[Federal Register Volume 60, Number 146 (Monday, July 31, 1995)]
[Notices]
[Pages 39029-39034]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-18707]



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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-36020; File Nos. SR-CBOE-95-11; SR-PSE-95-04; SR-Phlx-
95-12; SR-Amex-95-07]


Self-Regulatory Organizations; Order Approving Proposed Rule 
Changes and Notice of Filing and Order Granting Accelerated Approval of 
Related Amendments by the Chicago Board Options Exchange, Inc., the 
Pacific Stock Exchange, Inc., and the Philadelphia Stock Exchange, 
Inc.; and Notice of Filing and Order Granting Accelerated Approval to 
Proposed Rule Change and Related Amendments by the American Stock 
Exchange, Inc., Relating to Listing Standards for Options on Securities 
Issued in Certain Corporate Restructuring Transactions

July 24, 1995.

I. Introduction

    On January 26, February 13, February 15, and February 17 the 
Chicago Board Options Exchange, Inc. (``CBOE''), the Philadelphia Stock 
Exchange, Inc. (``Phlx''), the Pacific Stock Exchange, Inc. (``PSE''), 
and the American Stock Exchange, Inc. (``Amex'') (collectively the 
``Exchanges''), respectively, submitted to 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\ proposed rule changes to adopt listing standards for 
options on securities issued in certain corporate restructuring 
transactions.

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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    On February 17, 1995, February 21, 1995, February 21, 1995 and July 
11, 1995, the CBOE, PSE, Phlx and Amex, respectively, submitted to the 
Commission Amendment No. 1 to their proposed rule changes in order to 
make certain technical corrections to the text of the proposals.\3\ On 
May 10, 1995, the CBOE submitted to the Commission Amendment No. 2 to 
its proposed rule change.\4\ On June 13, 1995, the CBOE submitted to 
the Commission Amendment No. 3 to its proposed rule change.\5\ On July 
11, 1995, the Amex submitted to the Commission Amendment Nos. 2 and 3 
to its proposed rule change.\6\ On June 26, July 11 and July 11, 1995, 
the Phlx, PSE, and the Amex submitted to the Commission Amendment Nos. 
2, 2, and 4, respectively, to their proposed rule changes.\7\ On July 
11, 1995, the Phlx submitted to the Commission Amendment No. 3 to its 
proposed rule changes.\8\

    \3\ The CBOE, PSE, Phlx and Amex submitted identical revisions 
to their proposed rule changes in order to clarify that comparative 
asset values and revenues shall be derived from the later of the 
most recent annual or most recently available comparable interim 
financial statements of each of the respective issuers. See Letters 
from Michael Meyer, Attorney, Schiff, Hardin & Waite, dated February 
17, 1995, Michael Pierson, Senior Attorney, PSE, dated February 21, 
1995, and Michele Weisbaum, Associate General Counsel, Phlx, dated 
February 21, 1995, to Beth Stekler, Attorney, Office of Market 
Supervision (``OMS''), Division of Market Regulation (``Market 
Regulation''), Commission. See also Letter from Claire McGrath, 
Special Counsel, Amex, to Michael Walinskas, Branch Chief, OMS, 
Market Regulation, Commission, dated July 11, 1995 (``Amex Letter'') 
(collectively ``Amendment No. 1'').
    \4\ Amendment No. 2 to CBOE's proposal makes certain technical 
changes and states that under narrowly defined circumstances, the 
CBOE may determine that the public ownership of shares and holder 
requirements for the Restructure Security are satisfied based on 
these same characteristics of the Original Security. See Letter from 
Michael Meyer, Attorney, Schiff Hardin & Waite, to Sharon Lawson, 
Assistant Director, OMS, Market Regulation, Commission, dated May 
10, 1995 (``CBOE Amendment No. 2'').
    \5\ Amendment No. 3 to CBOE's proposed rule change makes further 
technical changes, and eliminates the reference to rights offerings 
in paragraph (c) of proposed new Interpretation and Policy .05 to 
CBOE Rule 5.3. See Letter from Michael Meyer, Attorney, Schiff 
Hardin & Waite, to Sharon Lawson, Assistant Director, OMS, Market 
Regulation, Commission, dated June 13, 1995 (``CBOE Amendment No. 
3'').
    \6\ The Amex submitted Amendment No. 2 to its proposed rule 
change in order to delete any and all references to restructuring 
transactions involving shareholders other than existing shareholders 
of the issuer of the Original Security. The Amex also submitted 
Amendment No. 3 to its proposed rule change to correct a technical 
error in proposed rule 916.01(6) by properly referencing various 
commentaries. See Amex Letter, supra note 3.
    \7\ The Phlx, PSE, and Amex amended the text of their proposed 
rules to conform to the language filed by the CBOE. See Letter from 
Michele Weisbaum, Associate General Counsel, Phlx, to Michael 
Walinskas, OMS, Market Regulation, Commission, dated June 26, 1995 
(``Phlx Amendment No. 2''), Letter from Michael Pierson, Senior 
Attorney, PSE, to John Ayanian, Attorney, OMS, Market Regulation, 
Commission, dated July 11, 1995 (``PSE Amendment No. 2''). See also 
Amex Letter, supra note 3.
    \8\ The Phlx submitted Amendment No. 3 to its proposed rule 
change to make certain technical clarifications, and to revise 
paragraph (b) of proposed new Commentary .05 to Phlx Rule 1009 to 
state that option contracts may not be initially listed for trading 
on a Restructure Security until shares of the Restructure Security 
are issued and outstanding and are the subject of trading that is 
not on a ``when issued'' basis. See Letter from Michele Weisbaum, 
Associate General Counsel, Phlx, to John Ayanian, Attorney, OMS, 
Market Regulation, Commission, dated July 11, 1995 (``Phlx Amendment 
No. 3'').
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    Notices of the CBOE, PSE and Phlx proposals and Amendment No. 1 to 
PSE's and Phlx's proposed rule changes were published for comment in 
the Federal Register on February 8, 1995, March 1, 1995 and March 1, 
1995, respectively.\9\ No comments were 

