[Federal Register Volume 60, Number 39 (Tuesday, February 28, 1995)]
[Notices]
[Pages 10887-10890]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-4859]



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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-35400; SR-PHLX-95-01]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Philadelphia Stock Exchange, Inc. Relating to the Listing 
and Trading of DIVS, ZIPS and SPECS

February 21, 1995.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''), 15 U.S.C. 78s(b)(1), notice is hereby given that on January 
5, 1995, the Philadelphia Stock Exchange Inc. (``PHLX''), filed with 
the Securities and Exchange Commission (``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 PHLX, pursuant to Rule 19b-4 of the Act, hereby proposes to 
list for trading ``DIVS'' (Dividend Value of Stock), ``ZIPS'' (Zero 
Income Principal of Stock) and ``SPECS'' (Speculative Equity Component 
Stock) (collectively hereinafter referred to as the ``Products''), 
which are new hybrid options developed by Americus Stock Process Corp. 
(``ASPC'').

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 self-regulatory organization 
included statements concerning the purpose of and basis for the 
proposed rule change and discussed any comments it received on 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

    The PHLX proposes to list a new product developed by and licensed 
to the PHLX by ASPC that allows the purchase or sale of any of three 
economic interests inherent in a share of common stock. Each of these 
new instruments, called DIVS, ZIPS and SPECS, will be traded separately 
on the PHLX's equity options floor. The Exchange believes that the 
Products, combined, will have all the characteristics of a share of the 
underlying common stock, including voting rights, and that the ability 
to trade the Products as separate component instruments will provide 
new hedge, arbitrage, speculation and investment opportunities.
    The Products will be regulated, except as described herein, by the 
rules governing standardized options. Position limits of 1 million 
DIVS, ZIPS and SPECS respectively shall be established respecting any 
particular stock. See Rule 1001C. The sales practice rules applicable 
to options (Rules 1024 through 1029) will also be applicable to sales 
of DIVS, ZIPS and SPECS. (See Rule 1000C(a)). The 
[[Page 10888]] Options Clearing Corp. (``OCC'') will be the exclusive 
issuer of the Products which the Exchange proposes to issue in 
accordance with the disclosure scheme provided for under Rule 9b-1 of 
the Act (``Rule 9b-1''). The Products will be issued in separate series 
with each series having its own distinct CUSIP number and trading 
symbol. The Products will be issued in book-entry form. DIVS, ZIPS and 
SPECS will be created when opening buy and sell orders are executed, 
and the additional execution of such orders will increase the open 
interest. Quotations and transaction reporting will occur through the 
facilities of the Options Price Reporting Authority.
    The criteria for underlying common stocks upon which the Products 
will be based are the same criteria as utilized for standardized equity 
options listed on the PHLX under PHLX Rule 1009. Additionally, only the 
top 250 capitalized stocks traded on a national securities exchange or 
the NASDAQ national market will be considered for listing (See Rule 
1009C). DIVS, ZIPS and SPECS of a particular series will all be issued 
for the same length of time, currently proposed to be up to 60 months, 
and therefore all components of the same series will possess the same 
termination date (``Termination Date''), as defined in PHLX Rule 
1000C(b)(5). The Products will have a European-style\1\ settlement 
similar to standardized options.

