

[Federal Register: July 31, 2006 (Volume 71, Number 146)]
[Notices]               
[Page 43254-43255]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr31jy06-121]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-54191; File No. SR-CHX-2006-04]

 
Self-Regulatory Organizations; Chicago Stock Exchange, Inc.; 
Order Granting Approval to a Proposed Rule Change and Amendment Nos. 1, 
2 and 3 Thereto Relating to the Transfer of Securities Among Co.-
Specialists Within a Specialist Firm

July 21, 2006.
    On March 8, 2006, the Chicago Stock Exchange, Inc. (``CHX'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``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 amend its rules to permit the transfer of 
securities to different co-specialists within a specialist firm. 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 proposed rule change, as amended, was published for comment in the 
Federal Register on June 15, 2006.\5\ On July 3, 2006, CHX filed 
Amendment No. 3 to the proposed rule change.\6\ The Commission received 
no comments regarding the proposal, as amended. This order approves the 
proposed rule change, as amended.
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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 an 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in Amendment No. 2 superceded and replaced the rule text set forth 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.
    \5\ See Securities Exchange Act Release No. 53949 (June 6, 
2006), 71 FR 34648.
    \6\ In Amendment No. 3, the Exchange makes minor, non-
substantive changes to the rule text of the proposed rule change. 
This is a technical amendment and is not subject to notice and 
comment.
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    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.\7\ 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.\8\ 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.\9\
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    \7\ See Article XXX, Rule 1, Interpretation and Policy .01, 
Section II, Introductory paragraphs; and Section I.4.
    \8\ See Article XXX, Rule 1, Interpretation and Policy .01, 
Sections II and III.
    \9\ See Article XXX, Rule 1, Interpretation and Policy .01, 
Section I.4.
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    The current Exchange rules generally require that a co-specialist 
to whom a security was assigned in competition to keep the assigned 
security for a period of two years.\10\ Alternatively, if the 
specialist unit agrees to have the security posted, a period of at 
least one year must have elapsed from the date of the original 
assignment.\11\ Further, securities assigned without competition may be 
transferred without a waiting period. However, in all situations, the 
transfers must be approved by the CSAE.\12\
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    \10\ See Article XXX, Rule 1, Interpretation and Policy .01, 
Section I.2.
    \11\ Id.
    \12\ Id.
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    The Exchange proposes to delete the waiting period requirement 
prior to approving a request for deregistration and to permit the 
transfer of securities among co-specialists within a firm, without 
seeking prior CSAE approval, as 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. Accordingly, each intrafirm transfer by 
the specialist unit effectively would deregister a co-specialist in the 
securities that the co-specialist no longer trades and register another 
co-specialist in any newly-assigned securities.
    In addition, 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, the Exchange 
proposes to make explicit in its rules that it is important that a 
specialist firm accurately represent plans for having a particular co-
specialist trade a security. Under the proposal, 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.
    The Commission finds that the proposed rule change, as amended, is 
consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a national securities 
exchange.\13\ In particular, the Commission believes that the proposal, 
as amended, is consistent with Section 6(b)(5) of the Act, which 
requires that the rules of an exchange be designed to 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. The Commission 
believes that the proposed rule change, as amended, is designed to 
provide specialist firms with greater flexibility to respond to various 
market conditions that may require prompt transfer of securities among 
co-specialists within the same firm. With respect to the Exchange's 
proposal to require that a specialist unit 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, the Commission believes that

[[Page 43255]]

this requirement is designed to provide the CSAE with accurate and 
complete information at the time it makes specialist assignment 
decisions and to protect the integrity of the specialist assignment 
process.
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    \13\ In approving this proposed rule change, as amended, the 
Commission notes that it has considered the proposed rule's impact 
on efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
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    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\14\ that the proposed rule change (SR-CHX-2006-04), as amended, is 
hereby approved.
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    \14\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\15\
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    \15\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. E6-12151 Filed 7-28-06; 8:45 am]

BILLING CODE 8010-01-P