[[Page 39030]]
received on the proposals. This order approves the proposed rule 
changes by the CBOE, PSE, Phlx and Amex. The proposed rule change by 
the Amex, as amended, and certain amendments by the CBOE, PSE, and 
Phlx, have been approved on an accelerated basis.

    \9\ See Securities Exchange Act Release Nos. 35315 (February 1, 
1995), 60 FR 7598 (File No. SR-CBOE-95-11); 35410 (February 22, 
1995), 60 FR 11158 (File No. SR-PSE-95-04 and Amendment No. 1); and 
35409 (February 22, 1995), 60 FR 11159 (File No. SR-Phlx-95-12 and 
Amendment No. 1).
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II. Background

    The Exchanges currently maintain uniform standards regarding the 
approval for listing of underlying securities for options trading.\10\ 
Specifically, to be the subject of options trading, the underlying 
security must meet the following guidelines: (1) Trading volume in all 
markets of at least 2.4 million shares in the preceding twelve months 
(``Volume Test''); (2) market price per share of at least $7.50 for the 
majority of business days during the three calendar month period 
preceding the date of selection (``Price Test''); (3) a minimum public 
ownership of 7 million shares (``Public Ownership Requirement''); \11\ 
and (4) a minimum of 2,000 holders (``Holder Requirement'').\12\ An 
exchange must determine that a security satisfies the above 
requirements, as of the date it is selected for options trading 
(``selection date''), which is the date the exchange files for 
certification of the listing of the option with the Options Clearing 
Corporation (``OCC''). Depending upon the interest and response from 
other options exchanges, the exchange may begin options trading from 
three or five business days after the selection date.

    \10\ See Amex Rule 915; CBOE rule 5.3; PSE Rule 3.6; Phlx Rule 
1009; and NYSE Rule 715.
    \11\ Shares that are owned by persons required to report their 
stock holdings under Section 16(a) of the Act (i.e., directors, 
officers, and 10% beneficial owners) are excluded from this 
calculation.
    \12\ This proposal addresses price, volume, public ownership, 
and holder requirements specifically. For a Restructure Security to 
meet initial listing requirements, however, it must additionally 
comply with all requirements set forth by the Exchanges in their 
options eligibility rules. For example, the security must be 
registered, and listed on a national securities exchange, or traded 
through the facilities of a national securities association and 
reported as a ``national market system'' (``NMS'') security as set 
forth in Rule 11Aa3-1 under the Act, and the issuer must be in 
compliance with any applicable requirements of the Act. See supra 
note 10.
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    The Exchanges have adopted maintenance criteria for withdrawal of 
approval of an underlying security subject to options trading.\13\ A 
security previously approved for options transactions shall be deemed 
not to meet the guidelines for continued listing if (1) Trading volume 
in all markets is less than 1.8 million shares in the preceding twelve 
months (``Maintenance Volume Test''); (2) market price per share closes 
below $5.00 on a majority of business days during the preceding six 
calendar months (``Maintenance Price Test''); \14\ (3) public ownership 
amounts to fewer than 6.3 million shares (``Maintenance Public 
Ownership Requirement''); or (4) there are fewer than 1,600 holders 
(``Maintenance Holder Requirement'').\15\

    \13\ See Amex Rule 916; CBOE Rule 5.4; PSE Rule 3.7; Phlx Rule 
1010; and NYSE Rule 716.
    \14\ Additional criteria permits the underlying security under 
certain circumstances to trade as low as $3.00 for a temporary 
period of time. See Id.
    \15\ This proposal addresses maintenance criteria for market 
price and trading volume specifically. For a Restructure Security to 
meet maintenance requirements for an underlying security subject to 
options trading, however, it must additionally comply with all 
requirements set forth by the Exchanges in their options eligibility 
rules. See supra note 13.
    Both the initial and maintenance listing criteria are intended to 
ensure, among other things, that options are only traded on stocks with 
adequate depth and liquidity so that the options and their underlying 
components are not readily susceptible to manipulation.

