

[Federal Register: June 15, 2006 (Volume 71, Number 115)]
[Notices]               
[Page 34648-34651]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr15jn06-64]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-53949; File No. SR-CHX-2006-04]

 
Self-Regulatory Organizations; Chicago Stock Exchange, Inc.; 
Notice of Filing of a Proposed Rule Change and Amendment Nos. 1 and 2 
Thereto Relating to the Transfer of Securities Among Co-Specialists 
Within a Specialist Firm

June 6, 2006.
    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 March 8, 2006, the Chicago Stock Exchange, Inc. (``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. On May 3, 
2006, CHX filed Amendment No. 1 to the proposed rule change.\3\ On May 
22, 2006, CHX filed Amendment No. 2 to the proposed rule change.\4\ The 
Commission is publishing this notice to solicit comments on the 
proposed rule change, as amended, from interested parties.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ In Amendment No. 1, the Exchange revised the rule text of 
the proposed rule change to clarify the application of the proposal 
to intrafirm transfers and revised the purpose section to discuss 
the proposed provision requiring the specialist unit to accurately 
represent its plans in the specialist application regarding 
designating a particular co-specialist to trade a security.
    \4\ In Amendment No. 2, the Exchange revised the rule text of 
the proposed rule change to clarify the impact of a intrafirm 
transfer on the deregistration and registration of individual co-
specialists within a specialist firm and made non-substantive 
changes to the proposed rule text. The proposed rule text set forth 
in Amendment No. 2 superceded and replaced the rule text set forth 
in the initial filing and Amendment No. 1 in its entirety.
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Self-Regulatory Organization's Statement of the Terms of Substance of 
the Proposed Rule Change

    The CHX proposes to amend its rules to permit the transfer of 
securities to different co-specialists within a specialist firm. Below 
is the text of the proposed rule change, as amended. Proposed new 
language is in italics; \5\ proposed deletions are in [brackets].
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    \5\ The Exchange inadvertently failed to designate the phrase 
``as either a specialist or co-specialist'' in the first paragraph 
of CHX Rule 1 as proposed new text. For clarity, the new text has 
been underlined herein. The Exchange has committed to file an 
amendment reflecting the fact that this phrase is new text prior to 
Commission approval of the proposed rule change.
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ARTICLE XXX

Specialists

Registration and Appointment

    RULE 1. No Participant shall act as a specialist or co-specialist 
on the Exchange in any security unless registered as such in the 
particular security. Except for the intrafirm transfers of registration 
permitted by Section I.2 of Interpretation and Policy .01 of this Rule, 
[R]registration as either a specialist or co-specialist shall be 
subject to the approval of the Exchange.
* * * * *
    An applicant for initial registration as a co-specialist shall, or 
as otherwise may be determined by the Committee on Specialist 
Assignment and Evaluation be required to serve for a period of six 
months in the capacity of relief specialist under continuous 
supervision of a registered co-specialist. No application for co-
specialist in a particular issue will be considered by the Committee on 
Specialist Assignment and Evaluation (and no intrafirm transfer 
permitted by Section I.2 of Interpretation and Policy .01 of this Rule 
may be made) prior to the time that the individual has satisfied these 
training requirements.
* * * * *
    Unless required by [Subject to] the provisions of Article XXX, Rule 
8 or when permitted by Section I.2 of Interpretation and Policy .01 of 
this Rule, a specialist, co-specialist or relief specialist shall not 
relinquish their positions until permission to do so is received from 
the Committee on Specialist Assignment and Evaluation.
    * * * Interpretations and Policies:
.01 COMMITTEE ON SPECIALIST ASSIGNMENT AND EVALUATION
ASSIGNMENT FUNCTION
I. EVENTS LEADING TO ASSIGNMENT PROCEEDINGS
* * * * *
    1. No change.
    2. Specialist Request. Any specialist unit and co-specialist may 
ask to be deregistered in one or more of its assigned securities, and 
the Committee on Specialist Assignment and Evaluation (the Committee) 
will hear all such requests. The Committee will initiate a reassignment 
proceeding if it believes that such action is called for. The Committee 
may initiate a reassignment proceeding on the basis that if the merits 
of the request are not established the security must be retained by the 
registered specialist if no other unit appears to be able to make a 
better market or if no other unit applies.
* * * * *
    Exception, Intrafirm transfers that meet the criteria below do not 
require the submission of an application or the approval of the 
Committee and will not result in a proceeding by the Committee to 
reassign the security to another co-specialist or specialist firm.
    Because a specialist unit is responsible both financially and as a 
regulatory matter for the activities of its co-specialists, a 
specialist unit might, from time to time, determine that the 
responsibility for trading one or more securities should be transferred 
from one co-specialist to another within the same specialist unit. 
Without seeking prior Committee approval, a specialist unit may 
transfer the responsibility for trading securities among the co-
specialists associated with its firm, so long as (1) the specialist 
unit immediately notifies the Exchange, in the manner required by the 
Exchange, of each such transfer; and (2) when such a transfer is made 
within six months of an initial assignment of the security to the 
specialist unit, the specialist unit must inform the Exchange, in 
writing, of its reasons for making the change. Each such transfer by 
the specialist unit

