Self-Regulatory Organizations; Chicago Stock Exchange, Inc.; Order Granting Approval to Proposed Rule Change and Notice of Filing and Order Granting Accelerated Approval of Amendment No. 1 Thereto Relating to the Payment of Listing Fees by Specialists

[Federal Register Volume 63, Number 204 (Thursday, October 22, 1998)]
[Notices]
[Pages 56669-56670]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-28319]


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SECURITIES AND EXCHANGE COMMISSION

[Release Number 34-40560; File Number SR-CHX-98-15]


Self-Regulatory Organizations; Chicago Stock Exchange, Inc.; 
Order Granting Approval to Proposed Rule Change and Notice of Filing 
and Order Granting Accelerated Approval of Amendment No. 1 Thereto 
Relating to the Payment of Listing Fees by Specialists

October 15, 1998.

1. Introduction

    On June 16, 1998, the Chicago Stock Exchange, Inc. (``CHX'' or 
``Exchange'') submitted to the Securities and Exchange Commission 
(``SEC'' or ``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 establish that Specialists, 
Co-Specialists and Relief Specialists may not pay listing fees for any 
issuing corporation for which they act as a Specialist, Co-Specialist 
or Relief Specialist.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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    The proposed rule change was published for comment in the Federal 
Register on July 22, 1998.\3\ No comments were received on the 
proposal. On September 24, 1998, the Exchange submitted to the 
Commission Amendment No. 1 to the proposed rule change.\4\ This order 
approves the proposed rule change and grants accelerated approval to 
Amendment No. 1 thereto. The Commission is also soliciting comments on 
Amendment No. 1 to the proposed rule change.
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    \3\ Securities Exchange Act Release No. 40202 (July 14, 1998), 
63 FR 39319 (July 22, 1998).
    \4\ Letter from David T. Rusoff, Foley & Lardner to Deborah 
Flynn, Division of Market Regulation, Commission, dated September 
23, 1998 (``Amendment No. 1''). In Amendment No. 1, the CHX amends 
its proposal to clarify that the proposed rule prohibits indirect as 
well as direct payments of listing fees, by a specialist, on behalf 
of an issuer.
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II. Description of the Proposal

    The Exchange proposes to adopt new Rule 20A to Article XXX to 
prohibit Exchange members and member organizations from directly or 
indirectly paying listing fees, including initial and maintenance fees, 
for any issuing corporation for which the member or member organization 
acts as a Specialist, Co-Specialist or Relief Specialist. According to 
the CHX, the purpose of the proposed rule is to avoid potential 
conflicts of interest, both actual and apparent, that could arise in 
such situations. The Exchange believes that Specialists have an 
obligation to maintain a free and open market in an issue. To maintain 
the integrity of the market, the Exchange believes that Specialists 
must remain independent of issuers.

III. Discussion

    After careful review, the Commission finds that the proposed rule, 
as amended, is consistent with the requirements of the Act and the 
rules and regulations thereunder applicable to a national securities 
exchange.\5\ In particular, the Commission believes the proposal is 
consistent with the requirements of Section 6(b)(5) of the Act\6\ 
because the rule is designed to promote just and equitable principles 
of trade, to perfect the mechanism of a free and open market and to 
protect investors and the public interest.
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    \5\ In approving this rule, the Commission has considered the 
proposed rule's impact on efficiency, competition, and capital 
formation. 15 U.S.C. 78c(f).
    \6\ 15 U.S.C. 78f(b)(5).
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    The Commission notes that proposed Rule 20A specifically prohibits 
CHX members from directly or indirectly paying listing fees for any 
issuer for which such member acts as a Specialist, Co-Specialist or 
Relief Specialist. The Commission believes that the proposed 
prohibition on specialists' payment of issuer listing fees, either 
directly or indirectly, should help to ensure and make clear that 
financial incentives given to an issuer to be listed, or remain listed, 
on the CHX will not be permitted. Any payment by a specialist to an 
issuer clearly raises a conflict of interest and puts into question the 
independence of the specialist in making a market in the issuer's 
stock. The Commission also notes that the proposed new rule is 
consistent with other CHX rules intended to ensure that Exchange 
specialists remain independent of issuers.\7\
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    \7\ See CHX Article XXX, Rule 23.
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    The proposal has also been amended to explicitly prohibit 
specialists' from paying issuer listing fees either directly or 
indirectly. The Commission believes that the addition of this language 
will make clear that financial incentives to obtain or retain listings, 
irrespective of whether the incentive is received directly or 
indirectly from the specialist, is prohibited. This should further 
preserve the independence of CHX specialists and issuers.
    While the Commission believes it is useful for the CHX to adopt an 
explicit prohibition under its rules to prohibit specialist payments to 
issuers, the Commission notes that any actions of specialists that 
raise questions as to their independence from an issuer when making a 
market in the issuer's stock would raise concerns under the Act. Based 
on the above, the Commission believes that the proposed new rule will 
enhance the integrity of the market and should help to ensure just and 
equitable principles of trade in accordance with Section 6(b)(5) of the 
Act.\8\
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    \8\ 15 U.S.C. 78f(b)(5).
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    The Commission finds good cause for approving Amendment No. 1 to 
the proposed rule prior to the thirtieth day after the date of 
publication of notice thereof in the Federal Register. The Commission 
notes that Amendment No. 1 clarifies the proposed rule by specifically 
stating that indirect, as well as direct, payments of listing fees for 
issuers by specialists are prohibited. The amendment, therefore, does 
not substantively change the meaning or intent of the proposed rule. As 
Amendment No. 1 strengthens the original proposal by making clear that 
indirect payments of listing fees are prohibited, the Commission 
believes that Amendment No. 1 raises no new

[[Page 56670]]

issues of regulatory concern. For these reasons, the Commission 
believes that good cause exists, consistent with Section 6(b)(5)\9\ and 
Section 19(b)\10\ of the Act, to approve Amendment No. 1 to the 
proposed rule on an accelerated basis.
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    \9\ U.S.C. 78(b)(5).
    \10\ U.S.C. 78s(b).
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning Amendment No. 1, including whether Amendment No. 1 
is consistent with the Act. 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 other 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, 450 Fifth Street, N.W., Washington, 
D.C. 20549. Copies of such filing also will be available for inspection 
and copying at the principal office of the CHX. All submissions should 
refer to File No. SR-CHX-98-15 and should be submitted by November 12, 
1998.

V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act.\11\ that the amended proposed rule change (SR-CHX-98-15) is 
approved.

    \11\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\12\
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    \12\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-28319 Filed 10-21-98; 8:45 am]
BILLING CODE 8010-01-M