III. Description of the Proposals

    The Exchanges propose to amend their rules to facilitate the 
earlier listing of options on securities issued in certain corporate 
restructuring transactions. The proposals will apply to securities 
(``Restructure Security'') issued by a public company to existing 
shareholders, with existing publicly traded shares subject to options 
trading, in connection with certain ``restructuring transactions.''\16\

    \16\ The proposal defines a ``restructuring transaction'' as a 
spin-off, reorganization, recapitalization, restructuring or similar 
corporate transaction.
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    Under the current standards, an exchange is generally precluded 
from listing eligible options on newly issued securities for at least 
three months, given that the guidelines require three months of price 
history to determine if the underlying security meets the Price Test. 
Additionally, an exchange may only list eligible options on newly 
issued securities, if the underlying security meets the Volume Test 
which requires trading volume in all markets of at least 2.4 million 
shares in the preceding twelve months. The proposed rule changes, 
however, would facilitate the earlier listing of options on a 
Restructure Security by permitting an exchange to determine whether a 
Restructure Security satisfies the Volume Test and Price Test by 
reference to the trading volume and market price history of an 
outstanding equity security (``Original Security'') previously issued 
by the issuer of the Restructure Security, or affiliate thereof. In 
addition, the Exchanges propose specific criteria for evaluating the 
distribution of shares of a Restructure Security for purposes of 
meeting the Public Ownership and Holder Requirements. To the extent 
that the initial options listing requirements are satisfied based upon 
these ``lookback'' provisions to the Original Security and the other 
provisions of the proposal, then an exchange will permit options 
trading to begin on the ex-date for the transaction.\17\

    \17\ Option contracts may not be initially listed for trading in 
respect of a Restructure Security until the ex-date. The ex-date 
occurs at such time when shares of the Restructure Security become 
issued and outstanding and are the subject of trading that are not 
on a ``when issued'' basis or in any other way contingent on the 
issuance or distribution of the shares. See e.g., Phlx Amendment No. 
3, supra note 8.
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    Before an exchange may invoke this proposed ``lookback'' provision 
and utilize the volume and price of the Original Security for purposes 
of meeting the options eligibility criteria for the Restructure 
Security, the Restructure Security must first satisfy one of four 
alternate conditions. The first three alternate conditions are intended 
to ensure that the trading volume and market price history of the 
Original Security represent a reasonable surrogate for determining the 
likely future trading volume and price data of the Restructure 
Security. Under these conditions either, (a) the aggregate market value 
of the Restructure Security, (b) the aggregate book value of the assets 
attributed to the business represented by the Restructure Security 
(minimum $50 million) or (c) the revenues attributed to the business 
represented by the Restructure Security (minimum $50 million) must 
exceed one of two stated percentages of the same measure for the 
Original Security.\18\ The threshold percentages will be 25% if the 
applicable measure determined with respect of the Original Security 
represents an interest in the combined enterprise prior to the 
restructuring transaction, and 33\1/3\% if the applicable measure 
determined with respect of the Original Security represents an interest 
in the remainder 

[[Page 39031]]
of the enterprise after the restructuring transaction. The fourth 
alternate condition is that the aggregate market value represented by 
the Restructure Security be at least $500 million. This condition is 
based on the Exchanges' view that even if a Restructure Security does 
not meet the comparative tests outlined above, a Restructure Security 
with an aggregate market value of 4500 million, by virtue of its 
absolute size, represents a substantial portion of the Original 
Security, and thus should qualify for the ``lookback'' provision.

    \18\ Aggregate market value will be based on share prices that 
are either (a) all closing prices in the primary market on the last 
business day preceding the selection date or (b) all opening prices 
in the primary market on the selection date. The aggregate market 
value of the Restructure Security may be determined from ``when 
issued'' prices, if available.
    Asset values and revenues will be derived from the later of (a) 
the most recent annual financial statements or (b) the most recent 
interim financial statements of the respective issuers covering a 
period of not less than three months. Such financial statements may 
be audited or unaudited and may be pro forma.
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    If any one of the four conditions set forth above is satisfied, a 
Restructure Security will qualify for the ``lookback'' provision. Under 
the ``lookback'' provision, a Restructure Security may be eligible for 
options trading immediately upon its issuance provided the following 
requirements are satisfied. First, the Restructure Security must 
satisfy the options Volume and Price Tests. Under the proposals, an 
exchange may be permitted to determine whether a Restructure Security 
satisfies the Volume and Price Tests by reference to the trading volume 
and market price history of the Original Security. Under the proposed 
rule change, the trading volume and market price history of the 
Original Security that occurs prior to the restructuring ex-date can be 
used for these calculations (emphasis added).\19\ Volume and price data 
may be derived from ``when issued'' trading in the Restructure 
Security. However, once an exchange uses ``when issued'' volume or 
prices for the Restructure Security to satisfy the relevant guidelines, 
it may not use the Original Security for that purpose on any subsequent 
trading day. In addition, both the trading volume and market price 
history of the Original Security must be used, if either is so used.

