[Federal Register Volume 60, Number 239 (Wednesday, December 13, 1995)]
[Notices]
[Pages 64086-64088]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-30299]



-----------------------------------------------------------------------

[[Page 64087]]


SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-36558; File No. SR-OCC-95-13]


Self-Regulatory Organizations; the Options Clearing Corporation; 
Notice of Filing of Proposed Rule Change Relating to Adjustments of 
Options for Ordinary Stock Dividends

December 6, 1995.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on September 19, 1995, The 
Options Clearing Corporation (``OCC'') 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 
primarily by OCC. On October 16, 1995, OCC filed an amendment to the 
proposed rule change.\2\ The Commission is publishing this notice to 
solicit comments from interested persons.

    \1\ 15 U.S.C. 78s(b)(1) (1988).
    \2\ The original filing required that dividends or distributions 
(i) not exceed ten percent of the market value of the underlying 
security and (ii) be paid on a regular basis in order to be deemed 
``ordinary.'' OCC amended its proposal with respect to cash 
dividends by eliminating the requirement that cash dividends of less 
than ten percent be paid on a regular basis in order to be deemed 
ordinary for purposes of determining whether to adjust the option. 
OCC also amended the proposal to require that stock dividends of 
less than ten percent of the market value of the underlying security 
be paid on a quarterly basis, as opposed to regularly, in order to 
be deemed ordinary. Letter from Jacqueline R. Luthringshausen, OCC, 
to Jerry W. Carpenter, Associate Director, Division of Market 
Regulation, Commission (October 11, 1995).
---------------------------------------------------------------------------

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

    The proposed rule change will revise OCC's By-Laws to adopt a 
general rule of not adjusting options for ordinary stock dividends or 
distributions on the underlying security and will delete references to 
the review by the Commission of options adjustment decisions made by an 
OCC adjustment panel.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, OCC 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. OCC has prepared summaries, set forth in sections (A), 
(B), and (C) below, of the most significant aspects of such 
statements.\3\

    \3\ The Commission has modified the text of the summaries 
prepared by OCC.
---------------------------------------------------------------------------

(A) Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    Under the proposed rule change, OCC will amend Article VI, Section 
11 of its By-Laws governing adjustments on options for ordinary stock 
dividends declared on the underlying security. Article VI, Section 11 
sets forth general rules concerning adjustment that OCC may make to the 
standardized terms of option contracts when certain events occur. A 
specific adjustment is determined by the vote of an adjustment panel 
comprised of two designated representatives of each exchange that lists 
such option and the designee of OCC's Chairman. OCC's designee only 
votes in the case of a tie.
    Currently, Article VI, Section 11(d) contains a general rule 
requiring that equity option contracts be adjusted in the case of a 
stock dividend, stock distribution, or stock split where one or more 
whole shares of the underlying security is issued with respect to each 
outstanding share. The adjustment is made by reducing the strike price 
and increasing each option contract by the same number of additional 
option contracts as the number of shares issued with respect to each 
outstanding share. The unit of trading stays the same. However, Section 
11(c) states that there will be no adjustment for ordinary cash 
dividends. This is because ordinary cash dividends generally are paid 
on a quarterly basis and adjusting outstanding options each time a 
dividend is paid could create a massive proliferation of option series 
that would dilute market liquidity and would overtax price reporting 
and other systems.
    Article VI, Section 11(j) grants authority to the adjustment panel 
to make such exceptions to any of the general adjustment rules as it 
deems to be appropriate. Recently, two adjustment panels exercised 
their exception authority and determined not to adjust outstanding 
option contracts to reflect a stock dividend. In both instances, the 
issuer evidenced a pattern of declaring a small stock dividend in 
conjunction with a quarterly cash dividend. In determining not to 
adjust the options, each adjustment panel considered the provision in 
the Options Disclosure Document that states a stock dividend may be 
treated as an ordinary cash dividend by an adjustment panel if the 
issuer of the underlying security announces or exhibits a policy of 
declaring regular stock dividends that do not individually exceed 10% 
of the market value of the underlying security.
    The adjustment panels involved in making the two recent adjustments 
have requested that OCC amend its By-Laws to provide for a general rule 
that no adjustment will be made to reflect ordinary stock dividends. As 
a result, OCC is proposing to define in its By-Laws ordinary stock 
dividends as dividends that are paid on a quarterly basis by the issuer 
of the underlying security and that do not individually exceed ten 
percent of the market value of the underlying security. Because the 
proposed change only will apply to recurrent stock dividends, OCC 
anticipates that it will apply only in a small number of cases. OCC 
believes that formalizing a policy of not adjusting for recurrent stock 
dividends will eliminate potential problems associated with the 
creation of an undesirable proliferation of options series as well as 
eliminate the need to convene adjustment panels to make discretionary 
determinations for such dividends on a case-by-case basis.
    OCC also proposes to amend its By-Laws to clarify when cash 
dividends will be considered ordinary. Under the proposal, cash 
dividends that do not exceed ten percent of the market value of the 
underlying security will be deemed to be ordinary whether or not they 
are paid on an ordinary basis.
    Finally, pursuant to a request from Commission staff, OCC proposes 
to delete language from Article VI, Section 11 that provides for 
Commission review of the determinations made by an OCC adjustment 
panel.
    OCC believes the proposed rule change is consistent with the 
requirements of Section 17A of the Act \4\ and the rules and 
regulations thereunder because the proposal will provide for the prompt 
and accurate settlement of options transactions and will provide for 
the safeguarding of related securities and funds.

    \4\ 15 U.S.C. 78.q-1 (1988).
---------------------------------------------------------------------------

(B) Self-Regulatory Organization's Statement on Burden on Competition

    OCC does not believe that the proposed rule change will impose any 
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 not and are not intended to be solicited with 
respect 

[[Page 64088]]
to the proposed rule change and none were received.

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

    Within thirty-five 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 ninety 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 OCC 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 submission 
should file six copies thereof with the Secretary, Securities and 
Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549. 
Copies of the submissions, 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. Sec. 552, will be available for inspection and copying in 
the Commission's Public Reference Room, 450 Fifth Street, N.W., 
Washington, D.C. 20549. Copies of such filings will also be available 
for inspection and copying at the principal office of OCC. All 
submissions should refer to the file number SR-OCC-95-13 and should be 
submitted by January 3, 1996.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\5\

    \5\ 17 CFR 200.30-3(a)(12) (1994).
---------------------------------------------------------------------------

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-30299 Filed 12-12-95; 8:45 am]
BILLING CODE 8010-01-M