    \1\A European-style option may only be exercised during a 
limited period of time before the option expires.
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    ZIPS and SPECS of the same series also will have a coordinate 
termination claim (``Termination Claim''), as defined in PHLX Rule 
1000C(b)(4). The Termination Claim is a preset price established at the 
time of the issuance of a new series of SPECS and ZIPS and is used to 
determine these instruments' payout on their Termination Date. In 
accordance with the PHLX Rule 1004C, Termination Claims will be set at 
the underlying stock price reflecting the most recent business day's 
consolidated closing value rounded up to the nearest $2.50 increment 
for stocks priced at or below $25.00 or to the nearest $5.00 increment 
for stocks priced above $25.00. The PHLX may list new series of DIVS, 
ZIPS and SPECS annually, or at more frequent intervals, depending on 
market conditions. No new series will be opened nor opening 
transactions be permitted if open interest in DIVS, ZIPS and SPECS 
represent more than 10 percent of the outstanding shares of any related 
underlying stock. See Rule 1012C.
    The PHLX anticipates that the sum of the market prices of DIVS, 
ZIPS and SPECS on the same underlying security with the same 
Termination Date and Termination Claim will approximate the actual 
market price for the related underlying security. Because DIVS, ZIPS 
and SPECS are each economic interests in a single underlying share, if 
the combined price of a DIVS, ZIPS and SPECS diverges from that of the 
underlying security, the Exchange believes that arbitrage opportunities 
would tend to remove the pricing disparity.
    As discussed below, the Products confer voting rights to their 
purchasers. The voting rights are allocated among the three components, 
as discussed below. In this regard, sellers of the Products are 
obligated to deliver the voting rights to the purchasers.
    For customer margin purposes, DIVS, ZIPS and SPECS are contemplated 
to be margined as equity securities pursuant to Regulation T for 
initial margin and PHLX Rule 722 for maintenance margin.\2\

    \2\The PHLX and counsel for ASPC are currently seeking agreement 
and confirmation of this treatment from the staff of the Board of 
Governors of the Federal Reserve System.
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Characteristics of Individual Components DIVS

    The basic characteristic of DIVS will be the right to receive 
substitute payments in the same amount (and at the same time) as 
regular dividends declared and paid on the underlying shares of common 
stock for all record dates that precede the Termination Date of the 
particular series of DIVS.
    On each ex-dividend date, OCC will notify clearing members of 
debits they have incurred on OCC's books for any net short DIVS 
positions. These debits will be charged to such clearing members' 
accounts at OCC on payment date. Ex dates and payment dates will 
coincide with that of the underlying common stock. Hence, DIVS sellers 
assume the obligation to fund the substitute dividend payments with 
respect to DIVS as they arise. On the Termination Date for a particular 
series of DIVS, DIVS holders' rights will cease except as to rights to 
unpaid dividends declared as of a record date occurring prior to the 
Termination Date.

ZIPS

    Each ZIPS will confer the right to receive on the Termination Date 
that number of underlying common shares to which the ZIPS relate having 
an aggregate value (determined soley by reference to the market price) 
equal to the lesser of (i) the Termination Claim for that class of ZIPS 
or (ii) the market price of the common shares on the Termination 
Date.\3\

    \3\All references to market price are to the last sale price on 
the relevant day as set forth on the appropriate consolidated tape, 
or if there is no such last sale price, the mean of the closing bid 
and ask price or as otherwise approved by the Commission prior to 
the commencement of trading in a series.
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    For example, if the Termination Claim for a class of ZIPS is $50, 
and on the Termination Date of the ZIPS the market price of the related 
underlying common stock is $80, a holder of 100 ZIPS would be entitled 
to receive that number of common shares with an aggregate market value 
of 100 x $50=$5,000. $5,000/$80 equals 62.5 shares, so that an owner 
would be entitled to 62 whole shares and a payment of cash in lieu of 
the fractional share of $40.\4\ Brokers holding short component 
positions for clients would make delivery of the shares and cash for 
any fractional shares. Brokers holding long component positions for 
their clients would receive the shares and cash for any fractional 
shares, which they will forward to their clients.

