[Federal Register Volume 59, Number 97 (Friday, May 20, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-12299]
[[Page Unknown]]
[Federal Register: May 20, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-34063; File Nos. SR-Amex-91-26, SR-COBE-91-34, SR-NYSE-
92-25, SR-PSE-91-33, and SR-Phlx-91-40]
Self-Regulatory Organizations; Order Granting Partial Approval of
Proposed Rule Changes and Notice of Filing and Order Granting
Accelerated Approval of Amendments to Proposed Rule Changes by the
American Stock Exchange, Inc., Chicago Board Options Exchange, Inc.,
New York Stock Exchange, Inc., Pacific Stock Exchange Inc., and
Philadelphia Stock Exchange, Inc., Relating to the Listing and Trading
of Options on Preferred Stock
May 13, 1994.
I. Introduction
Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ on October 8, 1991, October
4, 1991, September 23, 1992, November 20, 1991, and October 18, 1991,
the American Stock Exchange, Inc. (``Amex''), the Chicago Board Options
Exchange, Inc. (``CBOE''), the New York Stock Exchange, Inc.
(``NYSE''), the Pacific Stock Exchange, Inc. (``PSE''), and the
Philadelphia Stock Exchange, Inc. (``Phlx''), respectively (each
individually referred to herein as an ``Exchange'' and two or more
collectively referred to as ``Exchanges''), filed with the Securities
and Exchange Commission (``Commission'') proposed rule changes to
provide for the listing and trading of options on preferred stock.\3\
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\1\15 U.S.C. 78s(b)(1) (1988).
\2\17 CFR 240.19b-4 (1993).
\3\The original proposals of the NYSE and PSE, and the amended
proposals of the Amex, CBOE, and Phlx, also included requests to
list and trade options on American depositary receipts (``ADRs'').
Four of these filings also were subsequently amended several times
concerning options on ADRs (see, e.g., Amex Amendment Nos. 1, 2, 3,
and 4; CBOE Amendment Nos. 1 and 2; PSE Amendment Nos. 1 and 2; and
Phlx Amendment Nos. 1 and 2). The portions of the filings concerning
the listing and trading of options on ADRs previously were approved.
See infra note 8.
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The Exchanges filed amendments (``Exchange Amendments'') to their
proposals to indicate that the listing of options on preferred stock on
the respective Exchanges would be limited solely to preferred stock
that is non-convertible.\4\
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\4\The Amex filed Amendment No. 5 to its proposal on April 14,
1994. See Letter from Claire P. McGrath, Managing Director, and
Special Counsel, Amex, to Michael Walinskas, Branch Chief,
Derivatives Regulation, Division of Market Regulation, Commission,
dated April 14, 1994. The CBOE filed Amendment No. 3 to its proposed
rule change on May 10, 1993. See Letter from Michael L. Meyer,
Schiff Harding & Waite, to Sharon L. Lawson, Assistant Director,
Division of Market Regulation, Commission, dated May 5, 1993. The
NYSE filed Amendment No. 1 to its proposal on May 10, 1994. The PSE
filed Amendment No. 3 to its proposal on March 16, 1994. See Letter
from Michael D. Pierson, Senior Attorney, Market Regulation, PSE, to
Thomas No. McManus, Division of Market Regulation, Commission, dated
March 15,1994. The Phlx filed Amendment No. 3 to its proposed rule
change on March 17, 1994.
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The proposed rule changes were published for comment: (1) On
October 25, 1991, for the Amex, CBOE, and Phlx;\5\ (2) on December 17,
1991, for the PSE;\6\ and (3) December 3, 1992, for the NYSE.\7\ No
comments were received on these proposals. This order approves these
proposals as they relate to the listing of options on preferred
stock.\8\
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\5\See Securities Exchange Act Release No. 29829 (October 18,
1991), 56 FR 55356 (October 25, 1991). In addition, the Commission
in this release granted partial accelerated approval of proposals to
permit the listing of options on the preferred stock of R.J.R.
Nabisco Holdings Corporation (``RJR Preferred''). This partial
approval was granted in light of the extremely active trading in RJR
Preferred and the fact that RJR Preferred met the established
uniform options listing standards.
\6\See Securities Exchange Act Release No. 30048 (December 9,
1991), 56 FR 65527 (December 17, 1991).
\7\See Securities Exchange Act Release No. 31528 (November 27,
1992), 57 FR 57256 (December 3, 1992).
\8\On November 27, 1992, the Commission issued orders granting
partial accelerated approval of the Exchanges' proposals (including
amendments thereto) to permit the Exchanges to provide for the
listing and trading of options on ADRs, provided that there is a
comprehensive surveillance sharing agreement in place between the
particular Exchange and the primary exchange on which the foreign
security underlying the ADR is listed or the governmental regulatory
authority overseeing such primary exchange, or provided that the
Commission otherwise approves the listing without such an agreement.