[[Page 34649]]

effectively deregisters a co-specialist in the securities that the co-
specialist no longer trades and registers another co-specialist in any 
newly-assigned securities.
    [Without limiting the foregoing, the Committee will generally 
approve a co-specialist's request for deregistration in any security 
for the purpose of having the security assigned to another co-
specialist in the same specialist unit only under the following 
conditions:]
    [(a) For any security awarded to such co-specialist in competition, 
a period of at least two years must have elapsed from the date of the 
original assignment. Alternatively, if the specialist unit agrees to 
have the security posted, a period of at least one year (but less than 
two years) must have elapsed from the date of the original assignment.]
    [(b) For any security awarded to such co-specialist without 
competition, no minimum time period is required.]
    3. No change.
    4. Split-Up and/or Merger of Specialist Units.
    (a) No change.
    (b) When a security is to be assigned or reassigned, specialists, 
not co-specialists, apply for registration. Article XXX, Rule 1.01.II. 
In applying for registration in a particular stock, however, a 
specialist must indicate the individual co-specialist who will trade 
the stock. Article XXX, Rule 1.01.III. Therefore, although the 
Committee assigns a stock to a specialist unit, not to the co-
specialist, and the specialist is responsible both financially and as a 
regulatory matter for the activities of its co-specialists, it is the 
trading activities of the co-specialist that are the basis for the 
Committee's evaluations. Thus, a specialist and co-specialist are 
jointly responsible for each assignment and, with the exception of an 
intrafirm transfer permitted by Section I.2 of Interpretation and 
Policy .01 of this Rule, a withdrawal of either party may require a new 
posting if circumstances warrant.
    (c) Because the specialist is financially responsible for the 
activities of its co-specialists, a co-specialist may act as such only 
with the concurrence of the specialist. If, at any time, a specialist 
no longer wants a co-specialist to trade for it, the specialist--
subject to the Committee's approval--may terminate the relationship. 
Similarly, a co-specialist--again subject to the Committee's approval--
may terminate his relationship with a specialist. With the exception of 
an intrafirm transfer permitted by Section I.2 of Interpretation and 
Policy .01 of this Rule, either of the decisions described above are 
subject tot he Committee's approval. When the Committee assesses a 
situation involving the split-up or merger of specialist units, [Among 
the factors] the Committee may consider a number of factors, including 
[are]:
    1. Co-specialist performance.
    2. Specialist capital generally.
    3. Specialist capital made available to the particular co-
specialist.
    4. Length of association between specialist and co-specialist.
    5. Length of time that the co-specialist has traded the security.
    6[5]. Whether the co-specialist has a proprietary interest in the 
trading profits or losses derived from the stock.
    7[6]. Whether the specialist or co-specialist wishes to continue 
trading the security.
    8[7]. Performance of the proposed new co-specialist.
    9[8]. Financial capacity of the co-specialist's new specialist 
unit.
    Based on its consideration of these and any other relevant factors, 
the Committee will decide whether to (i) leave a security with the 
specialist, (ii) permit the co-specialist to take the security with 
him, or (iii) require a new posting. In the event of a posting, the 
existing specialist or co-specialist will be permitted to reapply for 
the stock. A decision to permit the specialist or co-specialist to 
retain the security may be made conditionally based on the performance 
of the new co-specialist or specialist.
    As noted above, intrafirm transfers that meet the criteria set out 
in Section I.2 of Interpretation and Policy .01 of this Rule do not 
require the approval of the Committee and will not result in a 
proceeding by the Committee to reassign the security to another co-
specialist or specialist firm.
    5.-8. No change.