    \4\If the market price of a share of the related common stock on 
the Termination Date had been $50 or less, the owner of the 100 ZIPS 
would have received 100 shares of the underlying common stock. 
Exercise procedures in accordance with OCC guidelines would be 
followed on Termination Date.
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SPECS

    SPECS will reflect the appreciation in value above the Termination 
Claim for that series of SPECS. Specifically, SPECS will constitute the 
right to receive on the Termination Date that number of related common 
shares having a market value equal to the amount, if any, by which the 
market price of the related common shares exceeds the Termination 
Claim.
    From the example given in the discussion above of ZIPS, an owner of 
100 SPECS with respect to the same series of ZIPS would be entitled to 
receive the following number of common shares: 100 x ($80-$50)=$3,000. 
$3,000/$80 equals 37.5 common shares, so the owner of the 100 SPECS 
would be entitled to 37 whole shares and a cash payment in lieu of the 
fractional share of $40.\5\

    \5\If the market price of a common share had been less than $50 
(the Termination Claim), the SPECS would expire worthless.
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    On the Termination Date for a class of ZIPS or SPECS, OCC will 
instruct delivery, based on information provided by the brokers. Shares 
of the underlying stock will be delivered from the accounts of 
investors short the ZIPS or SPECS to satisfy the entitlements of those 
investors long the ZIPS and SPECS. [[Page 10889]] 

Voting Rights

    The vote to which the underlying common share is entitled will be 
allocated among the three components of the same series with the same 
Termination Date and Termination Claim in proposition to their relative 
market prices as of the record date for the meeting, consent or 
authorization.
    For example, if there are outstanding DIVS, ZIPS and SPECS with the 
following market values, each would have the indicated vote percentage:

------------------------------------------------------------------------
                                                     Market   Percentage
                     Security                        price       vote   
------------------------------------------------------------------------
DIVS term 12/31/99...............................     $20.25       18.75
ZIPS term 12/31/99...............................      78.75       72.92
SPECS term 12/31/99..............................       9.00        8.33
Combined Value...................................     108.00      100.00
------------------------------------------------------------------------

    If a DIVS, ZIPS or SPECS is sold uncovered, the underlying stock 
must be bought or borrowed by record date in order to enable the 
original naked seller to deliver the appropriate percentage of the vote 
to the DIVS, ZIPS or SPECS purchaser.
    Holders will receive proxy materials and be able to tender proxies 
for their respective shares of the vote to any broker or bank carrying 
their account, and that such broker or bank representing the sellers or 
shorts will surrender its proxy for the appropriate number of votes 
representing the components that were sold. Proxy materials will be 
provided through the mechanisms that banks, brokerage firms and 
clearing agencies have developed to comply with the requirements of 
Rules 14a-13, 14b-1 and 14b-2 under the Act. Costs for delivering the 
proxy materials will probably be borne by DIVS, ZIPS & SPECS holders.

SPECS

Adjustments for Stock Splits or Stock Dividends

    With respect to stock splits or stock dividends declared on the 
related underlying shares, DIVS, ZIPS, and SPECS will be adjusted 
proportionally, and, in the case of ZIPS and SPECS, the Termination 
Claim will also be adjusted proportionally on the record date for such 
event. For example, if a company has a two for one stock split, an 
owner of 100 DIVS would become the owner of 200 DIVS with the same 
Termination Date; an owner of 100 ZIPS would become the owner of 200 
ZIPS with the same Termination Date and one-half the Termination Claim; 
and an owner of 100 SPECS would become the owner of 200 SPECS with the 
same Termination Date and one-half the Termination Claim on such record 
date.
    If the related underlying company declares a stock dividend, the 
Products will be adjusted proportionally. For example, in the case of a 
declared 5% stock dividend, DIVS and ZIPS and SPECS with a Termination 
Claim of $50 would be adjusted as follows: an owner of 100 DIVS would 
become the owner of 105 DIVS; an owner of 100 ZIPS would become the 
owner of 105 ZIPS with a Termination Claim of $47.62; and an owner of 
100 SPECS would become the owner of 105 SPECS with a Termination Claim 
of $47.62.

