[Federal Register Volume 59, Number 75 (Tuesday, April 19, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-9318]
[[Page Unknown]]
[Federal Register: April 19, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-33901; File No. SR-CHX-93-28]
Self-Regulatory Organizations; Chicago Stock Exchange, Inc.;
Order Granting Approval to Proposed Rule Change and Notice of Filing
and Order Granting Accelerated Approval to Amendment No. 1 to Proposed
Rule Change Relating to Corporate Governance Issues
April 12, 1994.
I. Introduction
On October 21, 1993, 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 amend the Exchange's Charter,
Constitution, and rules relating to corporate governance issues. On
March 29, 1994, the CHX submitted Amendment No. 1 to the rule
filing.\3\ Specifically, the changes concern: (i) The limitation of
Governor monetary liability under Delaware law, (ii) providing more
flexibility in setting the dates for the annual meeting and election,
(iii) providing more flexibility in the number of Governors who can
serve on the Executive and Finance Committees, and (iv) granting the
President full voting powers on the Executive Committee.
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\1\15 U.S.C. Sec. 78s(b)(1) (1988).
\2\17 CFR 240.19b-4 (1993).
\3\Letter from J. Craig Long, Foley & Lardner, to Katherine
Simmons, Attorney, SEC, dated March 28, 1994. Amendment No. 1
clarified certain language in the proposal.
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The proposed rule change was published for comment in Securities
Exchange Act Release No. 33318 (December 10, 1993), 58 FR 66042
(December 17, 1993). No comments were received on the proposal. This
order approves the proposed rule change as amended.
II. Description of the Proposal
Liability of Governors
Delaware's General Corporation Law permits the adoption of a
provision in the Certificate of Incorporation of a Delaware corporation
that limits or eliminates the potential monetary liability of directors
to the corporation or its shareholders by reason of their conduct as
directors under certain circumstances. Such a provision does not apply
to acts or omissions of directors occurring prior to the approval of
the provision by shareholders and the filing of the amendment to the
Certificate of Incorporation with the Secretary of State of Delaware.
Because the CHX is a Delaware Corporation, the amendment to Article
Eleventh of its Certificate of Incorporation is based on section
102(b)(7) of the Delaware Corporations Code.\4\ Section 102(b)(7)
permits corporations to include in their certificates of incorporation
a provision limiting or eliminating the personal liability of directors
to the corporation and its shareholders for monetary damages for a
breach of their fiduciary duty. The statute does not permit the
limitation or elimination of director's liability under the following
circumstances: (1) A breach of the director's duty of loyalty, (2) acts
or omissions not in good faith or which involve intentional misconduct
or a knowing violation of the law, (3) unlawful payment of dividends or
unlawful stock purchases or redemptions, or (4) any transaction from
which the director derives an improper personal benefit.\5\ In
addition, the statute does not permit the adoption of any provision
that would eliminate or limit the liability of a director for any act
or omission occurring prior to the date when such provision becomes
effective.\6\
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\4\Del. Code Ann. title 8, Sec. 102(b)(7) (1993).
\5\Id.
\6\Id.
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The Delaware statute does not eliminate a director's fiduciary
duty, but rather prevents the imposition of monetary damages in the
event of a breach of that duty. Other legal remedies for breach of
fiduciary duty, such as rescission and injunction, remain available
under the Delaware provision.
The amendment to the CHX's Certificate of Incorporation limits the
liability of Governors to the fullest extent of Delaware Law. The
amendment includes the exclusions from limited liability enumerated in
Delaware section 207(b)(7) and adds an exclusion where liability arises
directly or indirectly as a result of a violation of a federal
securities laws. The amendment also eliminates Governor monetary
liability for acts occurring after the amendment becomes effective to
the fullest extent from time to time permitted by Delaware law, thus
automatically incorporating any future statutory revisions limiting
Governor liability.\7\
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\7\A similar amendment to the Constitution was approved by the
Board, the membership and the Securities and Exchange Commission in
late 1989 and early 1990. Securities Exchange Act Release No. 27625
(January 16, 1989), 55 FR 2470 (January 24, 1990). However, the
requisite number of membership votes was not obtained to amend the
Certificate of Incorporation under the then existing voting
requirement. The CHX put the 1989 proposal to a vote of its members
in 1990. At that time, the Exchange's rules requiring only a
majority of the members present at a meeting to approve a change to
the Constitution, while requiring a majority of the entire
membership to approve changes to the Certificate of Incorporation.