    \19\ See supra Section II.
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    Additionally, an exchange must determine whether a Restructure 
Security will satisfy the Public Ownership and Holder Requirements. 
This determination will either be based on facts and circumstances that 
will exist on the intended date for listing the option, or based on 
assumptions that are permitted under the proposal. Because the shares 
of the Restructure Security are to be issued or distributed to the 
shareholders of the issuer of the Original Security, the Exchanges 
propose that these requirements may be satisfied based upon the 
exchange's knowledge of the existing number of outstanding shares and 
holders of the Original Security.
    The Exchanges further proposes that if a Restructure Security is to 
be listed on an exchange or in an automatic quotation system that 
subjects it to an initial listing requirement of no less than 2,000 
holders, then the options exchange may assume that the Holder 
Requirement will be satisfied. Similarly, if a Restructure Security is 
to be listed on an exchange or in an automatic quotation system subject 
to an initial listing requirement of no less than public ownership of 7 
million shares, then the options exchange may assume that Public 
Ownership Requirement will be satisfied. Additionally, if an exchange 
determines that at least 40 million shares of a Restructure Security 
will be issued and outstanding in a restructuring transaction, then it 
may assume that the Restructure Security will satisfy both the Public 
Ownership and Holder Requirements.\20\

    \20\ According to the CBOE, for most restructuring transactions, 
it should be possible to know or to deduce from publicly available 
information on the distribution of the Restructure Security (or a 
worst case estimate of the number of shares that will be publicly 
held and the number of shareholders) upon completion of the 
restructuring transaction. As proposed, an exchange could make the 
necessary determination prior to the ex-date and could certify the 
Restructure Security for options trading on that basis. See Letter 
from Michael Meyer, Attorney, Schiff Hardin & Waite, to Sharon 
Lawson, Assistant Director, OMS, Market Regulation, dated January 
25, 1995 (``CBOE Letter'').
    An exchange, however, shall not rely on the above assumptions if, 
after reasonable investigation, it determines that either the public 
ownership of shares or the holder requirement, in fact, will not be 
satisfied on the intended date for listing the option. In addition, 
pursuant to the proposal, other exchanges will have the opportunity to 
challenge the certification by demonstrating that the Restructure 
Security will not meet the initial listing criteria with respect to 
public ownership and holders.
    Finally, the proposal will adopt a similar ``lookback'' provision 
for the Maintenance Volume Test and the Maintenance Price Test. 
Specifically, for purposes of satisfying these requirements, the 
trading volume and market price history of the Original Security, as 
well as any ``when issued'' trading in the Restructure Security, can be 
used for such calculations, provided that they are only used for 
determining price and volume history for the period prior to 
commencement of trading in the Restructure Security.

IV. Commission Finding and Conclusions

    The Commission finds that the proposed rule changes are consistent 
with the requirements of the Act and the rules and regulations 
thereunder applicable to a national securities exchange, and, in 
particular with the requirements of Section 6(b)(5),\21\ in 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.

    \21\ 15 U.S.C. 78f(b)(5).
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    The Commission believes that it is necessary for securities to meet 
certain minimum standards regarding both the quality of the issuer and 
the quality of the market for a particular security to become options 
eligible. These standards are imposed to ensure that those issuers upon 
whose securities options are to be traded are financially sound 
companies whose trading volume, market price, number of holders, and 
public ownership of shares are substantial enough to ensure adequate 
depth and liquidity to sustain options trading that is not readily 
susceptible to manipulation. The Commission also recognizes that under 
current equity options listing criteria, existing shareholders of an 
issuer that becomes involved in a restructuring transaction, may be 
precluded for a significant period from employing an adequate hedging 
strategy involving options on any newly acquired Restructure Security 
received in connection with such transaction.
    Accordingly, to determine whether the earlier listing of options 
overlying a Restructure Security is reasonable, the Commission must 
balance the benefits of providing adequate hedging strategies to 
shareholders of the issuer of the Restructure Security, and the risks 
of approving certain securities for options trading before such 
securities actually satisfy the options eligibility criteria, which 
currently, for newly issued securities, can not occur, at the very 
least, prior to three months after the security begins trading.\22\ The 
Commission believes that the proposed limited exception to established 
equity options listing procedure strikes such a reasonable balance.