Liquidating, Special or Partial Liquidating Dividends

    With regard to full liquidating dividends to shareholders, payments 
would be allocated among owners of DIVS, ZIPS and SPECS of the same 
class as follows:

--DIVS would receive the discounted present value at the date of 
distribution of the liquidating dividend of an imputed dividend 
stream. It would be assumed that the most recent four quarterly 
dividends (unless the issuer of the related common stock has 
announced a change in its dividend policy, in which case assumed 
dividends complying with the policy would be used) of the issuer 
would continue through the latest record date preceding the 
Termination Date. That cash stream would be discounted to present 
value assuming payment on the usual dividend payment dates, using as 
the discount rate the interest rate on U.S. Treasury Notes having 
the closest maturity to the Termination Date.
--The remaining amount would be allocated between ZIPS and SPECS of 
the same series, based upon an adjusted Termination Claim. The 
Termination Claim would be adjusted by discounting the Termination 
Claim to its present value at the date of distribution of the 
liquidating dividend. The discount rate used would be the interest 
rate on U.S. Treasury Notes having the closest maturity to the 
Termination Date. ZIPS will receive the amount of the distribution 
up to the adjusted Termination Claim (less the amount allocated to 
DIVS), with any excess going to the SPECS.

    Any adjustments made to the terms of the contract, as a result of 
any of these ``triggering'' events, would be handled for these 
instruments in the same manner as standardized options and would be in 
accordance with any applicable OCC rules.
    Transmission of money to beneficial owners would be accomplished 
through OCC and its participants in the same manner in which the 
substitute dividends would be transmitted from short DIVS to long DIVS.
    For purposes of allocating distributions among DIVS, ZIPS and 
SPECS, special dividends are those dividends which are declared as such 
by the issuer of the common shares, if that issuer does not also 
declare that it is changing its dividend policy by reducing or 
increasing the amount of its regular dividends. Special dividends would 
be allocated among DIVS, ZIPS and SPECS as follows:

--DIVS would be allocated and receive that portion of the special 
dividend equal to the quotient of (a) the annual dividend divided by 
(b) the last sale price\6\ of the stock on the day prior to the ex-
distribution date reduced by the amount of the special dividend 
which quotient is multiplied by (c) the amount of the special 
dividend.

    \6\If there is no last sale price, the mean of the closing bid 
and ask prices will be used.
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--If the remaining portion of the special dividend were less than 
the present value of the Termination Claim, the Termination Claim 
for ZIPS and SPECS would be reduced, but not below zero, by the 
future value at the Termination Date of the remaining portion of the 
special dividend. All determinations of present value and future 
value are computed using the maximum potential internal rate of 
return (``IRR'') for ZIPS. The maximum potential IRR for ZIPS is 
computed assuming purchase on the ex-distribution date at a price 
equal to the average closing price for the 10-day trading period 
preceding the announcement of the special dividend and receipt of 
the Termination Claim on the Termination Date (such discount rate 
being hereinafter the ``maximum potential IRR for ZIPS'').
--The remaining portion would be allocated and paid to the ZIPS.
--If the remaining portion of the special dividend equals or exceeds 
the present value of the Termination Claim, ZIPS would receive that 
portion of the special dividend equal in amount to such present 
value; the Termination Claim would be adjusted to zero and any 
additional amount of the special dividend would be allocated and 
paid to the SPECS. Any further liquidating, special or partial 
liquidating dividends would be allocated between DIVS and SPECS; the 
ZIPS having received in full an adjusted Termination Claim.

    For purposes of allocating distributions made by the issuer of the 
related common shares among DIVS, ZIPS and SPECS, partial liquidating 
dividends are all dividends other than regular dividends, liquidating 
dividends and special dividends. It is assumed that partial liquidating 
dividends would be accompanied by an announcement of a reduction in the 
regular dividends paid by the issuer.
    Partial liquidating dividends would be split among the three 
components as follows:

