Self-Regulatory Organizations; Midwest Clearing Corporation and Midwest Securities Trust Company; Notice of Filing of Proposed Rule Changes Relating To Establishment of a Risk Assessment Committee and Various Other Changes to MCC's and MSTC's Rules and By-Laws

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-33667; File Nos. SR-MCC-93-7 and SR-MSTC-92-14]

Self-Regulatory Organizations; Midwest Clearing Corporation and

Midwest Securities Trust Company; Notice of Filing of Proposed Rule

Changes Relating To Establishment of a Risk Assessment Committee and

Various Other Changes to MCC's and MSTC's Rules and By-Laws

February 23, 1994.

Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934

(``Act''),\1\ notice is hereby given that on November 17, 1993, and on

December 23, 1993, the Midwest Clearing Corporation (``MCC'') and the

Midwest Securities Trust Company (``MSTC'') respectively filed with the

Securities and Exchange Commission (``Commission'') the proposed rule

changes as described in Items I, II, and III below, which Items have

been prepared primarily by MCC and MSTC. MCC amended its proposal on

December 23, 1993, thereby making it virtually identical to that of

MSTC. MCC made a clarifying amendment on January 3, 1994.\2\ The

Commission is publishing this notice to solicit comments from

interested persons.

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\1\15 U.S.C. 78s(b)(1) (1988).

\2\Letter from David T. Rusoff, Foley & Lardner, to Richard

Strasser, (Attorney), Division of Market Regulation, Commission

(December 30, 1993).

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I. Self-Regulatory Organizations' Statement of the Terms of Substance

of the Proposed Rule Changes

MCC and MSTC propose to change their Rules and By-Laws to: (1)

Allow for the establishment of additional communities; (2) require MCC

and MSTC to consult with at least one member of the Risk Assessment

Committee before ceasing to act for a participant; (3) establish a Risk

Assessment Committee; (4) modify their procedures relating to appeals;

(5) add provisions relating to suits against MCC and MSTC and their

employees; and (6) add a provision that requires MCC or MSTC

participants, in certain circumstances, to pay MCC or MSTC all

reasonable expenses they incur in defending a legal proceeding

instigated by the participants.

II. Self-Regulatory Organizations' Statement of the Purpose of, and

Statutory Basis for, the Proposed Rule Changes

In their filings with the Commission, MCC and MSTC included

statements concerning the purpose of and statutory basis for the

proposed rule changes and discussed any comments received on the

proposals. The test of these statements may be examined at the places

specified in Item IV below. MCC and MSTC have prepared summaries, set

forth in sections (A), (B), and (C) below, of the most significant

aspects of such statements.

(A) Self-Regulatory Organizations' Statement of the Purpose of, and

Statutory Basis for, the Proposed Rule Changes

The purpose of the proposed rule changes is to amend various by-

laws and rules of MCC and MSTC to define participants' rights and

obligations more precisely and to give MCC and MSTC more flexibility

and protection in dealing with violations of their respective rules.

By-laws will be added to allow MCC and MSTC to establish committees

either through their respective by-laws or rules or by the board of

directors. Rules will be added to: (1) Establish a Risk Assessment

Committee for MCC and MSTC; (2) require MCC and MSTC to consult with at

least one member of the Risk Assessment Committee prior to ceasing to

act for a participant; and (3) expand the types of events that permit

MCC and MSTC to cease to act for a participant to any instance where a

participant poses a financial risk to MCC or MSTC. These changes will

provide independent input to management in its decision-making process

while still providing MCC and MSTC the flexibility to act quickly if

necessary.

To clarify that MCC and MSTC have the authority to establish the

new Risk Assessment Committee, the proposed rules will amend their by-

laws to add a provision that expressly permits MCC and MSTC to

establish committees by their rules or by-laws or through their boards

of directors. The Risk Assessment Committee will hear all appeals under

the applicable rules. The proposed rules specifically provide that

prior participation by a member of the Risk Assessment Committee in any

inquiry, consultation, examination, or investigation of the matter

under appeal will not disqualify the Committee member from hearing the

appeal. The proposed rules replace current rules which require the

board of directors to appoint a panel to hear an appeal.

MCC and MSTC also will add provisions to their rules that will give

them greater flexibility in the decision to cease to act for a

participant. Specifically, these provisions will allow MCC and MSTC to

cease to act for a participant if there are reasonable grounds to

believe that the participant poses a financial risk to MCC or to MSTC

even if the firm itself is not in financial difficulty. These

provisions will provide MCC and MSTC more flexibility in reducing risk

to themselves and to other participants.

The proposed rules also will mandate a formal standard of review to

be applied in appeals beyond the Risk Assessment Committee review.

Currently, either MCC's or MSTC's board may in its discretion reverse,

modify, or remand for further consideration any decision adverse to an

appellant. Under the proposed standard, neither board shall reverse,

modify, or remand for further consideration any decision adverse to an

appellant if the factual conclusions in the Risk Assessment Committee's

decision are supported by substantial evidence and if the decision

itself is not arbitrary, capricious, or an abuse of discretion.

Finally, the proposed rules add provisions relating to MCC's and

MSTC's liability and suits filed against MCC and MSTC and their

employees. The possibility of suit against individual staff members of

MCC or MSTC acting on company business makes it impossible for such

persons to perform properly their duties. The proposed rules will

prohibit an MCC or MSTC participant from suing any officer, director,

employee, or agent of MCC or MSTC, of the Chicago Stock Exchange, or of

any of their affiliates, if such person is acting on the business of

MCC, MSTC, the Exchange, or of any of their affiliates. These proposed

rules will not prohibit a participant from suing MCC or MSTC as a

result of the actions of these individuals; they merely will prohibit

suits against individuals acting in their official capacities. The

proposed rules also will limit MCC's and MSTC's liability to

participants to situations where MCC or MSTC acted willfully or with

gross negligence. Finally, the proposals will add new provisions that

require an MCC or MSTC participant that fails to prevail in a legal

proceeding instigated by that participant against MCC, MSTC, or any of

its officers, directors, committee members, employees, or agents to pay

MCC or MSTC all reasonable expenses, including attorneys' fees,

incurred by MCC or MSTC in defending the proceeding if those expenses

exceed $20,000.

The proposed rule changes are consistent with Section 17A of the

Act in that they will facilitate the safeguarding of securities and

funds which are in MCC's and MSTC's custody or control or for which

they are responsible.

(B) Self-Regulatory Organizations' Statement on Burden on Competition

MCC and MSTC believe that no burden will be placed on competition

as a result of the proposed rule changes.

(C) Self-Regulatory Organizations' Statement on Comments on the

Proposed Rule Changes Received From Members, Participants, or Others

No comments were received.

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

Commission Action

Within thirty-five 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 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 organizations consent,

the Commission will:

(A) By order approve the proposed rule changes; or

(B) Institute proceedings to determine whether the proposed rule

changes 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 submissions, all subsequent amendments, all written statements

with respect to the proposed rule changes that are filed with the

Commission, and all written communications relating to the proposed

rule changes 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 at the

principal offices of MCC and MSTC. All submissions should refer to File

Nos. SR-MCC-93-7 and SR-MSTC-93-14 and should be submitted by March 24,

1994.

For the Commission by the Division of Market Regulation,

pursuant to delegated authority.\3\

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\3\17 CFR 200.30-3(a)(12) (1993).

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Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 94-4865 Filed 3-2-94; 8:45 am]

BILLING CODE 8010-01-M