Self-Regulatory Organizations; Notice of Filing of Proposed Rule Change and Amendments Nos. 1, 2, and 3 Thereto by the Chicago Stock Exchange, Inc., Relating to a Specialist's De-Registration in an Issue

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-38882; File No. SR-CHX-97-15]

Self-Regulatory Organizations; Notice of Filing of Proposed Rule

Change and Amendments Nos. 1, 2, and 3 Thereto by the Chicago Stock

Exchange, Inc., Relating to a Specialist's De-Registration in an Issue

July 28, 1997.

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

(``Act''), 15 U.S.C. 78s(b)(1), notice is hereby given that on June 4,

1997, the Chicago Stock Exchange, Inc. (``CHX'' or ``Exchange'') filed

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

proposed rule change, and on July 3, 1997, July 22, 1997, and July 28,

1997, filed Amendment Nos. 1, 2, and 3,

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respectively,\1\ to the proposed rule change, as described in Items I,

II, and III below, which Items have been prepared by the self-

regulatory organization. The Commission is publishing this notice to

solicit comments on the proposed rule change from interested persons.

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\1\ See Letter from David T. Rusoff, Attorney, Foley & Lardner,

to Sharon Lawson, Senior Special Counsel, Division of Market

Regulation, Commission, dated June 23, 1997 (``Amendment No. 1'')

and Letters from David T. Rusoff, Attorney, Foley & Lardner, to

Heather Seidel, Attorney, Division of Market Regulation, Commission,

dated July 16, 1997 (``Amendment No. 2'') and July 21, 1997

(``Amendment No. 3'').

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

of the Proposed Rule Change

The Exchange proposes to amend Article XXX, Rule 1, Interpretation

and Policy .01 of the CHX Rules, to change a policy of the Exchange's

Committee on Specialist Assignment and Evaluation (``CSAE'') relating

to the time periods for which a co-specialist must trade a security

before deregistering as the specialist for the security. This policy

would be in effect for a one year pilot program.

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

Statutory Basis for, the Proposed 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

The Exchange's CSAE is responsible for, among other things,

appointing specialists and co-specialists \2\ and conducting

deregistration proceedings in accordance with Article XXX of the

Exchange's rules.\3\ As described in existing Interpretation and Policy

.01 of Rule 1 of Article XXX, seven circumstances may lead to the need

for assignment or re-assignment of a security. One such circumstance is

by specialist request.

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\2\ A specialist is a ``unit'' or organization which has

registered as such with the Exchange under Article XXX, Rule 1. A

co-specialist is an individual who has registered as such under

Article XXX, Rule 1. See CHX Rules Article XXX, Rule 1,

Interpretation and Policy .01.4(a).

\3\ See CHX Rules Article IV, Rule 4.

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Currently, the CSAE ``will initiate a re-assignment proceeding if

it believes that such action is called for.'' \4\ Using this standard,

the CSAE's current policy is to require a co-specialist to trade an

issue awarded in competition \5\ for a two year period, and to trade an

issue awarded without competition for a six-month period, before

permitting a co-specialist to deregister in the issue.

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\4\ See CHX Rules Article XXX, Rule 1, Interpretation and Policy

.01.2.

\5\ In this context, ``in competition'' means that more than one

specialist had applied to be the specialist in the issue.

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The CHX proposes to amend this policy for a one year pilot program.

Specifically, the proposal would change the time periods for which a

co-specialist must trade an issue before the CSAE will, in general,

approve a co-specialist's request to deregister in an issue.\6\ These

time periods would vary depending on whether the issue was awarded in

competition or without competition and whether another specialist will

assume the responsibility to trade the issue.

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\6\ The Exchange stated its intention to have the new policy

apply anytime there will not be another specialist assigned to the

issue, such as if the security was to be returned to the cabinet,

put in the cabinet for the first time, or traded by a lead primary

market maker pursuant to CHX Rules Article XXXIV, Rule 3. See

Amendment No. 2, supra note 1. Cabinet securities are those

securities which the Board of Governors designates to be traded in

the cabinet system because in the judgment of the Board such

securities do not trade with sufficient frequency to warrant their

retention in the specialist system. See CHX Rules Article XXVIII,

Rule 6. For a more detailed explanation of the operation of the

cabinet system, see CHX Rules Article XX, Rule 11.

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Under the proposed rule change, for a security that was awarded to

a co-specialist in competition, such co-specialist will be required to

trade the security for one year before being able to deregister in the

security if no other specialist will be assigned to the security after

posting.\7\ The two year time period currently in place for an intra-

firm transfer of such issues (i.e., transferring the issue to another

co-specialist in the same specialist unit) will remain. For a security

that was awarded to a co-specialist without competition, such co-

specialist will be required to trade the security for a three month

period before being able to deregister in the security if no other

specialist will be assigned to the security after posting. The six

month time period currently in place for an intra-firm transfer of such

issues will remain.

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\7\ In this context, posting means that all specialists are put

on notice that the security in question is available for

reassignment. See CHX rules Article XXX, Rule 1. Telephone

conversation between David Rusoff, Attorney, Foley & Lardner, and

Heather Seidel, Attorney, Market Regulation, Commission, on July 24,

1997.

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Whether or not the security was awarded in competition, the

effective date of a specialist's deregistration in an issue for which

no specialist will be assigned after posting will be the first business

day of each calendar quarter; provided, however, that the applicable

time period for which a specialist is required to trade an issue must

have been satisfied prior to such date.

Whether or not the security was awarded in competition, in general,

the CSAE will require that order sending firms be given at least 15

days advance notice of a co-specialist's intention to de-register in

the issue.

The Exchange believes that this new policy will encourage more

specialists and co-specialists to become the specialist or co-

specialist in additional securities. By reducing the current two year

requirement to one year and the current six month requirement to three

months, a specialist or co-specialist will reduce its risk and exposure

that is attendant with registering as a specialist or co-specialist for

a particular issue. The Exchange believes that the current two year and

six month standards are too long--they are too burdensome and onerous

on a specialist or co-specialist. Circumstances can unexpectedly change

over a two year period. As a result, under the current policy, a

specialist or co-specialist may be reluctant to apply to become a

specialist in an issue. The Exchange believes that the new policy, as

proposed, will more accurately balance the need for consistency and

continuity with respect to the trading of an issue by a particular

specialist against the need by a specialist to have the flexibility to

de-register as the specialist for an unprofitable issue. As stated

above, this will encourage specialists to apply to trade more issues.

This, in turn, will increase the liquidity and depth of the market. For

example, it might encourage a specialist to trade an issue in which no

specialist is currently assigned.

2. Statutory Basis

The Exchange believes that the proposed rule change is consistent

with Section 6(b)(5) of the Act \8\ in that it is 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

[[Page 41983]]

general, to protect investors and the public interest.

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\8\ 15 U.S.C. 78f(b)(5).

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

The Exchange 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 either solicited or received.

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

Commission Action

Within 35 days of the 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 the 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 of such filing will also be

available for inspection and copying at the principal office of the

Exchange. All submissions should refer to File No. SR-CHX-97-15 and

should be submitted by August 25, 1997.

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. 97-20410 Filed 8-1-97; 8:45 am]

BILLING CODE 8010-01-M