--DIVS would be allocated and receive that portion of the partial 
liquidating dividend equal to the discounted present value of 
[[Page 10890]] the amount of the reduction in the quarterly dividend 
as stated in the newly announced policy of the issuer. This 
computation would be made assuming payment on the usual dividend 
payment dates, using as the discount rate the interest rate on U.S. 
Treasury Notes having the closest maturity to the Termination Date.
--If the remaining portion of the partial liquidating dividend were 
less than the present value of the Termination Claim, the 
Termination Claim for ZIPS and SPECS would be reduced, but not below 
zero, by the future value at the Termination Date of the remaining 
portion of the partial liquidating dividend. The determination of 
present value and future value for ZIPS will be computed using the 
maximum potential IRR for ZIPS. In this case, the maximum potential 
IRR for ZIPS is computed assuming purchase on the ex-distribution 
date at a price equal to the average closing price for the 10-day 
trading period preceding the announcement of the partial liquidating 
dividend and receipt of the Termination Claim on the Termination 
Date.
--That remaining portion would be allocated and paid to the ZIPS.
--If the remaining portion of the partial liquidating dividend 
equals or exceeds the present value of the Termination Claim, ZIPS 
would receive that portion of the liquidating dividend equal in 
amount to such present value; the Termination Claim would be 
adjusted to zero and any additional amount of the partial 
liquidating dividend would be allocated and paid to the SPECS. Any 
further liquidating or partial liquidating dividends would be 
allocated between DIVS and SPECS; the ZIPS having received in full 
an adjusted Termination Claim.

Spin-offs and Split-ups

    In the case of spin-off or split-up transactions, each DIVS, ZIPS 
and SPECS holder would become the owner of two issues of DIVS, ZIPS and 
SPECS--one for each company and each having the same number of such 
securities with the same Termination Date. The Termination Claim would 
be allocated between the two issues of ZIPS and the two issues of SPECS 
based upon the ratio of the prices of the two issues (i.e., the 
underlying common shares and the spun-off company) at the opening of 
trading on the effective date of the spin-off or split-up transactions.

Mergers

    If the company that issued the common shares from which the DIVS, 
ZIPS and SPECS were created were to be the surviving company, there 
would be no adjustment to the terms of the DIVS, ZIPS and SPECS unless, 
as part of such transaction, there was a stock split, stock dividend, 
partial liquidating dividend or other corporate transaction that would 
require adjustment. If the issuer were not the surviving entity, each 
owner of DIVS, ZIPS and SPECS would vote his interest in accordance 
with his voting rights, and, if the merger was approved, he would 
receive his share of the compensation given for each common share as if 
a liquidating dividend was paid or an exchange offer was made, as 
appropriate.

Rights Offerings

    If the issuer of stock from which DIVS, ZIPS and SPECS were created 
were to make a rights offering, the rights would be allocated to the 
ZIPS and the Termination Claim would be reduced by the future value of 
the rights calculated to the Termination Date. The future value would 
be computed using as the interest rate, the maximum potential IRR for 
ZIPS and using the average closing sale price for the first 10 days of 
trading in the rights.

Exchange or Tender Offers

    If there were an exchange or tender offer for the common shares to 
which DIVS, ZIPS and SPECS related, OCC's existing option procedures 
and practices would apply.
    These particularized procedures for adjusting the contract 
specifications of any open interest in any particular DIVS, ZIPS and 
SPECS series will be well documented in the eventual disclosure 
document to be published by the issuer, OCC.
    The PHLX believes the proposed rule change is consistent with 
Section 6(b)(5) of the Act which provides in part that the rules of the 
Exchange be designed to prevent fraudulent and manipulative acts and 
practices, to facilitate transactions in securities, to remove 
impediments to and perfect the mechanism of a free and open market and 
to protect investors and the public interest.

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

    The PHLX 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

    No written comments were either received or requested.

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

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the PHLX consents, the Commission will:
    (A) By order approve such proposed rule change, or,
    (B) Institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing. 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 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 in the 
Commission's Public Reference Section, 450 Fifth Street, N.W., 
Washington, D.C. 20549. Copies of such filing will also be available 
for inspection and copying at the principal office of the above-
mentioned self-regulatory organization. all submissions should refer to 
the file number in the caption above and should be submitted by March 
21, 1995.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\7\

    \7\17 CFR 200.30-3(a)(12) (1994).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-4859 Filed 2-27-95; 8:45 am]
BILLING CODE 8010-01-M