The Exchange was able to pass the amendment to the Constitution, but
did not have sufficient votes to amend its Certificate of
Incorporation. The discrepancy in the number of votes needed to
amend the Constitution and the Certificate of Incorporation was
removed in the Exchange's corporate restructuring which the
Commission approved in 1992. Securities Exchange Act Release No.
31633 (December 22, 1992), 57 FR 62402 (December 30, 1992). The
standard for amending both the CHX's Constitution and Certificate of
Incorporation is now a majority of the members present at a meeting.
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Annual Meeting and Election
Instead of holding one annual meeting, the amendment to Article IV,
section 2 of the CHX's Constitution provides for two annual meetings to
be held in April: An annual election meeting and an annual report
meeting. The Board will have the flexibility to annually determine on
which business days in April to hold the meetings. The annual election
meeting will be held to vote for Governors and the Nominating
Committee. The annual report meeting will be held to provide
management, the Board, and members an opportunity to discuss the
previous year's results and current issues facing the Exchange. The
Board could determine to have these meetings on the same day or
different days in April.
Composition of the Executive and Finance Committees
The amendment to Article V, Section 4 of the CHX's Constitution and
Article IV, Rule 2 of its Rules provides that the specified number of
Governors who may serve on the Executive and Finance Committees are
minimums. Currently the Executive Committee is composed of 7 Board
members plus the President and Chairman of the Board as ex-officio
members.\8\ The Finance Committee is composed of 5 Board members plus
the two ex-officio members. The number of Committee members could be
increased if the Vice Chairman and the Board so determine.
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\8\An ex-officio member is one who is the member of a board or
committee by virtue of his or her title to a certain office.
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Voting Powers of the President and Chairman
Article VI, Section 4 of the CHX's Constitution provides that the
President is ``a member of the Board of Governors and an ex-officio
member, without the right to vote, of all committees except the
Nominating, Audit, and Compensation Committees.'' The rule change
grants the president voting power on the Exchange's Committees of which
he is an ex-officio member if so designated in the CHX's Constitution
or Rules. The rule change to Article V, Section 4 of the CHS's
Constitution grants the President full voting powers on the Executive
Committee. In addition, the rule change adds Judiciary Committees and
the Committee on Organization and Governance to the list of committees
of which the president is not an ex-officio member.
Article VI, Section 2 of the CHX's Constitution provides that the
Chairman of the Board of Governors is ``an ex-officio member, without
the right to vote except as otherwise designated in this Constitution,
of all committees except the Nominating Committee.'' The rule change
allows to Exchange to designate the Chairman's right to vote on
committees in the Exchange's Rules as well as the Constitution. The
rule change to Article IV, Rules 7 and 9 of the Exchange's Rules grants
the Chairman of the Board full voting powers on the Committee on
Organization and Governance and the Compensation Committee. In
addition, the rule change to Article VI, Section 2 of the Constitution
specifies that the Chairman is not a member of any Judiciary Committee.
Miscellaneous
Finally, the rule change replaces the term ``Public Governor'' with
``non-member Governor'' and provides the definition of the term in
Article IV, Rule 7 of the CHX's Rules to state that ``the term non-
member Governor shall mean a Governor who is unaffiliated with the
Exchange or any broker or dealer in securities, as defined in Article
III, Section 2 of the Exchange's Constitution.'' The rule change also
adds the term ``non-member Governor'' to Article IV, Rule 8.
III. Discussion
The Commission finds that the proposed rule change is consistent
with the requirements of the Act and the rules and regulations
thereunder applicable to a national securities exchange and with the
requirements of Section 6(b) of the Act.\9\ In particular, the
Commission believes that the proposal is consistent with sections
6(b)(1), (3), and (5) of the Act.\10\ Section 6(b)(1) requires that an
exchange be organized and have the capacity to carry out the purposes
of the Act and to comply, and to enforce compliance by its members and
persons associated with its members with the Act, the rules and
regulations thereunder, and the rules of the exchange. Section 6(b)(3)
of the Act requires, among other things, that the rule of an exchange
assures a fair representation of its members in the selection of its
directors and administration of its affairs. Section 6(b)(5) requires,
among other things, that the rules of an exchange be designed, in
general, to protect investors and the public interest.
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\9\15 U.S.C. 78f(b) (1988).
\10\15 U.S.C. 78f(1), (3), and (5) (1988).