    \22\ See supra Section II.
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    As discussed in more detail below, the Commission believes that the 
conditions of the new rule will help to ensure that only those 
securities that are most likely to have adequate depth and liquidity 
will be eligible for options trading prior to the establishment of a 
recognized trading history. Additionally, by facilitating the earlier 
listing of options on a Restructure Security, the Commission believes 
that investors formerly holding the Original Security, upon which 
options are currently traded, should be able to 

[[Page 39032]]
better hedge the risk of their newly acquired stock position in the 
Restructure Security.\23\

    \23\ Although the proposals do not specifically address it, the 
Commission understands that the application of the proposals is 
limited to instances where options are listed on the Original 
Security.
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    Despite the benefits of the proposal, the Commission believes that 
the proposal should only apply to restructuring transactions that 
involve financially sound and sufficiently large companies. The 
Commission believes that the Exchanges have addressed this concern by 
adding conditions to the proposal that require that Restructure 
Security to either satisfy certain comparative test (comparing the 
Restructure Security, or its related business with that of the Original 
Security, or its related business),\24\ or meet a very high aggregate 
market value standard ($500 million).

    \24\ See supra note 18 and accompanying text. The Commission 
notes that the Exchanges proposed that comparative asset values and 
revenues, when used to determine whether the above-mentioned 
conditions are satisfied, shall be derived ``from the later of the 
most recent annual or most recently available comparable interim 
(not less than three months financial statements.'' This provision 
means that the interim financial statements must cover a period of 
not less than three months.
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    The Commission believes that if one of the comparative tests is 
satisfied, the Restructure Security should adequately resemble the 
Original Security to qualify for the ``lookback'' provision. Under the 
``lookback'' provision, a Restructure Security will be able to satisfy 
the Volume and Price Tests if the trading volume and market price 
history of the Restructure Security, together with the trading volume 
and market price history of the Original Security occurring prior to 
the ex-date, meet the existing related requirements. Moreover, the 
Commission believes that, given the limited scope of the proposal, it 
is appropriate to conclude that a Restructure Security with an 
aggregate market value of at least $500 million appropriately qualifies 
for the ``lookback'' provision.
    The Commission also believes that it is appropriate for an exchange 
to count ``when issued'' trading in the Restructure Security when 
determining if the Restructure Security will satisfy the Volume and 
Price Tests set forth in the initial options listing requirements. 
However, once an exchange begins to use ``when issued'' volume or price 
history for the Restructure Security to satisfy the Volume or Price 
Tests, it may not use the Original Security for such purposes on any 
subsequent trading day. In addition, both the trading volume and market 
price history of the Original Security must be used, if either is so 
used. For example, if in order to satisfy the Volume Test for a 
Restructure Security for which the ex-date is expected to be February 
1, 1996, an exchange may elect to base its determination on the trading 
volume of the Original Security from February 1, 1995 through December 
27, 1995, and then utilize the trading volume in the when-issued market 
for the Restructure Security from December 28, 1995 through January 31, 
1996, in determining whether options covering the Restructure Security 
may be listed on the February 1 ex-date. Under this example, after 
December 28, 1995, only when-issued trading data for the Restructure 
Security may be used in determining whether it meets the Volume and 
Price Tests. An exchange, however, would be permitted to use the volume 
and price history of the Original Security throughout the entire period 
prior to February 1, 1996, provided that it did not rely on any when-
issued trading data during that period.
    The Commission notes that an exchange shall not use trading history 
relating to the Original Security after the ex-date to meet the initial 
options listing requirements for the option contracts overlying the 
Restructure Security. Additionally, the condition that option contracts 
overlying a Restructure Security shall not be initially listed for 
trading until such time as shares of the Restructure Security are 
issued and outstanding and are the subject of trading that is not on a 
``when issued'' basis or in any other way contingent on the issuance or 
distribution of the shares will ensure that options will only be traded 
a Restructure Security when it is certain the security is actually 
issued and outstanding.
    In addition to satisfying the Volume and Price Tests, a Restructure 
Security must also meet certain distribution requirements before an 
exchange can deem such security to be options eligible. Specifically, 
the Restructure Security must have 2,000 holders, and 7 million shares 
must be owned by persons not required to report their stock holdings 
under Section 16(a) of the Act to be options eligible. Under the most 
typical restructuring transaction, a spin-off to existing shareholders 
of the issuer of the Original Security, an exchange should be able to 
determine from publicly available information or otherwise reasonably 
deduce whether the Restructure Security will satisfy the 2,000 
shareholders requirement and the public ownership of 7 million shares 
requirement.\25\ As an example, if Issuer A, having public ownership of 
10 million shares of common stock owned by 5,000 holders intends to 
effect a spin-off of a subsidiary, whereby one share of the subsidiary 
is issued to existing shareholders of Issuer A for each currently held 
outstanding share of Issuer A, immediately following the spin-off the 
former subsidiary will have public ownership of 10 million shares and 
5,000 holders. As a result, the former subsidiary will satisfy both the 
public ownership of 7 million shares and 2,000 holder requirements.

