Self-Regulatory Organizations; Notice of Filing of Proposed Rule Change by the Chicago Stock Exchange, Incorporated Relating to Approval of Applicants to Membership

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-38034; File No. SR-CHX-96-29]

Self-Regulatory Organizations; Notice of Filing of Proposed Rule

Change by the Chicago Stock Exchange, Incorporated Relating to Approval

of Applicants to Membership

December 10, 1996.

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

(``Act''), 15 U.S.C. Sec. 78s(b)(1), notice is hereby given that on

December 6, 1996, the Chicago Stock Exchange, Incorporated (``CHX'' 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 self-regulatory

organization.\1\ The Commission is publishing this notice to solicit

comments on the proposed rule change from interested persons.

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\1\ The proposal was originally filed with the Commission on

November 6, 1996. The CHX subsequently submitted Amendment No. 1 to

the filing. Amendment No. 1 amends Rule 6 of Article I to change the

vote required by the Executive Committee to approve an applicant to

membership. Currently, CHX rules require the affirmative vote of not

less than two-thirds of the members of the Executive Committee

present at the time of the vote. Amendment No. 1 changes the

requirement to an affirmative vote of a majority of the Executive

Committee present at the time of the vote. Letter from David T.

Rusoff, Foley & Lardner to Karl J. Varner, Division of Market

Regulation, SEC, dated December 6, 1996.

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

the Proposed Rule Change

The Exchange proposes to amend Article I, Rule 5 and Rule 6 of its

rules relating to approval procedures for applicants to membership. The

specific criteria are set forth below.

Chicago Stock Exchange, Incorporated Rules

Additions are italicized; deletions [bracketed]

Article I

Procedure of Application

Application

RULE 5. (a) Each application for membership shall be made in

writing and be filed with the Secretary together with the names of two

sponsors who shall be responsible individuals who have known the

applicant sufficiently

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well and over a long enough period of time that they can unqualifiedly

endorse the character and integrity of the applicant from their

personal knowledge of him and of his business connections. All

applicants shall be investigated by the staff to determine if the

applicant meets the requirements for membership [before submission to

the Executive Committee for consideration].

Staff [Recommendation] Determination

(b) If the staff [recommends] determines that the applicant is not

[be elected] qualified for election to membership, the applicant shall

be sent a statement of reasons therefor and may, within 15 days of the

receipt thereof, file a request with the Executive Committee that it

consider his or her application together with a written statement

indicating why in his or her opinion the staff [recommendation]

determination is in error or insufficient to preclude his or its

election to membership.

Notice and Posting

(c) If the staff [recommends] preliminary determines that the

applicant is qualified for [be elected to] membership or if the

applicant files a request with the Executive Committee pursuant to

paragraph (b), the name of the applicant, the sponsors' names and the

name of the member or member organization from which the membership is

to be transferred shall be posted upon the bulletin board on the Floor

of the Exchange for ten business days and notice thereof mailed to all

the members.

Posting and Voting on Membership

Rule 6. During the posting period for a membership application

pursuant to Rule 5 of this Article, any member may file an objection to

the election of the applicant to membership with the Chairman of the

Executive Committee. The applicant shall be sent a statement of reasons

for such objection and may, within 10 business days of the receipt

thereof, file a written response thereto with the Executive Committee.

If the staff made a preliminary determination that the applicant is

qualified for membership, if no objections were filed during the

posting period, and if no material information that adversely reflects

upon the applicant comes to the attention of the staff before the

expiration of the posting period, the membership transfer shall

automatically become effective at the opening of business on the first

business day after the expiration of the posting period. If all three

of these conditions are not present for a particular applicant, [A] at

the expiration of the posting period[,] staff shall so notify the

applicant of such fact fact and the Executive Committee shall consider

the posted application and vote upon the applicant for membership. The

affirmative votes for [not less than two-thirds] a majority of the

members of the Executive Committee present at the time of voting shall

be required to elect. These [T] transfers shall become effective upon

election to membership.

In the event the applicant does not receive such [two-thirds]

majority vote, he, she or it shall have the right to a hearing before

the Executive Committee, conducted in accordance with procedures set

forth in a notice of such hearing to be given to the applicant.

Following the hearing, the Executive Committee shall again vote upon

the applicant, a [two-thirds] majority vote of the members of the

Executive Committee present at the time of voting being required to

elect. [The applicant may petition the Board of Governors for review of

any adverse determination made by the Executive Committee following a

hearing, a two-thirds vote of the members of the Board present at the

time of voting being required to elect.] The decision of the Executive

Committee shall be final.

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 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

Rules 5 and 6 of Article I of the Exchange's rules govern the

application and approval process for applicants to Exchange membership.

Once an application for membership has been submitted in writing to the

Exchange, the rules require the staff to investigate the applicant's

qualifications to determine if such applicant meets the requirements

for membership. If the staff recommends that the applicant not be

admitted to membership, the applicant may appeal such staff

recommendation to the Executive Committee. If the staff recommends that

an applicant be elected to membership, the applicant then must go

through a 10 business day posting period before membership may be

transferred. The purpose of the 10 business day posting period is to

allow any member to file an objection to the election of the applicant

to membership. At the expiration of the posting period, the Executive

Committee then must consider the applicant and vote upon the applicant

for membership. These transfers become effective upon election to

membership.

Because the Securities Exchange Act of 1934 requires the CHX to

approve an applicant to become a member of the Exchange if such

applicant meets the requirements of the Act and the Exchange's rules

for becoming a member, the Executive Committee has limited discretion

in approving a qualified applicant to become a member.

As a result, the purpose of the proposed rule change is to limit

the role of the Executive Committee during the approval process to

situations where an objection is raised, or material adverse

information is received, during the posting period, or where the staff

does not recommend an applicant for membership and the applicant

decides to appeal. Under Rules 5 and 6 of Article I, as proposed to be

amended, if the staff recommends an applicant for membership and if no

objections are received, or material adverse information is received,

during the subsequent posting period, the membership transfer would

become effective at the beginning of the next business day following

completion of the posting without any action taken by the Executive

Committee. If the staff did not recommend an applicant for membership,

or an objection was raised or material adverse information is received

during the posting period, the existing procedure would come into play

where the Executive Committee would hear an appeal, in the former

situation, or would make a determination relating to the objection and

either approve or disapprove the applicant in the latter situation.

This new procedure would eliminate the requirement that the

Executive Committee perform the pro forma role of approving each

membership transfer. At the same time, it would allow the Executive

Committee to make a determination if there is some information brought

to the Exchange's attention during the posting period

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which was not known to the staff at the time of its investigation.

2. Basis

The proposed rule change is consistent with Section 6(b)(5) of the

Act in that it is designed to promote just and equitable principles of

trade, to remove impediments and to perfect the mechanism of a free and

open market and a national market system, and, in general, to protect

investors and the public interest.

(B) Self-Regulatory Organization's Statement on Burden on Competition

The Exchange does not believe that the proposed rule change will

impose a burden on competition.

(C) Self-Regulatory Organization's Statement of Comments on the

Proposed Rule Change Received From Members, Participants or Others

No written comments were solicited or received.

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, 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 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

Commission's Public Reference room. Copies are also available for

inspection and copying at principal office of the Chicago Stock

Exchange. All submissions should refer to file number SR-CHX-96-29 and

should be submitted by January 6, 1997.

For the Commission, by the Division of Market Regulation,

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

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 96-31785 Filed 12-13-96; 8:45 am]

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