See Securities Exchange Act Release Nos. 31529 (November 27, 1992),
57 FR 57248 (December 3, 1992) (Amex); 31531 (November 27, 1992), 57
FR 57250 )December 3, 1992) (CBOE); 31529 (November 27, 1992), 57 FR
57256 (December 3, 1992) (NYSE); 31530 (November 27, 1992), 57 FR
57262 (December 3, 1992) (PSE); and 31532 (November 27, 1992), 57 FR
57264 (December 3, 1992) (Phlx) (collectively, ``ADR Approval
Orders''). In addition, to the extent that there is no surveillance
sharing agreement between the relevant U.S. options exchange and the
primary exchange on which the foreign security underlying the ADR
trades, the Commission has approved other Exchange proposals to list
options on such ADRs provided that 50 percent or more of the world-
wide trading volume of the underlying foreign security occurs in the
U.S. ADR market. See Securities Exchange Act Release Nos. 33555
(January 31, 1994), 59 FR 5619 (February 7, 1994) (Amex); 33554
(January 31, 1994), 59 FR 5622 (February 7, 1994) (CBOE); 33552
(January 31, 1994), 59 FR 5626 (February 7, 1994) (NYSE); 33551
(January 31, 1994), 59 FR 5631 (February 7, 1994) (PSE); and 33553
(January 31, 1994), 59 FR 5634 (February 7, 1994) (Phls).
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II. Description of the Proposal
In 1991, the Commission issued an order approving proposed rules
changes by the Exchanges easing the standards relating to the
selection, and continuing eligibility, of securities underlying
exchange-traded options (in effect, increasing the number of securities
eligible for options trading).\9\ In this order, the Commission stated
that the Exchanges would be required to file separate rule proposals
pursuant to Section 19(b) of the Act in order to list for trading
options on securities other than common stock.\10\ In response thereto,
the Exchanges filed with the Commission the above referenced rule
proposals in order to enunciate generally their policies that
securities other than common stock may be appropriate for options
trading, and specifically to provide for the listing of options on ADRs
and preferred stock.\11\
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\9\Securities Exchange Act Release No. 29628 (August 29, 1991),
56 FR 43949 (September 5, 1991).
\10\Id.
\11\As stated earlier, the portions of the proposals relating to
the listing of options on ADRs have been previously approved. See
supra note 8.
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The proposals under consideration would authorize the Exchanges to
amend their rules to provide for the listing and trading of options on
preferred stock which is non-convertible, and which otherwise satisfies
the Exchanges' uniform options listing and maintenance listing
standards.
The initial options listing standards for each of the Exchanges
would require the following: (1) the preferred stock must have a
``float'' of a minimum of 7,000,000 shares outstanding; (2) there must
be at least 2,000 holders of the underlying preferred stock; (3) the
trading volume in all markets in which the underlying preferred stock
is traded must have been at least 2,400,000 shares over the prior
twelve months; (4) the market price per share of the preferred stock
must have been at least $7.50 for the majority of business days during
the prior three calendar months; (5) the preferred stock underlying the
option must be registered under the Act and listed on a national
securities exchange or traded through the facilities of a national
securities association and reported as a national market system
security; and (6) the issuer of the preferred stock must be in
compliance with all applicable requirements of the Act and rules
thereunder relating to the making of timely reports.\12\
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\12\See Amex Rule 915; CBOE Rule 5.3; NYSE Rule 715; PSE Rule
3.6; and Phlx Rule 1009.
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The maintenance listing criteria for all Exchanges would require:
(1) the preferred stock must maintain a ``float'' of 6,300,000 shares
outstanding; (2) there must continue to be at least 1,600 holders of
the preferred stock; (3) the trading volume in all markets in which the
underlying preferred stock is traded must have been at least 1,800,000
shares over the prior twelve month period; (4) the market price per
share must have been at least $5 for the majority of business days
during the three preceding calendar months; (5) the preferred stock
continues to be registered under the Act and listed on a national
securities exchange or traded through the facilities of a national
securities association and reported as a national market system
security; and (6) the issuer of the preferred stock continues to be in
compliance with all applicable requirements of the Act and rules
thereunder relating to the making of timely reports.\13\
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\13\See Amex Rule 916; CBOE Rule 5.4; NYSE Rule 716; PSE Rule
3.7; and Phlx Rule 1010.
