[Federal Register Volume 63, Number 100 (Tuesday, May 26, 1998)]
[Notices]
[Pages 28533-28535]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-13816]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-39998; File No. SR-CHX-98-06]
Self-Regulatory Organizations; Order Approving Proposed Rule
Change and Notice of Filing and Order Granting Accelerated Approval to
Amendment Nos. 2 and 3 to the Proposed Rule Change by the Chicago Stock
Exchange, Inc. Relating to Registration Requirements
May 18, 1998.
I. Introduction
On February 18, 1998, the Chicago Stock Exchange, Inc. (``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\ and Rule 19b-4
thereunder,\2\ a proposal to amend its rules to clarify the persons
required to register with the CHX. On March 18, 1998, the CHX filed
Amendment No. 1 to the proposal.\3\ The proposed rule change and
Amendment No. 1 were published for comment in the Federal Register on
April 1, 1998.\4\ On May 7, 1998, the CHX filed Amendment No. 2 to the
proposal.\5\ On May 15, 1998, the CHX filed Amendment No. 3 to the
proposal.\6\ No comments were received regarding the proposal. 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\ See Letter from Patricia L. Levy, Senior Vice President and
General Counsel, CHX, to Katherine A. England, Division of Market
Regulation (``Division''), Commission, dated March 17, 1998
(``Amendment No. 1''). Amendment No. 1 revises CHX Article VI, Rule
2(a) to state that registered persons, as defined in CHX Article VI,
Rule 2(b), must register with the CHX.
\4\ See Securities Exchange Act Release No. 39804 (March 25,
1998), 63 FR 15906.
\5\ See Letter from Patricia L. Levy, Senior Vice President and
General Counsel, CHX, to Yvonne Fraticelli, Attorney, Division,
Commission, dated May 6, 1998 (``Amendment No. 2''). Amendment No. 2
revises CHX Article VI, Rule 2(b) to include members in the CHX's
definition of registered persons.
\6\ See Letter from Patricia L. Levy, Senior Vice President and
General Counsel, CHX, to Yvonne Fraticelli, Division, Commission,
dated May 15, 1998 (``Amendment No. 3''). Amendment No. 3 revises
Interpretation and Policy .01 to CHX Article VI, Rule 2, to indicate
that amendments to Form U-4 and Form BD regarding any registered
person must be filed within 30 days after the registered person
learns the facts or circumstances requiring the forms to be revised
or, if the revision involves a statutory disqualification, as
defined in the Act, within 10 days after the statutory
disqualification occurs. The CHX's original proposal did not include
the 10-day limit for the filing of amendments involving a statutory
disqualification.
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II. Description of the Proposal
CHX Article VI, ``Restriction and Requirements,'' Rule 2,
``Registration and Approval of Member and Member Organization
Personnel,'' governs the registration and approval of member and member
organization personnel and other associated persons. The CHX proposes
to replace the current text to CHX Article VI, Rule 2 with new text in
order to clarify those persons who are required to register with the
Exchange. Specifically, new CHX Article VI, Rule 2(a),
``Registration,'' will require all registered persons, as defined in
CHX Article VI, Rule 2(b), to register with the CHX.\7\ The CHX may
waive the registration requirement or permit a short-form registration
or notification for an individual who is properly registered with
another self-regulatory organization (``SRO'').
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\7\ See Amendment No. 1, supra note 3.
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New CHX Article VI, Rule 2(b), ``Definition of Registered
Persons,'' defines ``registered persons'' as all members and persons
associated with a member or member organization who are engaged or will
be engaged in the securities business of a member or
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member organization, or the management of such securities business,
including those persons whose functions include supervision,
solicitation, conduct or business and the training of other persons
associated with the member or member organization for any of these
functions. CHX Article VI, Rule 2(b) also enumerates, without
limitation, specific persons who are within the definition of
registered persons, including: (i) Sole proprietors; (ii) officers;
(iii) partners; (iv) principal stockholders (as defined in CHX Article
II, Rule 4); (v) directors; (vi) branch office managers; (vii)
nominees; (viii) representatives (including any persons performing the
duties customarily performed by a salesperson or registered
representative); (ix) persons whose functions include (a) underwriting,
trading or sales of securities; (b) research or investment advice,
other than general economic information or advice, with respect to the
activities described in the preceding clause (a); and (c) activities
other than those specifically mentioned that involve communication,
directly or indirectly, with public investors in securities in
connection with the activities described in the preceding clauses (a)
and (b); and (x) persons listed on Schedule A, B, or C of the member's
or member organization's Form BD.\8\
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\8\ Schedule A of Form BD requests information concerning direct
owners and executive officers; Schedule B requests information
concerning indirect owners; and Schedule C is used to amend
Schedules A and B.
