Self-Regulatory Organizations; Notice of Filing and Order Granting Partial Accelerated Approval of Proposed Rule Change by the Chicago Stock Exchange, Incorporated Relating to Specialist Retention Periods for Securities Traded on the Exchange

[Federal Register Volume 64, Number 196 (Tuesday, October 12, 1999)]
[Notices]
[Pages 55324-55326]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-26525]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-41922; File No. SR-CHX-99-11]


Self-Regulatory Organizations; Notice of Filing and Order 
Granting Partial Accelerated Approval of Proposed Rule Change by the 
Chicago Stock Exchange, Incorporated Relating to Specialist Retention 
Periods for Securities Traded on the Exchange

September 27, 1999.
    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, 1999, 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, II, 
and III below, which Items have been prepared by the CHX. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons, and to approve that 
portion of the proposal related to securities listed on the exchange on 
an accelerated basis.
---------------------------------------------------------------------------

    \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 make permanent a pilot program \3\ 
relating to the time periods for which a co-specialist must trade a 
security listed on the Exchange prior to deregistering as the 
specialist for that security as set forth in Article XXX, Rule 1, 
Interpretation and Policy .01. The Exchange also proposes to adopt 
separate co-specialist retention periods relating to the time periods 
for which a co-specialist must trade a Nasdaq National Market (``NM'') 
security, which are traded on the Exchange pursuant to unlisted trading 
privileges, prior to deregistering as the specialist for that security. 
The text of the proposed rule change is available at the CHX and the 
Commission.
---------------------------------------------------------------------------

    \3\ The pilot program expired on September 8, 1999.
---------------------------------------------------------------------------

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 CHX 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 VI below. The CHX 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
    (a) Listed Securities: Interpretation and Policy .01 to Article 
XXX, Specialists, Rule 1, Registration and Appointments, of the 
Exchange's rules set forth the procedures for allocating and 
reallocating securities among specialist units and co-specialists. The 
Exchange's Committee on Specialist Assignments and Evaluation 
(``CSAE'') is responsible for appointing specialists and co-specialists 
\4\ and conducting deregistration proceedings in accordance with 
Article XXX of the Exchange's rules. Several circumstances may lead to 
the need for assignment or reassignment of a security.\5\ One of these 
circumstances is by specialist request. Subsection 2 of Interpretation 
and Policy .01 addresses the assignment and reassignment process when a 
specialist requests deregistration in one or more of its assigned 
securities. The Exchange amended Subsection 2 on a pilot basis in 1997 
to specifically address the deregistration of co-specialists in 
securities.\6\ Under the pilot program, a co-specialist awarded a 
security in competition was required to trade that security for at 
least one year before being able to deregister in the security, if no 
other specialist will be assigned to the security after posting and 
deregistration.\7\ In addition, generally, two years had to elapse 
before an intra-

[[Page 55325]]

firm transfer of the issue (i.e., transfer of the issue to another co-
specialist within the same specialist unit) would be permitted without 
posting. For securities awarded to co-specialists without competition, 
a co-specialist was required to trade the security for three months 
before being able to deregister in the security if no other specialist 
would be assigned to the security after posting and deregistration. 
Finally, no minimum time period was required to elapse before an intra-
firm transfer is permitted for non-competitive assignments.
---------------------------------------------------------------------------

    \4\ A specialist is a ``unit'' or organization that has 
registered as such with the Exchange under Article XXX, Rule 1. A 
co-specialist is an individual who has registered such under Article 
XXX, Rule 1. See CHX Rules, Article XXX, Rule 1, Interpretation and 
Policy .01.4(a).
    \5\ CHX Rules, Article 1, Rule 1, Interpretation and Policy .01.
    \6\ Securities Exchange Act Release No. 39028 (Sept. 8, 1997), 
62 FR 48329 (Sept. 15, 1997); see also Securities Exchange Act 
Release No. 40408 (Sept. 8, 1998), 63 FR 49375 (Sept. 15, 1998).
    \7\ Posting means that all specialist are put on notice that the 
security is available for reassignment.
---------------------------------------------------------------------------