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The Commission believes that the proposed rule change to limit
Governor monetary liability to the Exchange and its members is
consistent with the requirements of the Act.\11\ In reaching its
determination to approve this rule change, the Commission has
considered the potential impact that the proposal will have on the
special role and responsibilities of the Board of Governors of a
registered national securities exchange under the Act.\12\
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\11\The Commission approved the same rule change for the CHX in
Securities Exchange Act Release No. 27625 (January 16, 1989), 55 FR
2470 (January 24, 1990); the Pacific Stock Exchange, Inc. in
Securities Exchange Act Release No. 27466 (November 22, 1989), 54 FR
49380 (November 30, 1989); and the Midwest Clearing Corp. in
Securities Exchange Act Release No. 27446 (November 16, 1989), 54 FR
48707 (November 24, 1989).
\12\The Powers and responsibilities of the CHX's Board of
Governors are set out in the Exchange's Constitution. Under Article
III, Section 1, the Board of Governors is authorized to manage the
business of the Exchange and is vested with all powers necessary for
the government of the Exchange, including the regulation of the
business conduct of members and member organizations and the
promotion of the welfare, objects and purposes of the Exchange.
Furthermore, Section 1 provides that the Board may establish Rules
governing the qualifications for membership and the requirements for
remaining a member in good standing. The Board is also given the
power to fill vacancies in any office, including the Board of
Governors, but excluding the Nominating Committee, until the next
annual meeting. The Board also has the power to interpret the
Constitution and Rules of the Exchange, and any interpretation made
by it remains final and conclusive.
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The Board of Governors of a national securities exchange has a
crucial role in ensuring that the exchange meets its responsibilities
as a self-regulatory organization under the Act. In view of this, the
CHX proposal is limited so that the exemption from monetary damages is
not available where liability is based, directly or indirectly, on a
violation of the federal securities laws.
At the same time, the Commission recognizes that national
securities exchanges, such as the CHX, are incorporated under state law
and, as such, are generally entitled to take advantage of provisions
under state corporation codes to the extent they are consistent with
the federal securities laws. The proposed rule change adequately
balances the need to retain the special responsibilities of directors
of national securities exchanges with the desire of the Exchange to
adopt state law provisions pertaining to its corporate structure. The
rule change allows the Exchange to take advantage of section 102(b)(7)
of the Delaware Corporations Code as would any other organization
incorporated in Delaware, except where the imposition of monetary
actions involves a violation of the federal securities laws.
Accordingly, Governors of the CHX will still be subject to the full
panoply of damages in actions involving violations of the federal
securities laws.\13\
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\13\To the extent there is any concern that the imposition of
monetary damages against Board members for violations of federal
securities laws would deter persons from acting on CHX's Board of
Governors, the Commission notes that Article X of the CHX's
Constitution and Article Eleventh of the CHX's Certificate of
Incorporation allows the Exchange to provide indemnification to
members of its Board of Governors, within the limits permitted by
Delaware law, to safeguard them from expense and liability for
actions that they take in such capacity in good faith in furtherance
of, or without belief that such actions are opposed to, the best
interests of the CHX and is members.
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The Commission believes that the CHX's proposal to split its annual
meeting and provide for an annual election meeting and an annual report
meeting will allow Exchange members to better concentrate on the
respective issues. The annual election meeting will be held to vote for
Governors and the Nomination Committee. The annual report meeting will
be held to provide management, the Board, and members an opportunity to
discuss the previous year's results and current issues facing the
Exchange. Because each of these meetings is of extreme importance and
may involve lengthy discussions, the Commission believes holding two
separate meetings is appropriate and consistent with section 6(b)(3) of
the Act which requires that the rules of the exchange assures a fair
representation of its members in the selection of its directors and
administration of its affairs.\14\
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\14\The Commission notes that the proposal could allow the
annual election meeting to take place prior to the annual report
meeting. Before setting the meeting times, the Exchange should
consider that the report meeting may provide information to members
that is relevant to their election of Governors at the annual
election meeting.
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The CHX's Constitution provides that appointments to the Executive
Committee are made by the Vice Chairman of the Board with the approval
of the Board of Governors.\15\ In December 1992, the Commission
approved changes to the CHX's organization and governance,\16\
including changes to the Exchange's Executive Committee. Before that
rule change, the Executive Committee was comprised of six Governors and
the Chairman, Vice Chairman, and President. The rule change removed the
Vice Chairman from the Executive Committee and provided instead for
seven Governors. In addition, the Chairman was designated as the
Committee's Chairman with full voting powers. The President, however,
remained an ex-officio member of the Committee without the power to
vote.
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\15\See Article V, Section 4 of the CHX's Constitution.