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III. Commission Findings and Conclusions
The Commission finds that the portions of the proposed rule changes
relating to the listing of options on non-convertible preferred stock
is consistent with the requirements of Section 6(b)(5) of the Act and
the rules and regulations thereunder applicable to a national
securities exchange. Specifically, the Commission finds that allowing
options to trade on preferred stock, among other things, gives
investors a better means to hedge their positions in the preferred
stock, as well as enhanced market timing opportunities. Further, the
pricing of the preferred stock underlying an option may become more
efficient, and market makers in such preferred stock, by virtue of
enhanced hedging opportunities, may be able to provide deeper and more
liquid markets. In sum, the Commission believes that options on
preferred stock will engender the same benefits to investors and the
marketplace that exist with respect to options on common stock.
The Commission also believes that it is appropriate to permit the
Exchanges to list and trade options on preferred stock given that the
proposal includes specific provisions related to the protection of
investors. First, the proposals require that the preferred stock must
meet the particular Exchange's uniform options listing standards in all
respects. As described above, this would include both initial listing
and maintenance of listing criteria. These criteria ensure, among other
things, that the underlying preferred stock must initially and
thereafter maintain sufficient price and share float levels in order to
help prevent the options on the preferred stock from being readily
susceptible to manipulation.
Second, the proposals would permit the Exchanges to list only
options on preferred stock that is non-convertible. The Commission
currently believes that it is inappropriate to trade options on
preferred stock which is convertible into another security, such as
common stock. Specifically, where the preferred shares underlying a
listed option could be converted into another security, the Commission
is concerned that the public float of that particular preferred stock
could decrease, perhaps suddenly, to a level approaching or falling
below the maintenance standard of 6,300,000 shares, due to a large
number of conversions. Such a decrease in the public float of the
preferred stock underlying the option, in turn, may have an adverse
impact on the liquidity of the preferred stock, and consequently make
the markets for the preferred stock and the options thereon more
readily susceptible to manipulation. Although the Commission recognizes
that all options trading contains the risk that the underlying security
may fall below the maintenance criteria, because the convertibility
feature is attached to the preferred stock at all times, the ability of
this to occur is more likely than with other non-convertible
securities. Therefore, the Commission believes that permitting the
Exchanges to list options only on non-convertible preferred stock
addresses the foregoing concerns, and generally serves to prevent
fraudulent and manipulative acts and practices, promotes just and
equitable principles of trade, and protects investors and the public
interest.
The Commission notes that the listing on the Exchanges of options
on ADRs where the foreign securities underlying the ADRs are preferred
shares must be done in a manner consistent with this order and the ADR
Approval Orders.\14\ Specifically, the underlying preferred shares must
be non-convertible, and there must be a comprehensive surveillance
sharing agreement in place between the particular Exchange and the
primary exchange on which the underlying security is listed or the
governmental regulatory authority overseeing such primary exchange (or
the Commission must otherwise approve the listing without such an
agreement).\15\
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\14\See supra note 8.
\15\Id. Such a comprehensive surveillance sharing agreement
would not be necessary if 50 percent or more of the world-wide
trading volume of the underlying foreign security occurs in the U.S.
ADR market. Id.
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The Commission finds good cause for approving the Exchange
Amendments prior to the thirtieth day after the date of publication of
notice of filing thereof in the Federal Register. As originally
proposed, the Exchanges' rule changes would have provided for the
listing of options on any type of preferred stock, including
convertible preferred stock. The Exchange Amendments significantly
narrow the scope of the original proposals by providing for the listing
only of options on non-convertible preferred stock. This refinement
will serve to protect investors and the public interest, and minimize
the potential for manipulation. Further, the original, broader
proposals were published for the full 21-day comment period, and no
comments were received. The Commission finds, therefore, that no new
issues are raised by the Exchange Amendments. Accordingly, the
Commission believes it is consistent with Sections 19(b)(2) and 6(b)(5)
of the Act to approve the Exchange Amendments on an accelerated basis.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the Exchange Amendments. 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 changes that are
filed with the Commission, and all written communications relating to
the proposed rule changes 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. Sec. 552, will be available for inspection and
copying in the Commission's Public Reference Section, 450 Fifth Street
NW., Washington, DC. Copies of such filings also will be available for
inspection and copying at the principal office of the above-mentioned
self-regulatory organizations. All submissions should refer to the
appropriate file number in the caption above and should be submitted by
June 10, 1994.
It is therefore ordered, Pursuant to section 19(b)(2) of the
Act\16\ that the portions of the proposed rule changes (File Nos. SR-
Amex-91-26, SR-CBOE-91-34, SR-NYSE-92-25, SR-PSE-91-33, and SR-Phlx-91-
40), as amended, relating to the listing of options on preferred stock,
are approved.
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\16\15 U.S.C. 78s(b)(2) (1988).
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\17\
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\17\17 CFR 200.30-3(a)(12) (1993).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-12299 Filed 5-19-94; 8:45 am]
BILLING CODE 8010-01-M