

functional separation (``Chinese Wall'') between the specialist

operation and any associated or affiliated persons as appropriate to

its operation and further establish, maintain and enforce written

procedures reasonably designed to prevent the misuse of material, non-

public information, which includes review of employee and proprietary

trading, memorialization and documentation of procedures, substantive

supervision of inter-departmental communications by the Exchange

specialist firm's Compliance Department and procedures concerning

proprietary trading when the firm is in possession of material, non-

public information. The Exchange specialist firm must obtain the prior

written approval of the Exchange that it has complied with the

requirements above in establishing functional separation as appropriate

to the operation and that it has established proper compliance and

audit procedures to ensure the maintenance of the functional

separation. A copy of these Chinese Wall procedures, and any amendments

thereto, must be filed with the Exchange's Surveillance Department.

(b) The following are the minimum procedural and maintenance

requirements:

(1) The associate or affiliated person can have no influence on

specific specialist trading decisions.

(2) Material, non-public corporate or market information obtained

by the associated or affiliated person from the issuer may not be made

available to the specialist.

(3) Clearing and margin financing information regarding the

specialist may be routed only to employees engaged in such work and

managerial employees engaged in overseeing operations of the affiliated

or associated persons and specialist entities.

(c) Information that may be made available to others:

(1) A broker affiliated with an associated or affiliated person may

make available to the specialist only the market information that he

would make available to an unaffiliated specialist in the normal course

of his trading and ``market probing'' activity.

(2) A specialist may make known to a broker affiliated with an

affiliated or associated person only the information about market

conditions in specialty stocks that he would make available in the

normal course of specializing to any other broker and in the same

manner as it would make such information available to any other broker.

(3) An affiliated or associated person can popularize a specialty

stock provided it makes adequate disclosure about the existence of

possible conflicts of interest.

(d) A specialist who becomes privy to material, non-public

information must communicate that fact promptly to his firm's

compliance officer or other designated official. The specialist shall

seek guidance from the compliance officer or other designated official

as to what procedures the specialist should follow after receipt of

such information or such other action that should be taken. Appropriate

records shall be maintained by the compliance officer or other

designated official. The record should include a summary of the

information received by the specialist and a description of the action

taken by the compliance officer or other designated official.

(e) The Exchange has established the following procedures to

monitor compliance with this rule:

(1) Examination of the Chinese Wall procedures established by

Exchange specialist firms.

(2) Surveillance of proprietary trades effected by an affiliated or

associate person and its affiliated or associated specialist

(``designated dealer'') firm.

Accordingly, the Exchange will conduct periodic examinations of the

specialist firm's Chinese Wall procedures to ensure that a functional

separation between the associated or affiliated person and the

specialist has been created and thereafter maintained. The Exchange

will also monitor the trading activities of affiliated or associated

persons and affiliated or associated specialists in the specialist

firms' specialty stocks in order to monitor the possible trading while

in possession of material, non-public information through the periodic

review of trade and comparison reports generated by the Exchange.

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 CSE included statements

concerning the purpose of and basis for the proposed rule change and

discussed any comments it received on the proposed rule change. The

text of these statements may be examined at the places specified in

Item IV below. The CSE has prepared summaries, set forth in sections

(A), (B), and (C) below, of the most significant parts 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 new rule is to require specialists to

establish the appropriate functional separation to their operations

while maintaining and enforcing written procedures reasonably designed

to prevent the misuse of material, non-public information by employee,

affiliated individual and proprietary accounts. The proposed rule

further requires that a copy of such procedures be provided to the

Exchange for review and approval, and sets forth specific guidelines

for designated dealers to follow in adopting, maintaining and enforcing

Chinese Wall procedures.

(2) Basis

The proposed rule change is consistent with section 6(b) of the Act

in general and furthers the objectives of section 6(b)(5) in particular

in that it promotes just and equitable principals of trade and protects

investors and the public interest.

B. Self-Regulatory Organization's Statement on Burden on Competition

The CSE does not believe that the proposed rule change will impose

any inappropriate burden on competition.

C. Self-Regulatory Organization's Statement on Comments on the Proposed

Rule Change Received From Members, Participants or Others

No written comments were solicited or received with respect to the

proposed rule change.

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

Commission Action

Within 35 days of the date of publication of this notice in the

Federal Register or within such longer period (i) as the Commission may

designate up to 90 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. Persons making written submissions

should file six copies thereof with the Secretary, Securities and

Exchange Commission, 450 Fifth Street, NW., Washington, DC 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 person, 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 the filing will also be

available for inspection and copying at the principal office of the

CSE. All submissions should refer to File No. SR-CSE-94-04 and should

be submitted by July 12, 1994.

For the Commission, by the Division of Market Regulation,

pursuant to the delegated authority, 17 CFR 200.30-3(a)(12).

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 94-15043 Filed 6-20-94; 8:45 am]

BILLING CODE 8010-01-M