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With regard to independent contractors associated with members and
member organizations, the CHX notes that it has been the long-standing
policy of the Commission to characterize and treat independent
contractors whose actions are controlled by a member or member
organization as employees for purposes of the Act.\9\ This
characterization and treatment applies irrespective of whether such
persons might be deemed employees in an unrelated statutory context
(e.g., for purposes of IRS regulations). Accordingly, an independent
contractor, as well as any other person associated with a member or
member organization, must register with the CHX if he or she falls
within the definition of registered person.
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\9\ See Letter from Douglas Scarff, Director, Division,
Commission, to Gordon S. Macklin, President, National Association of
Securities Dealers, Inc., dated June 18, 1982 (``1982 Letter''). In
its 1982 Letter, the Division noted that the Act requires that a
person selling securities be registered with the Commission as a
broker-dealer under Section 15(a) unless he or she is an associated
person as defined in Section 3(a)(18) of the Act. With regard to
securities salespersons designated as independent contractors, the
Division stated that unless an independent contractor's activities
are subject to control by a broker-dealer within the scope of
Section 3(a)(18) of the Act, the salesperson must be registered
individually as a broker-dealer. The Division noted that an
independent contractor salesperson whose activities are subject to
control by a broker-dealer must be registered with an SRO and should
be covered by the employer broker-dealer's fidelity bond. Finally,
the Division stated that a firm is responsible for ensuring either
that an independent contractor is registered as a broker-dealer or
assuming the supervisory responsibilities attendant to a
relationship with an associated person.
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New CHX Article VI, Rule 2(c), ``Persons Exempt from
Registration,'' exempts from registration persons associated with a
member or member organization (i) whose functions are solely and
exclusively ministerial; or (ii) who are not actively engaged in the
securities business.\10\
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\10\ Persons in this category may include, for example, senior
officers in a division of a broker-dealer that does not participate
in the member's securities business. Telephone conversation between
Patricia L. Levy, Senior Vice President and General Counsel, CHX,
and Yvonne Fraticelli, Attorney, Division, Commission, on March 13,
1998 (``March 13 Conversation'').
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The sole new provision in CHX Article VI, Rule 2(d), ``Other
Registration Requirements,'' prohibits members from making application
for the registration of any associated person where there is no intent
to employ such person in the member's securities business.\11\ The
CHX's proposal also amends Interpretation and Policy .01 to CHX Article
VI, Rule 2 to state that amendments to Form U-4 and Form BD regarding
any registered person must be filed within 30 days after the registered
person learns the facts or circumstances requiring the forms to be
amended or, if the amendment involves a statutory disqualification, as
defined in the Act, within 10 days after the statutory disqualification
occurs.\12\
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\11\ The current version of CHX Article VI, Rule 2 contains the
other requirements listed in new CHX Article VI, Rule 2(d). In
general, these provisions include the requirements that members: (1)
terminate their relationship with an associated person for whom the
CHX has withdrawn or withheld registration or approval; (2) obtain
CHX approval before allowing a person subject to a statutory
disqualification to become associated with the member; (3) take
reasonable care to determine the existence of a statutory
disqualification prior to employing an associated person; and (4)
promptly notify the CHX if an associated person becomes subject to a
statutory disqualification.
\12\ See Amendment No. 3, supra note 6.
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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, in
particular, the requirements of Section 6(b)(5) \13\ in that it is
designed to prevent fraudulent and manipulative acts and practices, to
promote just and equitable principles of trade, and to protect
investors and the public interest.\14\ In addition, the Commission
finds that the proposal is consistent with Section 6(c)(3)(B) \15\ of
the Act, which allows a national securities exchange to require that
any person associated with a member, or any class of such persons,
register with the exchange in accordance with procedures established by
the rules of the exchange.
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\13\ 15 U.S.C. 78f(b)(5)(1998).
\14\ In approving this rule, the Commission has considered the
proposed rule's impact on efficiency, competition, and capital
formation. 15 U.S.C. 78c(f).
\15\ 15 U.S.C. 78f(c)(3)(B).
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New CHX Artidle VI, Rule 2(a) will require all registered persons,
as defined in CHX Article VI, Rule 2(b), to register with CHX.\16\ New
CHX Article VI, Rule 2(b) generally defines registered persons as
members and persons associated with a member who are engaged or will be
engaged in the securities business of a member, or in the management of
such business, including the functions of supervision, solicitation,
conduct of business or the training of associated persons for any of
these functions. New CHX Article VI, Rule 2(b) also enumerates, without
limitation, specific persons who are within the definition of
registered person. In addition to the persons required to register
under the CHS's current rule, new CHX Article VI, Rule 2(b) also will
require that the following persons register with the CHX: sole
proprietors; principal stockholders (as defined in CHX Article III,
Rule 4); persons listed on Schedules A, B, or C of a member's Form BD;
\17\ and persons engaged on behalf of a member in underwriting,
trading, or sales of securities, research or investment advice, or
other activities involving communication with the public in connection
with underwriting, trading, sales of securities, or research or
investment advice.
