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. 34-40408; File No. SR-CHX-98-20]

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

September 8, 1998.

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

(``Act''), \1\ and Rule 19b-4 thereunder, \2\ notice is hereby given

that on August 19, 1998, 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 Exchange.

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).

\2\ 17 CFR 240.19b-4.

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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 extend for another one-year term, until September 8,

1999, the current 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.

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.

[[Page 49376]]

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.\3\ The pilot program currently expires on September

8, 1998. In accordance with the Commission's order approving the pilot

program, the Exchange submitted a report to the Commission describing

its experience with the pilot program.\4\ The purpose of the proposed

rule change is to extend the pilot program for another one-year term to

allow the Exchange to further review the operation of the time periods

for which a co-specialist must trade a security before deregistering as

the specialist for the security.

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\3\ See Securities Exchange Act Release No. 39028 (September 8,

1997), 62 FR 48329. On November 21, 1997, the Commission approved a

rule change that amended and clarified certain time periods of the

pilot program. See Securities Exchange Act Release No. 39342

(November 21, 1997), 62 FR 63578.

\4\ See Letter from Daniel J. Liberti, Chicago Stock Exchange,

to Katherine England, SEC, dated July 23, 1998.

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

appointing specialists and co-specialists \5\ and conducting

deregistration proceedings in accordance with Article XXX of the

Exchange's rules.\6\ Seven circumstances may lead to the need for

assignment or reassignment of a security.\7\ One such circumstance is

by specialist request.

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\5\ 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).

\6\ CHX Rules, Article IV, Rule 4.

\7\ CHX Rules, Article XXX, Rule 1, Interpretation and Policy

.01.

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

it believes that such action is called for.''\8\ Using this standard,

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

follows.\9\

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\8\ CHX Rules, Article XXX, Rule 1, Interpretation and Policy

.01.2.

\9\ As explained in Securities Exchange Act Release No. 39028,

supra note 3, the Exchange intended 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. 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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For a security that was awarded to a co-specialist in competition,

\10\ 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.\11\ Generally, 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 permitted without posting.

However, the specialist unit has the opportunity to transfer the

security intra-firm after one year if it agrees to have the security

posted after one year has elapsed to permit other specialist units or

co-specialists to apply to trade the issue.

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\10\ In this context, ``in competition'' means that more than

one specialist had applied to be the specialist in the issue.

\11\ 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.

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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. No minimum time period is required to

elapse before an intra-firm transfer is normally permitted.

2. Statutory Basis

The Exchange believes that the proposed rule change is consistent

with Section 6(b)(5) of the Act \12\ in that it is designed to promote

just and equitable principles of trade, to remove impediments to 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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\12\ 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 submissions

should file six copies thereof with the Secretary, Securities and

Exchange Commission, 450 Fifth Street, NW., Washington, DC 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 in the

Commission's Public Reference Room. Copies of the filing also will be

available for inspection and copying at the Exchange. All submissions

should refer to file number SR-CHX-98-20 and should be submitted by

October 6, 1998.

IV. Commission's Findings and Order Granting Accelerated Approval

of Proposed Rule Change

The Commission has carefully reviewed CHX's proposed rule change

and believes, for the reasons set forth below, 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, with the requirements of Section 6(b) \13\ in that

it is designed to prevent fraudulent and manipulative acts and

practices, to promote just and equitable principles of trade, to remove

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

to protect investors and the public interest.\14\

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\13\ 15 U.S.C. 78f(b).

\14\ 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 approving the proposed rule change to

extend for another one-year term, until September 8, 1999, the pilot

program relating to the time periods for which a co-specialist must

trade a security before deregistering as the specialist for the

security is reasonable under the Act because it will serve to protect

investors and the public interest by allowing the CHX additional time

to collect data on the program's effectiveness and to determine whether

any modifications are necessary.

The Commission believes that the pilot policy, as modified, 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

[[Page 49377]]

specialist in having the flexibility to deregister in an unprofitable

issue. Under the pilot program, for a security that was awarded to a

co-specialist in competition, the 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. Generally, 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 permitted without

posting. However, the specialist unit has the opportunity to transfer

the security intra-firm after one year has elapsed if it agrees to have

the security posted to permit other specialist units or co-specialists

to apply to trade the issue.

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. No minimum time period is required to

elapse before an intra-firm transfer is normally permitted.

Overall, the Commission believes that the pilot policy may

encourage CHX specialists to register in additional securities that

might otherwise remain in the cabinet. This, in turn, could add to the

depth and liquidity of the market for additionally listed securities.

The pilot program is now scheduled to expire on September 8, 1999.

The Commission requests that the CHX submit a report on the

effectiveness of the pilot program by July 8, 1999. 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 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 second pilot

year to the two prior years. In addition, the Commission requests that

the CHX submit by July 8, 1999, any proposed rule change pursuant to

Rule 19b-4 under the Act \15\ to further extend or seek permanent

approval of the pilot program.

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\15\ 17 CFR 240.19b-4.

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The Commission believes that there is good cause for approving the

proposed rule change prior to the thirtieth day after the date of

publication of notice of filing thereof in the Federal Register. This

will permit the pilot program to continue without interruption, thereby

allowing CHX to better assess the effects of the program. 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; and no comments were received with regard to the

modifications made to the pilot program in November, 1997 which were

also published in the Federal Register. Finally, the CHX stated in its

report to the Commission on the pilot program that, in the first year

of operation of the pilot program, it received no complaints or

negative feedback regarding the pilot program policy, and there was no

apparent abuse in the operation of the pilot policy. Accordingly, the

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

the Act \16\ to accelerate approval of the proposed rule change.

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\16\ 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,\17\ that the proposed rule change (SR-CHX-9-20) is hereby approved

on an accelerated basis.

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\17\ 15 U.S.C. 78s(b)(2).

For the Commission, by the Division of Market Regulation,

pursuant to delegated authority.\18\

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\18\ 17 CFR 200.30-3(a)(12).

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Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 98-24638 Filed 9-14-98; 8:45 am]

BILLING CODE 8010-01-M