\16\See Securities Exchange Act Release No. 31633 (December 22,
1992), 57 FR 62402 (December 30, 1992).
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In approving the 1992 changes to the Exchange's Executive
Committee, the Commission emphasized concerns about floor domination of
the governance of the Exchange.\17\ When appointing the Executive
Committee members the CHX's Constitution directs the Vice Chairman to
assure the geographic diversity of the Governors appointed to that
Committee.\18\ Consistent with this directive, the Executive Committee
has traditionally consisted of two public Governors, two ``upstairs''
member Governors, and two floor member Governors.\19\ The Exchange
represented at the time of the 1992 changes that it continued to
support such diversity in the Executive Committee and expected its
future composition to be consistent with past practices.\20\
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\17\Section 6(b)(3) of the Act requires that the rules of an
exchange assure a fair representation of its members in the
selection of its directors and administration of its affairs and
provide that one or more directors represent issuers and investors
and not be associated with a member of the exchange or a broker-
dealer. The Executive Committee wields most of the powers of the
full Board between Board meetings. As a result, floor domination of
the Executive Committee (like floor domination of the Board) may
violate Section 6(b)(3)'s requirement of fair representation.
\18\Art. V., Sec. 4 of the CHX's Constitution.
\19\The Exchange indicated that the seventh Governor member of
the Executive Committee (created by the departure of the Vice
Chairman) would be appointed ad hoc, depending on the strengths and
weaknesses of individual Board members and the needs of the
Exchange. Telephone conversation between J. Craig Long, Vice
President, General Counsel and Secretary, MSE, and Beth Stekler,
Staff Attorney, SEC, on December 18, 1992.
\20\See letter from John L. Fletcher, Vice Chairman, and Homer
J. Livingston, President-Designate, MSE, to Brandon C. Becker,
Deputy Director, Division of Market Regulation, SEC, dated December
17, 1992.
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The rule change now under consideration provides that the Executive
Committee will be comprised of at least seven floor governors. This
change allows the Vice Chairman, with Board approval, to expand the
number of governors serving on the Executive Committee. While the
Commission believes that the Exchange should be able to expand the
number of Governors serving on the Committee if such expansion is
necessary for the efficient administration of Exchange business, the
Commission expects the Exchange to maintain the relative representation
of the various geographic groups on the Committee and would be
concerned if the Committee was dominated by a particular group (e.g.,
floor members). The CHX has represented that it will continue to
support diversity in the Executive Committee. Specifically, the CHX has
indicated that the Vice Chairman will appoint additional governors,
should the number be increased from seven, in a manner which will
continue fair representation of public Governors, ``upstairs'' member
Governors, and floor member Governors as required by the CHX's
Constitution.\21\ The Commission therefore believes that the proposal
is consistent with section 6(b)(3) of the Act.
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\21\Telephone conversation between Craig Long, Foley & Lardner,
and Katherine Simmons, Division of Market Regulation, SEC (January
26, 1994).
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For the reasons discussed below, the Commission also is approving
changes to the Exchange's Executive Committee, Finance Committee,
Committee on Organization and Governance, and Compensation Committee.
The Commission notes that although there is no provision in the CHX's
Constitution specifically directing geographic diversity in the
Governors appointed to committees other than the Executive
Committee,\22\ Section 6(b)(3) of the Act requires that the rules of an
exchange assure a fair representation of its members in the
administration of its affairs. The Commission believes that the fair
representation provision of Section 6(b)(3) requires the Exchange to
ensure that all of its committees have a diversity of governors (i.e.,
public Governors, ``upstairs'' member Governors, and floor member
Governors).
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\22\ See Art. V., Sec. 4 of the CHX's Constitution and text
accompanying note 14, supra.
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Preliminarily, the Commission believes the rule change to Article
VI, Sections 2 (Chairman) and 4 (President) to provide that the
Chairman and President are ex-officio members of all Executive
Committees (except those specified in the provisions) without the right
to vote unless ``otherwise designated in the Constitution or the
Rules'' is consistent with the Act. The rule change allows the Exchange
to indicate if the Chairman or President has the right to vote on a
particular Committee in the Section or Rule pertaining to each
Committee.
The Commission believes that giving the President full voting
powers on the Executive Committee is consistent with the President's
voting powers on the Board. The Commission notes that the Executive
Committee has full Board authority to act between Board meetings on
most issues. In addition, because the Exchange's Constitution requires
that the president not be a member of the Exchange or affiliated in any
way with a member organization during his incumbency,\23\ granting the
President voting powers does not change the presentation on the
Executive Committee of any particular group. Therefore, this rule
change is consistent with sections 6(b) (1) and (3) of the Act.
