Self-Regulatory Organizations; Notice of Filing of and Order Granting Accelerated Approval to Proposed Rule Change by the Chicago Stock Exchange, Incorporated Relating to a Policy of the Specialist Assignment and Evaluation Committee

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-39342; File No. SR-CHX-97-29]

Self-Regulatory Organizations; Notice of Filing of and Order

Granting Accelerated Approval to Proposed Rule Change by the Chicago

Stock Exchange, Incorporated Relating to a Policy of the Specialist

Assignment and Evaluation Committee

November 21, 1997.

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

(``Act''),\1\ notice is hereby given that on October 27, 1997, 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 and II 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 and to grant accelerated approval to the

proposed rule change.

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

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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 to amend the current one-year pilot program concerning 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 change would be in effect for the remainder of

the current one-year pilot program.

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 III 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

On September 8, 1997, the Commission approved a rule change on a

one year pilot basis relating to the time periods for which a co-

specialist must trade a security before deregistering as the specialist

for the security.\2\ The pilot program currently expires on September,

1998. The purpose of the proposed rule change is to make a slight

modification to this pilot program.

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\2\ See Securities Exchange Act Release No. 39028 (September 8,

1997), 62 FR 48329.

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

appointing specialists and co-specialists and conducting deregistration

proceedings

[[Page 63579]]

in accordance with Article XXX of the Exchange's rules.\3\ Seven

circumstances may lead to the need for assignment or reassignment of a

security.\4\ One such circumstance is by specialist request.

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

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

.01.

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Currently, the CSAE will initiate a reassignment proceeding if it

believes that such action is called for. Using this standard, the

CSAE's policy under the current one year pilot program is as follows:

For a security that was awarded to a co-specialist in competition,

such co-specialist is required to trade the security awarded in

competition for one year before being able to deregister in the

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

posting. Two-years must elapse before an intra-firm transfer of the

issue (i.e., a transfer of the issue to another co-specialist in the

same specialist unit) is normally permitted without posting.

For a security that was awarded to a co-specialist without

competition, such co-specialist is required to trade the security

awarded without competition 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. A six-month time period must elapse

before an intra-firm transfer is normally permitted.

At this time, the Exchange believes that one aspect of the new

policy should be amended and one aspect should be clarified.

Specifically, the Exchange believes that the requirement that six

months elapse before permitting an intra-firm transfer of an issue that

was awarded without competition is too onerous. Instead, the Exchange

believes that, where the security was awarded without competition,

there should be no minimum time period before the intra-firm transfer

will be considered by the CSAE without posting. Because the security

was awarded without competition from any competing applicant from

another specialist unit, no one would be disadvantaged if the security

is transferred to another co-specialist in the same specialist unit

without waiting for six months to elapse, provided the transfer is to a

qualified co-specialist, which determination shall be made by the CSAE.

Without this change, a specialist unit might be tempted to return

the security to the cabinet (which can be done after only three months)

and having another co-specialist in the same unit apply to take it back

out, or, for less profitable issues, not apply for the security in the

first place. This change will further the Exchange's goal of increasing

the depth and liquidity of the market by encouraging specialists to

apply for issues that might otherwise remain in the cabinet.

Second, the Exchange would like to clarify the intra-firm transfer

policy when a security is awarded with competition. While the two-year

period is appropriate for permitting an intra-firm transfer without

posting, the Exchange believes that a specialist unit should be given

an opportunity for an intra-firm transfer after one year. As a result,

for securities awarded with competition, after one year has elapsed,

the CSAE will consider requests for an intra-firm transfer if the

security is posted, in order to permit other specialist units and co-

specialists to apply to trade the issue.

2. Statutory Basis

The Exchange believes that the proposed rule change is consistent

with Section 6(b)(5) of the Act \5\ 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.

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\5\ 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 a burden on competition.

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

Proposed Rule Change Received From Members, Participants or Others

No comments were solicited or received.

III. Solicitation of Comments

Interested persons are invited to submit written data, views and

arguments concerning the foregoing. Persons making written submission

should file six copies thereof with the Secretary, Securities and

Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549.

Copies of the submissions, 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, 450 Fifth Street, N.W., Washington,

D.C. 20549. Copies of such filing also will be available for inspection

and copying at the Exchange. All submissions should refer to file

number SR-CHX-97-29 and should be submitted by [insert date 21 days

from the date of publication].

IV. Commission's Findings and Order Granting Accelerated Approval

of Proposed Rule Change

The Commission has carefully reviewed CHX's proposed rule change

and has concluded, for the reasons set forth below, that the proposal

is consistent with the requirements of the Act and the rules and

regulations thereunder applicable to a national securities exchange,

and in particular, the requirements of Sections 6(b)(5) in that it is

designed to prevent fraudulent, manipulative acts and practices and to

promote just and equitable principles of trade, and to remove

impediments to and protect the mechanism of a free and open market and

to protect investors and the public interest.\6\

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\6\ In approving this rule, the Commission notes that is 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 finds that the amended policy, as proposed, should

result in a reasonable 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. Under the pilot program as

approved in September, for a security that was awarded in competition,

a co-specialist wishing to transfer that issue to another co-specialist

in the firm before the two years had elapsed might find it easier to

deregister after one year and have another co-specialist in the

specialist unit apply for the issue again. Similarly, for a security

that was awarded without competition, a co-specialist would deregister

within three months to allow another co-specialist in the firm to apply

for the security again rather than have to wait the full six months.

The change will remove the need for deregistration prior to making an

intra-firm transfer.

Overall, the Commission concludes that the proposed changes are

minor but may encourage CHX specialists to register in additional

securities that might otherwise remain in the cabinet. This, in turn,

could add to the depth

[[Page 63580]]

and liquidity of the market for such additionally listed securities.

Finally, the Commission notes that the proposed change to the pilot

program does not alter the notification requirement to order entry

firms, and the effective date of a specialist's deregistration.

The Commission finds good cause for approving the proposed rule

change prior to the thirtieth day after the date of publication notice

thereof in the Federal Register. This will permit the changes to be in

effect for as much of the pilot program as possible thereby allowing

CHX to better assess the effects of these changes to be assessed prior

to the expiration of the pilot. In addition, the rule change that

implemented the pilot program was published in the Federal Register for

the full comment period and no comments were received. Accordingly, the

Commission believes that it is consistent with Sections 6 and 19(b) of

the Act \7\ to accelerate approval of the proposed rule change.

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\7\ 15 U.S.C. 78f and 78s(b)(2).

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

Act,\8\ that the proposed rule change (SR-CHX-97-29) is hereby approved

on an accelerated basis.

\8\ 15 U.S.C. 78s(b)(2).

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For the Commission by the Division of Market Regulation,

pursuant to delegated authority.\9\

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\9\ 17 CAR 200.30-3(a)(12).

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Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 97-31394 Filed 11-28-97; 8:45 am]

BILLING CODE 8010-01-M