    \25\ The Commission notes that ``public ownership of shares, as 
referred to herein, are shares that are owned by persons not 
required to report their stock holdings under Section 16(a) of the 
Act (i.e., directors, officers, and 10% beneficial owners).
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    As an alternative to the above, the proposal provides that an 
exchange may make certain limited assumptions based on facts and 
circumstances that will exist on the intended date for listing the 
options in order to determine the Public Ownership and Holder 
Requirements. First, if a Restructure Security is to be listed on an 
exchange or in an automatic quotation system that has, and applies to 
the Restructure Security, an initial listing requirement that the 
issuer have no less than 2,000 holders, the Commission believes that it 
is reasonable for an exchange to assume that its comparable option 
listing requirement will be satisfied. Second, if a Restructure 
Security is to be listed on an exchange or in an automatic quotation 
system that has, and applies to the Restructure Security, an initial 
listing requirement of no less than public ownership of 7 million 
shares, the Commission believes that it is reasonable for the an 
exchange to assume that its comparable option listing requirement will 
be satisfied.
    The Commission notes that currently no exchange or automatic 
quotation system has a public ownership initial stock listing standard 
that is as stringent as those required under the options eligibility 
requirements. Moreover, a stock exchange may now be able to list stocks 
pursuant to alternate listing standards. For example, the Commission 
has recently approved alternate listing standards for companies listed 
on the New York Stock Exchange (``NYSE''), including, among other 
things, the distribution of shares.\26\ Under these alternate listing 
standards, the NYSE is currently allowed to list certain companies with 
500 shareholders that meet heightened requirements in other areas in 
lieu of its 2,200 total shareholder requirement. 

[[Page 39033]]
Therefore, the Exchanges should be careful to precisely determine which 
listing standards are being applied to the listing of the Restructure 
Security prior to making a determination as to whether the Restructure 
Security meets the corresponding options listing criteria.

    \26\ See Paragraph 102.01 of the NYSE's Listed Company Manual. 
See also Securities Exchange Act Release No. 35571 (April 5, 1995), 
60 FR 18649 (April 12, 1995) (order approving proposed rule change 
relating to domestic listing standards).
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    Additionally, the proposal provides that if at least 40 million 
shares of a Restructure Security will be issued and outstanding in a 
restructuring transaction, an exchange may assume that the Restructure 
Security will satisfy both the public ownership of shares and holder 
requirements. The Commission believes this is appropriate because it 
appears unlikely that a Restructure Security with at least 40 million 
issued and outstanding shares, will have fewer than 2,000 holders or 
less than 7 million shares owned by persons not required to report 
holdings under Section 16(a) the Act.
    The Commission believes that concerns associated with the ability 
of an exchange to make important listing decisions based on assumptions 
rather than confirmed facts are alleviated by the crucial provision 
contained in the proposal that an exchange shall not rely on the above 
assumptions if, after a reasonable investigation, it determines that 
either the public ownership of shares or the holder requirement, in 
fact, will not be satisfied on the intended date for listing the 
option. At the very least, an exchange should investigate the basis for 
its assumptions regarding the public ownership of shares and number of 
shareholders just prior to selecting the option and just prior to 
trading the option, utilizing a worst case analysis in making its 
assumptions that the Restructure Security will meet these listing 
standards upon completion of the restructuring transaction.\27\