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See article IV, Section 4 of the CHX's Constitution.
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The Commission also believes that the Exchange's proposal to allow
the Vice Chairman, with Board Approval, to expand the number of
Governors serving on the Finance Committee is consistent with the
requirements of Section 6(b)(1) of the Act because the rule change is
designed to enhance the governance process of the Exchange. The Finance
Committee reviews annual profit plans and budgets for the Exchange and
its subsidiaries, reviews the financial condition of the Exchange and
its subsidiaries, reviews the performance of Exchange investments,
formulates investment policy, and makes recommendations to the
management or Board. Because this Committee has an important function
involving a wide range of financial issues, the Commission believes it
is reasonable that the Exchange may decide that additional Governors
are necessary for the Committee to fulfill its duties.
Additionally, the Commission believes that the rule change to give
the Chairman full voting rights as a member of the Compensation
Committee and the Committee on Organization and Governance is
consistent with Sections 6(b) (1) and (3) of the Act. The Compensation
Committee is responsible for establishing the compensation of the
President and for coordinating with the President to determine a
comprehensive corporate compensation and benefits policy.\24\ The
Committee on Organization and Governance is responsible for
periodically reviewing the organization and governance structure of the
Exchange and its subsidiaries, and for making recommendations to the
Board of Governors with respect thereto.\25\ The Chairman is appointed
by the Board of Governors from among the 24 Governors, and may
accordingly be an ``up-stairs'' member, a floor member, or a public
governor. Granting the Chairman voting rights on the Compensation
Committee and the Committee on Organization and Governance, therefore,
may change the relative representation of one of these constituencies.
The Commission expects that the Exchange will ensure fair
representation on these Committees consistent with section 6(b)(3) of
the Act.
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\24\See Article IV, Rule 7 of the CHX's Rules.
\25\See Article IV, Rule 9 of the CHX's Rules.
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The Commission believes that the rule change providing that neither
the Chairman nor the President are ex-officio members of any Judiciary
Committee also is consistent with Sections 6(b)(1) and (5) of the Act.
Article IV, Rule 5 of the Exchange's Rules states that ``the President
shall appoint five disinterested members of the Exchange and/or general
partners or officers of member organizations as a Judiciary Committee''
whenever a disciplinary matter is to be reviewed in accordance with the
Rules. The rule change specifies that the Chairman and President are
not ex-officio members of any Judiciary Committee.
Finally, the Commission believes that the rule change replacing
``Public Governor'' with ``non-member Governor'' and defining the term
as a ``Governor who is unaffiliated with the Exchange or any broker or
dealer in securities, as defined in Article III, Section 2 of the
Exchange's Constitution,'' serves to provide consistency within the
CHX's Constitution and Rules, and has no substantive effect. The
Commission notes, however, that ``non-member Governors'' are intended
to be representatives of the public and that the term is synonymous
with the Commission's use of the term ``public Governor'' in general,
and in this order and the order approving the 1992 changes to the CHX's
organization and governance.\26\ This interpretation is consistent with
Section 6(b)(3) of the Act, which requires that the Exchange provide
that one or more directors be representatives of issuers and investors
and not be associated with a member of the exchange, broker, or dealer.
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\26\See supra note 15 and accompanying text.
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The Commission finds good cause for approving Amendment No. 1 to
the rule change prior to the thirtieth day after publication of notice
of filing thereof. Amendment No. 1 made a non-substantive change to the
proposal by including in the rules the Constitutional definition that a
non-member Governor is unaffiliated with the Exchange or any broker or
dealer in securities.\27\ The CHX's proposed rule change was published
in the Federal Register for the full statutory period and no comments
were received.\28\
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\27\See supra note 3.
\28\See Securities Exchange Act Release No. 33318 (December 10,
1993), 58 FR 66042 (December 17, 1993).
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IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning Amendment No. 1. 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 at the Commission's Public Reference Section, 450 Fifth Street,
NW., Washington, DC 20549. Copies of such filing will also be available
for inspection and copying at the principal office of the CHX. All
submissions should refer to File No. SR-CHX-93-28 and should be
submitted by May 10, 1994.
V. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\29\ that the proposed rule change (SR-CHX-93-28) is approved.
\29\15 U.S.C. 78S(B)(2) (1988).
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For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\30\
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\30\17 CFR 200.30-3(a)(12) (1993).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-9318 Filed 4-18-94; 8:45 am]
BILLING CODE 8010-01-M