    The pilot program was extended for another year in 1998.\8\ Based 
on its success, the Exchange is requesting permanent approval of the 
requirements of the program.\9\
---------------------------------------------------------------------------

    \8\ Securities Exchange Act Release No. 40408 (Sept. 8, 1998), 
63 FR 49375 (Sept. 15, 1998).
    \9\ Pursuant to the original approval order, the Exchange was 
required to submit a report to the Commission describing its 
experience with the pilot program after a one year period. The 
Exchange submitted the required report and requested an extension of 
the pilot program for an additional one year period. The Commission 
again requested a report at the end of one year to further evaluate 
the program. The Exchange recently submitted this report in 
anticipation of this rule filing. See letter from Daniel J. Liberti, 
CHX, to Katherine A. England, Assistant Director, Commission dated 
July 7, 1999.
---------------------------------------------------------------------------

    (b) Nasdaq NM Securities. In addition to requesting permanent 
approval of the provisions of the pilot program, the Exchange is also 
proposing to adopt specific retention periods for co-specialists in 
Nasdaq/NM securities. Because the number of Nasdaq/NM securities that 
the Exchange can trade pursuant to unlisted trading privileges 
(``UTP'') is limited,\10\ stock allocation issues relating to Nasdaq/NM 
securities that are distinct from allocation issues relating to other 
securities trade on the Exchange have developed. Specifically, because 
of the existing 1,000 security limit on the total number of Nasdaq/NM 
securities that can be traded UTP on an Exchange-wide basis, co-
specialists in Nasdaq/NM securities cannot acquire a new Nasdaq/NM 
issue until they deregister in an issue they currently trade and that 
security is removed from the list of Nasdaq/NM securities traded on the 
Exchange. The current specialist deregistration rules, however, do not 
provide the flexibility to quickly complete this procedure. In 
addition, the current rules do not provide Nasdaq/NM specialist firms 
sufficient flexibility to reallocate stocks awarded in competition 
between co-specialists within the same specialist unit when a co-
specialist's stocks become active and volatile.\11\
---------------------------------------------------------------------------

    \10\ Securities Exchange Act Rel. No. 41392 (May 12, 1999), 64 
FR 27839 (May 21, 1999).
    \11\ In such a situation, a specialist unit might deem it to be 
in the best interests of customers and the Exchange to transfer the 
stock to another co-specialist within the same specialist unit that 
is assigned to a fewer number of issues or is more experienced.
---------------------------------------------------------------------------

    To address these concerns, the Exchange is proposing to amend the 
retention restrictions on co-specialists for Nasdaq/NM securities in 
Interpretation and Policy .01 to Rule 1. The amended interpretation 
will permit co-specialists in Nasdaq/NM issues to deregister in an 
issue more quickly, to allow them to respond to market developments. 
The proposed amended interpretation will also allow for easier transfer 
of issues between co-specialists within a specialist unit. 
Specifically, the proposed rule change specifies no minimum retention 
periods for Nasdaq/NM issues. In addition, and, subject to the CSAE's 
continuing authority, the proposal will also permit co-specialists in 
Nasdaq/NM securities to deregister at any time after providing at least 
five calendar days notice to order sending firms, and allow intra-firm 
transfer of Nasdaq/NM securities awarded in competition without a 
mandatory retention period.\12\
---------------------------------------------------------------------------

    \12\ There is currently no minimum retention period for intra-
firm transfers of securities awarded without competition. See 
Article XXX, Rule 1, Interpretation and Policy .01.
---------------------------------------------------------------------------

    The Exchange intends to ensure that there will be no disruption to 
the marketplace as a result of relaxed stock retention requirements. 
The Exchange believes that its recently filed rule change increasing 
the fee for such transfer to $2,000 will prevent disruptive serial 
transfers and deregistrations that have not been carefully contemplated 
by the specialist.\13\
---------------------------------------------------------------------------