    \27\ See e.g. CBOE Letter, supra note 20.
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    In addition, other exchanges will continue to have the opportunity 
to challenge the certification by demonstrating that the Restructure 
Security will not meet the initial listing criteria with respect to 
public ownership and holders. The Commission believes that this 
provision provides an important check and should help to ensure that no 
unqualified securities are listed for options trading.
    The Commission also believes that it is appropriate for an exchange 
to apply the ``lookback'' provision, to determine if a Restructure 
Security will satisfy the Maintenance Volume and Price Tests. The 
Commission believes that it is appropriate to use the trading volume 
and market price history of the Original Security, as well as any 
``when issued'' trading in the Restructure Security for such 
calculations, provided that they are only used for determining price 
and volume history for the period prior to commencement of trading in 
the Restructure Security.
    The Commission notes that because the Maintenance Volume and Price 
Test are calculated on a rolling forward basis, ``when issued'' trading 
history for the Restructure Security or trading history for the 
Original Security prior to the ex-date may be used for maintenance 
calculations for no more than twelve months after the ex-date for the 
Restructure Security with respect to the Maintenance Volume Test, and 
for no more than six months after the ex-date for the Restructure 
Security with respect to the Maintenance Price Test. For example, if in 
order to satisfy the Maintenance Volume Test for a Restructure Security 
on November 1, 1995, for which the ex-date is September 1, 1995, an 
exchange may elect to base its determination on the trading volume of 
the Original Security from November 1, 1994 through August 1, 1995, the 
trading volume in the when-issued market for the Restructure Security 
from August 2, 1995 through August 31, 1995, but must use the trading 
volume in the Restructure Security from September 1, 1995 through 
November 1, 1995. Similarly, in order to satisfy the Maintenance Price 
Test for the same Restructure Security on November 1, 1995, an exchange 
may elect to base its determination on the trading price of the 
Original Security from August 1, 1995 through August 15, 1995, the 
trading price in the when-issued market for the Restructure Security 
from August 16, 1995 through August 31, 1995, but must use the trading 
price in the Restructure Security form September 1, 1995 through 
November 1, 1995.
    The Commission notes that the Exchanges' proposals only permit them 
to avail themselves of the accelerated listing procedures for a 
traditional restructuring transaction that is limited to the 
distribution of shares to existing shareholders of the issuer of the 
Original Security. Accordingly, the Commission notes that this proposal 
does not address or apply to restructuring transactions that involve a 
sale of such securities to the general public, including, but not 
limited to, initial public offerings or secondary offerings. The 
Commission is approving the current proposal based, in part, on the 
need for investors and other market participants with combined stock/
option positions in an Original Security to be able to maintain their 
positions immediately following a restructuring transaction. Otherwise, 
holders of the Original Security might be temporarily prevented (until 
the Restructure Security independently satisfies the options listing 
criteria) from adequately hedging their involuntarily received new 
positions in the Restructure Security.
    The Commission also notes that this proposal does not address or 
apply to restructuring transactions that involve a sale of such 
securities in a rights offering to existing holders of the Original 
Security. The Commission believes that the contingencies in the terms 
of such an offering make it too difficult to determine whether the 
number of subscribers for such an offering would be adequate to meet 
the Pubic Ownership and Holder Requirements and therefore such an 
offering does not justify the immediate availability of options for the 
underlying security.
    The Commission believes that any future exchange proposing to 
expand the scope of this proposal beyond that of restructuring 
transactions involving distributions of securities to existing 
shareholders or expanding the rule to include rights offerings must 
address potential concerns associated with being able to adequately 
determine the minimum number of publicly owned shares and holders of 
the Restructure Security that will exist on the intended date for 
listing the options in order to justify accelerated availability of 
options trading.
    The Commission finds good cause for approving the proposed rule 
change by the Amex prior to the thirtieth day after the date of 
publication of notice of filing thereof in the Federal Register. 
Specifically, the Commission notes that the Amex's proposed rule change 
is substantively similar to those proposed by the CBOE, PSE, and Phlx. 
The Amex rule change proposal raises no issues that are not raised by 
the other exchanges. Additionally, the Commission notes that the CBOE, 
PSE, and Phlx proposals were subject to a full notice and comment 
period, and no comments were received, Accordingly, the Commission 
believes that it is consistent with section 6(b)(5) of the Act to 
approve Amex's proposed rule change, as amended, on an accelerated 
basis.
    The Commission also finds good cause for approving identical 
Amendment No. 1 to the proposed rule changes from the CBOE and Amex 
prior to the thirtieth day after the date of publication of notice of 
filing thereof in the Federal Register. This amendment clarifies that 
comparative asset values 

