# 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 > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/fr%3A98-24638 ## Record - **Collection:** Federal Register - **Document type:** Notice - **Published:** September 15, 1998 - **Citation:** 63 FR 49375 ## Text 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. --------------------------------------------------------------------------- \1\ 15 U.S.C. 78s (b)(1). \2\ 17 CFR 240.19b-4. --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- 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\ --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \12\ 15 U.S.C. 78f(b)(5). --------------------------------------------------------------------------- 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\ --------------------------------------------------------------------------- \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). --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \15\ 17 CFR 240.19b-4. --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \16\ 15 U.S.C. 78f and 78s(b)(2). --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \17\ 15 U.S.C. 78s(b)(2). For the Commission, by the Division of Market Regulation, pursuant to delegated authority.\18\ --------------------------------------------------------------------------- \18\ 17 CFR 200.30-3(a)(12). --------------------------------------------------------------------------- Margaret H. McFarland, Deputy Secretary. [FR Doc. 98-24638 Filed 9-14-98; 8:45 am] BILLING CODE 8010-01-M --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A98-24638. Public record. Not legal advice.