[Federal Register Volume 63, Number 3 (Tuesday, January 6, 1998)]
[Notices]
[Page 584]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-158]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-39498; File No. SR-CHX-97-21]
Self-Regulatory Organizations; Order Approving Proposed Rule
Change by the Chicago Stock Exchange, Incorporated, Regarding
Suitability of Customer Recommendations
December 29, 1997.
On September 18, 1997, the Chicago Stock Exchange, Incorporated
(``CHX'' or ``Exchange'') filed with the Securities and Exchange
Commission (``SEC'' or ``Commission'') pursuant to Section 19(b)(1) of
the Securities Exchange Act of 1934 (``Act''),\1\ a proposed rule
change regarding the suitability of customer recommendations. The
proposed rule change was published for comment in the Federal
Register.\2\ The Commission received no comment letters on the proposed
rule change, and for the reasons discussed below, is approving the
proposal.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ Securities Exchange Act Release No. 3907 (November 6, 1997),
62 FR 61157 (November 21, 1997).
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I. Description of Proposal
The Exchange proposes to add Article VIII, Rule 25 to the
Exchange's Rules. The Exchange currently does not have rule that
expressly addresses suitability, churning and related matters for
Exchange members. While the Exchange believes that such conduct may
currently fall within existing Exchange rules, such as the Exchange's
rule relating to ``just and equitable'' activity, the Exchange believes
that it is desirable at this time to specifically address this type of
conduct. As a result, the purpose of the proposed rule change is to add
Rule 25 to Article VIII of the Exchange's rules, requiring that, in
recommending to a customer the purchase, sale or exchange of any
security, a member must have reasonable grounds for believing that the
recommendation is suitable for such customer upon the basis of the
facts, if any, disclosed by such customer as to his other security
holdings and as to his financial situation and needs.
Specifically, prior to the execution of a transaction recommended
to a customer, other than transactions with customers where investments
are limited to money market mutual funds, a member would be required to
make reasonable efforts to obtain information concerning the customer's
financial status, the customer's tax status, the customer's investment
objectives, and such other information used or considered to be
reasonable by such member or registered representative in making
recommendations to the customer.
The rule change would contain a non-exclusive list of practices
that the Exchange deems to violate a member's duty to recommend to a
customer only securities suitable for that customer. These would be:
(1) Recommending speculative low-priced securities to customers without
knowledge of or an attempt to obtain information concerning the
customer's other securities holdings, their financial situation and
other necessary data; (2) excessive activity in a customer's account,
often referred to a ``churning'' or ``overtrading''; (3) trading in
mutual fund shares, particularly on a short-term basis; (4) fraudulent
activity (including establishing fictitious accounts in order to
execute transactions which otherwise would be prohibited, executing
transactions in discretionary accounts in excess of or without actual
authority from customers, causing the execution of transactions which
are unauthorized by customers or the sending of confirmations in order
to cause customers to accept transactions not actually agreed upon, and
unauthorized use or borrowing of customers' funds and securities); and
(5) recommending the purchase of securities or the continuing purchase
of securities in amounts that are inconsistent with the reasonable
expectation that the customer has the financial ability to meet such a
commitment.
In addition, with regard to derivative financial products, the rule
change would require that members make every effort to familiarize
themselves with each customer's financial situation, trading
experience, and ability to meet the risks involved with such products
and to make every effort to make customers aware of the pertinent
information regarding new financial products.
II. Discussion
The Commission finds that the proposed rule change is consistent
with Section 6(b)(5) of the Act and the rules and regulations
thereunder applicable to a national securities exchange, and
specifically, with the requirements of Section 6(b).\3\ In particular,
the Commission believes that the proposal is consistent with the
Section 6(b)(5) requirements that the rules of an exchange be designed
to promote just and equitable principles of trade, to prevent
fraudulent and manipulative acts, and in general to protect investors
and the public interest.
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\3\ 15 U.S.C. 78f(b).
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The Commission believes that the Exchange's proposal to add Article
VIII, Rule 25 to the Exchange's Rules benefits investors by requiring
exchange members, in recommending to a customer the purchase, sale or
exchange of any security, to have reasonable grounds for believing that
the recommendation is suitable for such customer upon the basis of the
facts, if any, disclosed by such customer as to his other security
holdings and as to his financial situation and needs. The Commission
also believes that including a non-exclusive list of practice that the
Exchange deems violates a member's duty of suitability with the rule is
a beneficial guide for investors. Additionally, the proposal will
benefit exchange members by providing them a rule specifically
addressing suitability, churning and related conduct.
III. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\4\ that the proposed rule change (SR-97-21) be, and hereby is,
approved.
\4\ 15 U.S.C. 78s(b)(12).
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For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\5\
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\5\ 17 CFR 300.30(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-158 Filed 1-5-98; 8:45 am]
BILLING CODE 8010-01-M