II. ASSIGNMENT PROCEDURES

* * * * *
    The assignment procedures set out in this Section II do not apply 
to the intrafirm transfers permitted by Section I.2 of Interpretation 
and Policy .01 of this Rule. Intrafirm transfers that meet the criteria 
set out in Section I.2 of Interpretation and Policy .01 of this Rule do 
not require the submission of an application or the approval of the 
Committee.
    In assigning specialists, co-specialists, relief specialists and 
odd-lot dealers, the Committee may act through a Subcommittee of not 
less than three of its members, at least one of whom shall not be 
affiliated with a broker/dealer. Where emergency circumstances require 
the expedited assignments of one or more specialists, co-specialists, 
relief specialists or odd-lot dealers, and a Subcommittee is unable to 
be convened, the chairman, or a member of the Committee designated by 
the chairman, may make such temporary assignment as he deems necessary, 
pending a final determination by a Subcommittee or the full Committee. 
Any proposal or agreement between or among specialists, co-specialists, 
relief specialists or odd-lot dealers, to exchange existing 
assignments, shall be submitted in writing to the Subcommittee for its 
consideration and, if not disapproved by the Subcommittee within 30 
days of the date of submission, shall become effective as written.
    1. Applications. In applying, a specialist unit should state the 
reasons why it believes the stock should be assigned to it. A standard 
application form is available from the Exchange and should be used for 
this purpose. Except as otherwise provided in paragraph 6, below, the 
application must, at a minimum, include the name and background of the 
co-specialist who will normally be trading the security and his ability 
and experience relative to the issue being applied for. It is important 
that the application accurately represent the specialist unit's plans 
as to the co-specialist who will trade the security. Also, if any 
special or unique characteristics of the security have been identified 
by the Committee, such as unusually high capital requirements or 
institutional participation making trading difficult, the applicant 
should specifically note and comment on its ability to deal with the 
special characteristics.
* * * * *
III. GUIDELINES FOR ASSIGNMENT OF ISSUES TO CO-SPECIALISTS

    The guidelines set out in this Section III apply to the assignment 
of securities by the Committee. These guidelines do not apply to the 
intrafirm transfers permitted by Section I.2 of Interpretation and 
Policy .01 of this Rule. Intrafirm transfers that meet the criteria set 
out in Section I.2 of Interpretation and Policy .01 of this Rule do not 
require the submission of an application or the approval of the 
Committee.
* * * * *
    3. Because the Committee considers the demonstrated ability and 
experience of the co-specialist designated by the specialist unit when 
applying for the assignment of a security, it is important that the 
specialist unit accurately represent its plans for having that 
particular co-specialist trade the

[[Page 34650]]

security. A specialist unit must not designate a co-specialist with 
relatively strong demonstrated ability and experience when applying for 
a security and then immediately transfer the security to a co-
specialist with less demonstrated ability and experience without good 
cause for making the change.
* * * * *

