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Self-Regulatory Organizations; Notice of Filing and Immediate Effectiveness of Proposed Rule Change by the Chicago Stock Exchange, Incorporated relating to Governance Structure

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Start Preamble September 7, 2001.

Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 (the “Act”),[1] and Rule 19b-4 thereunder,[2] notice hereby is given that on September 4, 2001, the Chicago Stock Exchange, Incorporated (“CHX” or “Exchange”) filed with the Securities and Exchange Commission (“SEC” or “Commission”) the proposed rule change as described in Items I, II and III below, which Items have been prepared by the self-regulatory organization. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons.

I. Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change

The Exchange is proposing amendments to its Certificate of Incorporation, Constitution and Rules, which would modify the Exchange's executive governance structure. Among other changes, the proposed amendments would permit the creation of a combined Chairman and Chief Executive Officer (“CEO”) position and permit the CEO to name a President, who could also serve on the CHX Board of Governors.

The text of the proposed rule change is available from the Office of the Secretary of the CHX or at the Commission.

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 Exchange included statements concerning the purpose of and basis for the proposed rule change and discussed any comments it received regarding the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. The self-regulatory organization 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

The proposed amendments, which have the support of the Exchange's Governance Committee and current Chairman, are intended, among other things, to permit the creation of a combined Chairman and CEO position. By giving the Board the flexibility to appoint a person to fulfill this combined role, these changes will give the Exchange another tool to meet the challenges facing self-regulatory organizations in the always-changing securities industry. Although the proposed changes can be seen in many of the Exchange's rules and constitutional provisions, they primarily would have the following impact on the Exchange's governance.

First the CEO would replace the President as the principal executive of Start Printed Page 48073the Exchange. In the revised rules and constitutional provisions, all of the powers currently held by the President are transferred to the CEO. For example, where the Constitution now allows the President to serve on the Board, to appoint Exchange officers or to sell memberships and distribute proceeds from those sales, the power to engage in these activities would be held by the CEO.[3]

Second, the CEO would have the ability to name a President (who might also serve as Chief Operating Officer) as the next most senior executive. Many other corporations, including other national securities exchanges, have a similar structure. For example, the CEOs of both the New York Stock Exchange (“NYSE”) and Chicago Board Options Exchange (“CBOE”) can appoint a President to serve as a senior executive.[4]

Third, under the proposed changes, the Board would have the option to choose as Chairman either the CEO or any Governor who now is eligible to serve as Chairman. Under the current structure, the Board chooses its Chairman from among those Board members who are either serving as “non-industry” governors or as “off-floor” member governors.[5] The proposed changes would provide the Board another option—the CEO. By building this flexibility into the Constitution, the Board could decide that, given the challenges facing national securities exchanges today, that it should appoint a single person to act as a full-time Chairman and CEO and, in later years, still could choose to return to the existing part-time Chairman structure.[6]

The Board would increase in size by one person to allow the President, if any, to serve on the Board. The Exchange's Board currently is composed of the Vice Chairman of the Board, the President and 22 governors (10 member governors and 12 non-industry governors).[7] Under the proposed change, the Board would consist of the Vice Chairman, the CEO, the President, if any, and 22 governors (divided among member and non-industry governors as they are today). In other words, if the CEO appointed a President, the President would serve on the Board and increase the number of persons on the Board from 24 to 25.

Additional changes in this proposal would: (1) Allow the Vice Chairman, in addition to the Chairman and the Chief Executive Officer, to be able to call meetings of the Board or the members; [8] (2) permit the Chairman to become a voting member of all Committees on which he serves; [9] and (3) correct small inaccuracies and delete unnecessary provisions.[10]

The Exchange believes that the proposed changes to its Certificate of Incorporation, Constitution and Rules will afford the Exchange's Board of Governors the flexibility to make optimal use of strong executive talent, without limiting in any respect the governing authority of the Board of Governors or disturbing the balance between member and non-industry Board representation. Further, the Exchange submits that the proposed changes are consistent with governance structures customary in many other corporations, including other exchanges.

2. Statutory Basis

The proposed rule is consistent with the requirements of the Act and the rules and regulations thereunder that are applicable to a national securities exchange, and, in particular, with the requirements of section 6(b).[11] In particular, the proposed rule is consistent with section 6(b)(5) of the Act [12] in that it is designed to promote just and equitable principles of trade, to remove impediments to and to perfect the mechanism of a free and open market and a national market system, and, in general, to protect investors and the public interest.

B. Self-Regulatory Organization's Statement on Burden on Competition

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

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

Written comments were neither solicited nor received.

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

The foregoing rule change is concerned solely with the administration of the Exchange and has become effective pursuant to section 19(b)(3)(A)(iii) of the Act [13] and subparagraph (f)(3) of Rule 19b-4.[14]

At any time within 60 days of the filing of such proposed rule change, the Commission may summarily abrogate such rule change if it appears to the Commission that such action is necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of the Act.

IV. Solicitation of Comments

Interested persons are invited to submit written data, views and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. Persons making written submissions should file six copies thereof with the Secretary, Securities and Exchange Commission, 450 Fifth Street, NW., Washington DC 20549-0609. 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 Start Printed Page 48074the Commission's Public Reference Room in Washington, DC. Copies of such filing will also be available for inspection and copying at the principal office of the Exchange. All submissions should refer to File No. SR-CHX-2001-19 and should be submitted by October 9, 2001.

Start Signature

For the Commission, by the Division of Market Regulation, pursuant to delegated authority.[15]

Margaret H. McFarland,

Deputy Secretary.

End Signature End Preamble


3.  See, e.g., CHX Constitution Article II, Section 5 (sales of memberships); Article III, Section 2 (serving on the Board); and Article VI, Section 4 (appointment of officers).

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4.  See NYSE Constitution Article VI, Sections 1 and 2; and CBOE Constitution Article VIII, Sections 8.1 and 8.2.

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5.  An “off-floor” member governor is a member who is not primarily engaged in business on the Exchange's trading floor or a general partner or an officer of a member organization that is not primarily engaged in business on the trading floor. See CHX Constitution, Article III, Section 10(3)-(5). “Non-industry” governors include, among others, public governors (who must have no material business relationship with a broker or dealer) and officers or employees of an issuer of securities listed exclusively on the Exchange. See CHX Constitution, Article III, Sections 10(1)-(4).

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6.  Under the current structure, the Board can and has selected well-qualified and dedicated chairmen who are engaged in other activities, including working in senior jobs at other organizations.

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7.  The Vice Chairman of the Board is a member who is primarily engaged in business on the Exchange's trading floor or a general partner or officer in a member organization that is primarily engaged in business on the floor. See CHX Constitution, Article III, Sections 2 and 10(3).

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8.  Permitting the Vice Chairman to call meetings is appropriate because, if the changes described above are approved without this change and the Board names the CEO as Chairman, there would be only one person (the Chairman/CEO) who would have power to call these meetings.

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9.  Allowing the Chairman to vote on the committees on which he serves is appropriate to ensure that he is a fully functioning member of the committees on which he serves.

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10.  For example, the Exchange's Certificate of Incorporation lists an outdated address for its Delaware registered office and its Rules refer to a Committee on Market Structure that has fulfilled its purpose of working to develop appropriate plans to integrate the Exchange into “the emerging National Market System.” See CHX Certificate of Incorporation, First Provision; CHX Rules, Article IV, Rule 6.

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13.  15 U.S.C. 78s(b)(3)(A)(iii).

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[FR Doc. 01-23154 Filed 9-14-01; 8:45 am]