Self-Regulatory Organizations; Chicago Stock Exchange, Inc.; Order Granting Approval to Proposed Rule Change Relating to a Specialist's De-Registration in an Issue

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-39028; File No. SR-CHX-97-15]

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

Order Granting Approval to Proposed Rule Change Relating to a

Specialist's De-Registration in an Issue

September 8, 1997.

I. Introduction

On June 4, 1997, the Chicago Stock Exchange, Inc. (``CHX'' or

``Exchange'') submitted to 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 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.

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

\2\ 17 CFR 240.19b-4.

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Notice of the proposed rule change, together with the substance of

the proposal, was published for comment in Securities Exchange Act

Release No. 38882 (July 28, 1997), 62 FR 41981 (August 4, 1997). No

comments were received on the proposal. This order approves the

proposed rule change.

II. Description

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

appointing

[[Page 48330]]

specialists and co-specialists \3\ and conducting de-registration

proceedings in accordance with Article XXX of the Exchange's rules.\4\

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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\3\ 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).

\4\ 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.'' \5\ Using this standard,

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

issue awarded in competition \6\ for a two year period, and to trade an

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

permitting a co-specialist to de-register in the issue.

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\5\ See CHX Rules Article XXX, Rule 1, Interpretation and Policy

.01.2.

\6\ 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.\7\ These

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

competition or without completion and whether another specialist will

assume the responsibility to trade the issue.

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\7\ 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.\8\ 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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\8\ 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, Division of 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 specialists to provide sending firms at least 15

days advance notice of a its intention to de-register in the issue.

III. Discussion

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, and, in

particular, with the requirements of Section 6(b).\9\ Specifically, the

Commission believes the proposal is consistent with the Section 6(b)(5)

requirements that the rules of an exchange be designed to promote just

and equitable principles of trade, to prevent fraudulent and

manipulative acts, and, in general, to protect investors and the

public.\10\

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\9\ 15 U.S.C. Sec. 78f(b).

\10\ In approving this rule, the Commission notes that it has

considered the proposed rule's impact on efficiency, competition,

and capital formation. 15 U.S.C. 78c(f).

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The Commission believes that the new policy, as proposed, should

result in a more accurate balance between the interests of consistency

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

specialist and that of a specialist in having the flexibility to

deregister in an unprofitable issue. In this regard, the Commission

believes that the proposed rule change will still preserve an

appropriate time period for which the specialist cannot deregister in

an issue. 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. 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 Commission also believes that the proposed new policy may help

to encourage more specialists and co-specialists to apply for

additional issues. The Commission notes that under the current policy,

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

specialist in an issue because of the long time period for which it

must hold the security before deregistering. By reducing the current

time periods for which a specialist or co-specialist must trade a

security before being allowed to deregister in that security, when no

other specialist will be assigned to that security, the proposal may

reduce the risk and exposure that is attendant with registering for a

particular issue. In turn, the Commission believes that the proposal

could increase the overall liquidity and depth of the CHX market by

encouraging specialists to register in additional securities.

The Commission further believes that the proposed pilot provides

adequate notice to order entry firms of the change in the status of an

issue, by providing that such firms be given at least 15 days advance

notice of a co-specialist's intention to deregister in the issue. In

addition, the effective date of a specialist's deregistration 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.

The Commission believes that approving the proposed rule change as

a pilot program is reasonable under the Act because it will serve to

protect investors and the public interest by allowing the CHX time to

collect data on its effectiveness and to determine whether any

modifications are necessary. The pilot will expire on September 8,

1998. The Commission requests that the CHX submit a report on the

effectiveness of the pilot program by July 8, 1998. The report should

state the Exchange's views on the effectiveness of the policy change,

including, but not limited to, whether there has been an increase in

the

[[Page 48331]]

number of specialists or co-specialists who register in additional

securities. The report should also include data on (1) the rate of

deregistration at the specialist's request, and (2) the number of

specialists applying to register in securities that do not have a

specialist already assigned, and compare that data for the pilot year

to the prior year. In addition, the Commission requests that the CHX

submit by July 8, 1998, any proposed rule change pursuant to Rule 19b-4

under the Act \11\ to further extend or seek permanent approval of the

pilot program.

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\11\ 17 CFR 200.19b-4.

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IV. Conclusion

It is therefore ordered, pursuant to Section 19(b)(2) of the

Act,\12\ that the proposed rule change (SR-CHX-97-15) is approved on a

one year pilot basis through September 8, 1998.

\12\ 15 U.S.C. Sec. 78s(b)(2).

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For the Commission, by the Division of Market Regulation,

pursuant to delegated authority.\13\

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\13\ 17 CFR 200.30-3(a)(12).

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Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 97-24305 Filed 9-12-97; 8:45 am]

BILLING CODE 8010-01-M