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\16\ However, the CHX may waive the registration requirement or
permit a short-form registration or notification for an individual
who is properly registered with another SRO.
\17\ See note 8, supra.
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The Commission believes that new CHX Article VI, Rules 2(a) and
2(b) will clarify the persons who are required to register with the
Exchange, thereby facilitating compliance with the CHX's registration
requirements and helping to ensure that all persons who are or will be
engaged in a member's securities business are registered with the CHX.
Because register persons and persons seeking to register are subject to
the
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CHX's jurisdiction,\18\ the proposal also will facilitate the CHX's
oversight of such persons by ensuring that the CHX has the authority to
enforce its rules and the federal securities laws against such persons.
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\18\ Registered persons submit to the authority of the
organizations or states to which they apply for registration on the
Form U-4.
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The CHX's proposal also protests investors and the public interest
by noting that a person characterized as an independent contractor must
register with the CHX if he or she falls within the definition of
registered person. This position is consistent with the 1982
Letter,\19\ which stated, among other things, that an independent
contractor salesperson whose activities are subject to control by a
broker-dealer must be registered with a SRO. By providing a clear
statement of the CHX's policy regarding the registration of independent
contractors, the CHX's proposal should help to ensure that independent
contractors who come within the CHX's definition of registered person
register with the CHX.
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\19\ See 1982 Letter, supra note 9.
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CHX Article VI, Rule 2(c), ``Person Exempt from Registration,''
provides exemptions from registration for associated persons who
functions are solely and exclusively clerical or ministerial or who are
not actively engaged in the securities business.\20\ The Commission
notes that the rules of the National Association of Securities Dealers,
Inc. (``NASD'') also provide these exemptions from registration.\21\
Accordingly, the Commission believes that these exemptions from
registration are reasonable and raise no new regulatory issues.
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\20\ As noted above, persons in this category may include, for
example, for example, senior officers in a division of a broker-
dealer that does not participate in the member's securities
business. See March 13 Conversation, supra note 10.
\21\ See NASD Rule 1060(a)(1) and (2).
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New CHX Article VI, Rule 2(d), ``Other Registration Requirements,''
prohibits members from making application for the registration of any
associated person when there is no intent to employ such person in the
member's securities business. NASD Rule 1031(a) also contains this
prohibition. Accordingly, the Commission believes that this provision
of the CHX's proposal is reasonable and raises no new regulatory
issues.
The Commission believes that it is reasonable for the CHX to amend
Interpretation and Policy .01 to indicate that amendments to Forms U-4
and BDA regarding any registered person must be submitted to the CHX
within 30 days after the registered person learns the facts or
circumstances requiring the forms to be revised, or, if the amendment
involves a statutory disqualification, as defined in the Act, within 10
days after the disqualification occurs.\22\ The Commission notes that
the rules of the NASD contain a similar provision.\23\ Accordingly, the
Commission believes that the CHX's amendment to Interpretation and
Policy .01 is reasonable and raises no new regulatory issues.
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\22\ See Amendment No. 3, supra note 6.
\23\ See NASD By-Law Article V, Section 2(c).
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The Commission finds good cause for approving Amendment Nos. 2 and
3 to the proposal prior to the thirtieth day after the date of
publication of notice of filing thereof in the Federal Register.
Amendment No. 2 clarifies new CHX Article VI, Rule 2(b) by indicating
that members, as well as associated persons, are registered persons
under CHX Article VI, Rule 2(b). This change reflects the inclusion of
sole proprietors within CHX Article VI, Rule 1(b)'s enumerated list of
registered persons and eliminates an inconsistency that would arise if
the CHX defined registered persons to include only persons associated
with members and member organizations. Amendment No. 3 strengthens the
CHX's proposal by requiring the filing of amendments to Forms U-4 and
BD that involve a statutory disqualification within 10 days after the
statutory disqualification occurs. Accordingly, the Commission believes
that it is consistent with Sections 6 and 19(b) of the Act to approve
Amendment Nos. 2 and 3 on an accelerated basis.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning Amendment Nos. 2 and 3, including whether
Amendment Nos. 2 and 3 are 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,
D.C. 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 persons, 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 will also be available for inspection and copying at the
principal office of the CHX. All submissions should refer to file
number SR-CHX-98-06 and should be submitted by June 16, 1998.
V. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\24\ that the proposed rule change (SR-CHX-98-06) is approved.
\24\ 15 U.S.C. 78s(b)(2).
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For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\25\
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\25\ 17 CFR 200.30-3(a)(12).
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[FR Doc. 98-13816 Filed 5-22-98; 8:45 am]
BILLING CODE 8010-01-M