    \13\ Securities Exchange Act Release No. 41569 (June 28, 1999), 
64 FR 36726 (July 7, 1999).
---------------------------------------------------------------------------

    Finally, the proposed amendments relating to Nasdaq/NM securities 
will only be effective for so long as there is a limit upon the number 
of Nasdaq/NM issues that can be traded UTP on the Exchange. If the 
Commission eliminates this limitation, Nasdaq/NM issues and the co-
specialists maintaining Nasdaq/NM issues will be subject to the regular 
retention periods applicable to all other issues traded on the 
Exchange.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b)(5) of the Act \14\ in that it is designed to promote 
just and equitable principles of trade, to foster cooperation and 
coordination with persons regulating securities transactions, to remove 
impediments to and perfect the mechanism of a free and open market and 
a national market system and, in general, to protect investors and the 
public interest.
---------------------------------------------------------------------------

    \14\ 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 any burden on completion.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    The Exchange has not solicited or received written comments on the 
proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing 
for Commission Action

    The Exchange has requested accelerated approval of the proposed 
rule filing relating to listed securities. The CHX points out that this 
portion of the proposed rule change has existed as a pilot for 
approximately two years, and was previously published in the Federal 
Register and subject to notice and comment. The Exchange believes that 
the program provides a benefit both to specialists and the investing 
public by permitting specialists to add or deregister as a specialist 
in an orderly manner. In light of this, and the fact that the portion 
of the proposed rule change related to listed securities has already 
been subject to notice and comment, the Exchange believes that 
accelerated approval is appropriate in order to reactivate this program 
on a permanent basis.
    With regard to that portion of the proposed rule change related to 
Nasdaq NM securities, within 35 days of the date of publication of this 
notice in the Federal Register or within such other period (i) as the 
Commission may designate up to 90 days of such date if it finds such 
longer period to be appropriate and publishes its reasons for so 
finding or (ii) as to which the self-regulatory organization consents, 
the Commission will:
    a. By order approve that portion of the proposed rule change 
related to Nasdaq NM securities, or
    b. Institute proceedings to determine whether the portion of the 
proposed rule change related to Nasdaq NM securities should be 
disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing,

[[Page 55326]]

including whether the proposed rule change 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, DC 20549-0609. 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. 522, will be 
available for inspection and copying in the Commission's Public 
Reference Room. Copies of such filing will also be available for 
inspection and copying at the principal office of the CHX. All 
submissions should refer to the File No. SR-CHX-99-11 and should be 
submitted by November 2, 1999.

V. Commission Findings and Order Granting Accelerated Approval of 
the Propose Rule Change

    The Commission finds that the portion of the proposed rule change 
relating to specialist retention periods for listed securities traded 
on the Exchange is consistent with the requirements of the Act and the 
rules and regulations thereunder applicable to a national securities 
exchange. Specifically, the Commission believes that the proposal is 
consistent with the Section 6(b)(5) \15\ requirements that the 
Exchange's rules be designed to promote just and equitable principles 
of trade, to remove impediments to and perfect the mechanism of a free 
and open market and, in general, to protect investors and the public 
interest.\16\
---------------------------------------------------------------------------

    \15\ 15 U.S.C. 78o(b)(5).
    \16\ In approving this rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. 15 U.S.C. 78c(f).
---------------------------------------------------------------------------

    The Commission finds good cause for approving the portion of the 
proposed rule change relating to listed securities prior to the 
thirtieth day after the date of publication of notice in the Federal 
Register. The Commission believes that accelerated approval will 
promote continuity in specialist retention practices relating to listed 
securities, as conducted under the recently expired pilot program. In 
addition, the Commission specifically notes that the pilot program was 
previously published in the Federal Register and operated for several 
years without comment from the industry or the investing public.
    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\17\ that the portion of the proposed rule change (File No. SR-CHX-
99-11) relating to listed securities traded on the CHX 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.
---------------------------------------------------------------------------

Jonathan G. Katz,
Secretary.
[FR Doc. 99-26525 Filed 10-8-99; 8:45 am]
BILLING CODE 8010-01-M