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, as 
amended, and discussed any comments it received regarding the proposal, 
as amended. The text of these statements may be examined at the places 
specified in Item IV 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
    Under the Exchange's current rules relating to the assignment of 
securities to specialist firms, the Committee on Specialist Assignment 
and Evaluation (``CSAE'') assigns each security to a specialist firm 
and this firm is responsible both financially and as a regulatory 
matter for the trading of the security.\6\ At the same time, however, 
when a specialist firm applies to trade a security, it must identify 
the co-specialist that will trade the security and the CSAE will review 
the co-specialist's trading performance in making its assignment 
decision.\7\ As an overall matter, the specialist firm and the 
individual co-specialist are jointly responsible for each assigned 
security and the decision by either the firm or the individual trader 
to deregister in a security could result in the posting of the security 
for re-assignment.\8\
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    \6\ See Article XXX, Rule 1, Interpretation and Policy .01, 
Section II, Introductory paragraphs; and Section I.4.
    \7\ See Article XXX, Rule 1, Interpretation and Policy .01, 
Sections II and III.
    \8\ See Article XXX, Rule 1, Interpretation and Policy .01, 
Section I.4. Telephone conversation between Ellen Neely, President 
and General Counsel, CHX and David Michehl, Special Counsel, 
Division of Market Regulation, Commission on May 26, 2006.
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    Several specialist firms have expressed interest in being able to 
transfer assigned securities among co-specialists within each firm. 
These types of transfers might be used, for example, when a particular 
security becomes more active than originally envisioned and could be 
better handled by a more experienced trader. Under the existing rules 
relating to the assignment of securities, however, intrafirm transfers 
are not particularly favored. In fact, the Exchange's rules typically 
require the co-specialist to whom a security was assigned in 
competition to keep the assigned stock for a period of two years.\9\
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    \9\ See Article XXX, Rule 1, Interpretation and Policy .01, 
Section I.2. Securities assigned without competition may be 
transferred without a waiting period, but these transfers must be 
approved by the CSAE.
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    Through this submission, the Exchange seeks to amend its rules to 
permit the transfer of securities among co-specialists within a firm, 
without seeking prior Committee approval, so long as: (1) The 
specialist unit immediately notifies the Exchange of such transfer; and 
(2) when such a transfer is made within six months of an initial 
assignment of the security to the specialist unit, the specialist unit 
provides written notification to the Exchange of the transfer decision 
and of its reasons for making the change.\10\ Each intrafirm transfer 
by the specialist unit effectively deregisters a co-specialist in the 
securities that the co-specialist no longer trades and registers 
another co-specialist in any newly-assigned securities.\11\ The 
Exchange believes that these changes will permit a specialist firm to 
have an appropriate amount of flexibility to respond to a variety of 
issues, including changes in the volatility of a particular security 
and the co-specialist's ability to trade assigned securities.\12\
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    \10\ See supra note 4.
    \11\ Id.
    \12\ The Exchange represents that these proposed rules are 
similar to provisions that are in place at the New York Stock 
Exchange. See NYSE Rule 103B, Section IV.
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    Under the Exchange's existing rules, when the CSAE makes a decision 
to assign a particular security, the CSAE considers the qualifications 
of the specialist unit and the co-specialist's demonstrated ability and 
experience. Because the CSAE bases its decision, in part, on a co-
specialist 's qualifications, it is important that a specialist firm 
accurately represent i ts plans for having a particular co-specialist 
trade a security. A specialist unit must not designate a co-specialist 
with relatively strong demonstrated ability and experience when 
applying for a security and then immediately transfer the security to a 
co-specialist with less demonstrated ability and experience without 
good cause for making the change.
2. Statutory Basis
    The Exchange believes that the proposed rule change, as amended, is 
consistent with Section 6(b)(5) of the Act \13\ in that it would 
promote just and equitable principles of trade, remove impediments to, 
and perfect the mechanism of, a free and open market and a national 
market system, and, in general, protect investors and the public 
interest by permitting specialist firms to respond to various issues 
that may arise by transferring securities among co-specialists within 
the firm.
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    \13\ 15 U.S.C. 78f(b)(4).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change, as 
amended, will impose any burden on competition.

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

    No written comments were solicited or received.

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

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer 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 such proposed rule change, as amended; or
    B. Institute proceedings to determine whether the proposed rule 
change, as amended, should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change, as amended, is consistent with the Act. Comments may be 
submitted by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml.
); or     Send an e-mail to rule-comments@sec.gov. Please include 

File Number SR-CHX-2006-04 on the subject line.

[[Page 34651]]

Paper Comments

     Send paper comments in triplicate to Nancy M. Morris, 
Secretary, Securities and Exchange Commission, Station Place, 100 F 
Street, NE., Washington, DC 20549-1090.

All submissions should refer to File Number SR-CHX-2006-04. This file 
number should be included on the subject line if e-mail is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml
). Copies of the submission, all subsequent amendments, all 

written statements with respect tot he 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 such 
filing also will be available for inspection and copying at the 
principal office of the CHX. All comments received will be posted 
without change; the Commission does not edit personal identifying 
information from submissions. You should submit only information that 
you wish to make available publicly. All submissions should refer to 
File Number SR-CHX-2006-04 and should be submitted on or before July 6, 
2006.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\14\
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    \14\ 17 CFR 200.30-3(a)(12).
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J. Lynn Taylor,
Assistant Secretary.
[FR Doc. 06-5417 Filed 6-14-05; 8:45 am]

BILLING CODE 8010-01-M