[[Page 39034]]
and revenues shall be derived from the later of the most recent annual 
or most recently available comparable interim financial statements of 
each of the respective issuers. The Commission believes that this 
amendment helps to clarify the method of determining comparative asset 
values and revenues and contains only minor variations from the 
original proposals. Accordingly, the Commission believes that it is 
consistent with Sections 6(b)(5) of the Act to approve Amendment No. 1 
to CBOE's and Amex's proposed rule changes on an accelerated basis.
    The Commission finds good cause for approving Amendments Nos. 2 and 
3 to the Amex's proposed rule change prior to the thirtieth day after 
the date of publication of notice of filing thereof in the Federal 
Register. Amendment No. 2 to Amex's proposal addresses the scope of 
transactions qualifying for the proposed equity options listing 
criteria by deleting any and all references to restructuring 
transactions involving shareholders other than existing shareholders of 
the issuer of the Original Security. This amendment ensures that the 
accelerated options listing procedures as proposed by the exchanges, 
apply only to a restructuring transaction involving existing 
shareholders of the issuer of the Original Security. The Commission 
believes that Amendment No. 2 to Amex's proposal effectively narrows 
the scope, and accurately reflects the original intent, of the proposed 
rule change. Amendment No. 3 to Amex's proposal corrects a technical 
error in proposed rule 916.01(6) by properly referencing various 
commentaries. The Commission does not believe the amendment raises any 
new or unique regulatory issues. Therefore, the Commission believes it 
is consistent with Sections 6(b)(5) of the Act to approve Amendment 
Nos. 2 and 3 to Amex's proposal on an accelerated basis.
    The Commission finds good cause for approving Amendments Nos. 2 and 
3 to the CBOE's proposed rule changes, prior to the thirtieth day after 
the date of publication of notice of filing thereof in the Federal 
Register. Specifically, Amendment No. 2, to CBOE's proposal makes 
certain technical changes to clarify the meaning of the proposed rule 
changes to achieve greater uniformity with the language of the other 
exchanges, and to properly reflect the original intent of the proposed 
rule change. Additionally, Amendment No. 2 to CBOE's proposal states 
that under narrowly defined circumstances, the CBOE may determine that 
the public ownership of shares and holder requirements are satisfied 
based on these same characteristics in respect of the Original 
Security. Amendment No. 3 to CBOE's proposed rule changes makes further 
technical changes, and eliminates the reference to rights offerings in 
paragraph (c) of proposed new Interpretation and Policy .05 to CBOE 
Rule 5.3. The Commission does not believe these amendments raise any 
new or unique regulatory issues. In particular, the Commission believes 
that the amendments clarify the meaning, and reflect the scope of the 
proposed rule change, as originally intended. Therefore, the Commission 
believes it is consistent with Sections 6(b)(5) of the Act to approve 
Amendments Nos. 2 and 3 to CBOE's proposed rule changes, respectively, 
on an accelerated basis.
    The Commission finds good cause for approving Amendments Nos. 2, 2, 
and 4 to the Phlx's, PSE's, and Amex's proposed rule changes, 
respectively, prior to the thirtieth day after the date of publication 
of notice of filing thereof in the Federal Register. These amendments 
merely conform the Phlx's, PSE's, and Amex's proposed rule changes to 
Amendment Nos. 2 and 3 to CBOE's proposal. The Commission does not 
believe the amendments raised any new or unique regulatory issues. 
Therefore, the Commission believes it is consistent with Sections 
6(b)(5) of the Act to approve Amendments Nos. 2, 2 and 4 to Phlx's, 
PSE's, and Amex's proposed rule changes, respectively, on an 
accelerated basis.
    The Commission finds good cause for approving Amendment No. 3 to 
the Phlx's proposed rule changes prior to the thirtieth day after the 
date of publication of notice of filing thereof in the Federal 
Register. Specifically, Amendment No. 3 to Phlx's proposal makes 
certain technical clarifications and revises paragraph (b) of proposed 
new Commentary .05 to Phlx Rule 1009 to state that option contracts may 
not be initially listed for trading on a Restructure Security until 
shares of the Restructure Security are issued and outstanding and are 
the subject of trading that is not on a ``when issued'' basis. Because 
Phlx Amendment No. 3 merely reverses an unintended amendment to the 
proposed rule change as originally filed, the Commission does not 
believe the amendment raises any new or unique regulatory issues. 
Therefore, the Commission believes it is consistent with Section 
6(b)(5) of the Act to approve Amendment No. 3 to Phlx's proposal on an 
accelerated basis.
    Interested persons are invited to submit written data, views and 
arguments concerning the Amex proposal Amendments Nos. 1, 2, 3 and 4 to 
Amex's proposal; CBOE Amendment Nos. 1, 2 and 3; Phlx Amendment Nos. 2 
and 3; and PSE Amendment No. 2. 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 at 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 offices of the Exchanges. 
All submissions should refer to SR-CBOE-95-11; SR-PSE-95-04; SR-Phlx-
95-12; and SR-Amex-95-07 and should be submitted by August 21, 1995.

V. Conclusion

    Based on the above findings, the Commission believes the proposals 
are consistent with Section 6(b)(5) of the Act by facilitating 
transactions in securities while at the same time ensuring continued 
protection of investors. As noted above, the strict conditions of the 
rule should help to identify for accelerated options eligibility only 
those Restructure Securities that will have adequate depth and 
liquidity to support options trading. At the same time it will provide 
investors with a better opportunity to hedge their positions in both 
the Original and the Restructure Security.
    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\28\ that the proposed rule changes (SR-CBOE-95-11; SR-PSE-95-04; 
SR-Phlx-95-12; and SR-Amex-95-07), as amended, are approved.

    \28\ 15 U.S.C. 78s(b)(2).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\29\

    \29\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-18707 Filed 7-28-95; 8:45 am]
BILLING CODE 8010-01-M