[Federal Register Volume 62, Number 32 (Tuesday, February 18, 1997)]
[Notices]
[Pages 7288-7289]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-3916]



SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-38269; File No. SR-Phlx-96-41]


Self-Regulatory Organizations; Order Approving Proposed Rule 
Change by the Philadelphia Stock Exchange, Inc. Relating to Designating 
Options as Tier I Securities

February 11, 1997.
    On October 11, 1996, the Philadelphia Stock Exchange, Inc. 
(``Phlx'' or ``Exchange'') filed with the Securities and Exchange 
Commission (``Commission'' or ``SEC'') the proposed rule change, 
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ to include equity options, index options and other option 
like products issued, cleared and guaranteed by the Options Clearing 
Corporation (``OCC'') as Tier I securities under Exchange Rule 803. 
Notice of the proposed rule change, together with the substance of the 
proposal, was published in the Federal Register.\2\ One comment letter 
was received on the proposal.\3\ The Commission is approving the 
proposed rule change contingent upon NASAA's\4\ amendment of the Phlx 
MOU to permit OCC issued options to be designated as Tier I 
securities.\5\
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    \1\ 15 U.S.C. Sec. 78s(b)(1).
    \2\ Securities Exchange Act Release No. 37914 (Nov. 1, 1996), 61 
FR 57940 (Nov. 8, 1996).
    \3\ See Letter from Karen M. O'Brien, General Counsel, North 
American Securities Administrators Association, Inc. (``NASAA''), to 
Karl Varner, Division of Market Regulation, SEC, dated January 27, 
1997, which indicated that OCC cleared options qualify for 
designation as Tier I securities under the NASAA Memorandum of 
Understanding (``MOU'') between NASAA and the Phlx. But see infra 
note 5.
    \4\ NASAA is an association of securities administrators from 
each of the 50 states, the District of Columbia, Puerto Rico and ten 
Canadian provinces.
    \5\ NASAA plans to have its board ratify this amendment to the 
Phlx MOU at its February 21, 1997, board meeting. According to 
NASAA, because the Phlx MOU is a membership document, it cannot be 
revised until the members vote on this amendment during the April 
1997, membership meeting. Telephone conversation between Karen 
O'Brien, General Counsel, NASAA, and Karl Varner, Attorney, Division 
of Market Regulation, SEC, on February 7, 1997.
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I. Background

    In 1994, the Exchange adopted a two tier listing criteria program 
for equity and debt securities.\6\ The Exchange originally adopted its 
Tier I listing standards based on standards established in a MOU 
between the NASAA and the Phlx. The Phlx MOU is modeled after the MOU 
between the

[[Page 7289]]

National Association of Securities Dealers (``NASD'') and NASAA,\7\ 
which is entitled ``A Model Uniform Marketplace Exemption.''
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    \6\ See Securities Exchange Act Release No. 34235 (June 17, 
1994), 59 FR 32736 (June 24, 1994).
    \7\ See Securities Act Release No. 6810 (Dec. 16, 1988), 53 FR 
52550 (Dec. 28, 1988).
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    In the order approving the Exchange's Tier I listing standards, the 
Commission noted that the Exchange was adopting the MOU standards in an 
effort to provide issuers whose securities were designated as Tier I a 
greater opportunity to obtain blue sky exemptions.\8\ With the adoption 
of the MOU, the Exchange has received blue sky exemptions for its 
listed securities designated as Tier I from a number of states. When 
the Exchange adopted its two tiered listing standards, however, the 
Exchange did not include equity and index options as Tier I securities, 
and the Phlx MOU with NASAA did not designate such options as Tier I 
securities. The Exchange has explained that exclusion of options as 
Tier I securities was merely an oversight rather than an intentional 
exclusion because the Exchange's equity and debt security listing 
standards are provided in a separate rule from its option listing 
standards.\9\
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    \8\ See supra note 6 n. 12.
    \9\ See Rules Phlx 803 through 805 for equity and debt security 
listing standards; Phlx Rules 1009 and 1009A for listing applicable 
to options on equities and indexes respectively.
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    The OCC, which is considered the issuer of all Phlx listed options, 
has the responsibility of registering these options. OCC has indicated 
to the Exchange that it must register Phlx listed options in numerous 
states in which the OCC would not otherwise be required to register if 
the options were able to take advantage of the blue sky exemptions 
accorded to the Phlx's Tier I securities. Thus, the Exchange proposes 
to include its equity options, index options and any other OCC issued, 
cleared and guaranteed products as Tier I securities for blue sky 
purposes. Under the proposal, options would still have to meet existing 
eligibility listing standards set forth in Phlx rules specifically for 
options.\10\ Further, the Phlx and NASAA have agreed that OCC issued 
options may qualify for designation as Tier I securities and are in the 
process of amending the Phlx MOU to reflect this change.\11\
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    \10\ See supra note 9.
    \11\ See supra notes 3 and 5. As discussed above, NASAA plans to 
revise the Phlx MOU. The Commission notes that this approval order 
is contingent on the NASAA's formal amendment of the Phlx MOU to 
permit OCC issued options to be designated as Tier I securities.
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Discussion

    The proposed rule change is consistent with Section 6 of the Act in 
general, and in particular, with Section 6(b)(5), in that it is 
designed to promote just and equitable principles of trade, prevent 
fraudulent and manipulative acts and practices, to foster cooperation 
and coordination with persons engaged in regulating, clearing, 
settling, processing information with respect to, and facilitating 
transactions in securities, to remove impediments to and perfect the 
mechanism of a free and open market and a national market system, as 
well as to protect investors and the public interest.
    The proposed rule change should facilitate transactions in 
securities and remove impediments to a free and open market by 
eliminating the need for OCC to register Phlx listed options in those 
states that currently grant a blue sky exemption to Phlx's Tier I 
securities. This rule change should help to eliminate some of the costs 
associated with listing options as well as making the process of 
listing options easier and quicker.
    As discussed above, under the rule being approved herein, OCC 
cleared options will be designated as Tier I securities for blue sky 
purposes only. Accordingly, the rule change does not affect or change 
in any way the standards that must be met to initially, or continue to, 
list equity and index options or such other OCC issued options 
permitted under Phlx rules. In approving the Phlx's proposal, the 
Commission recognizes that the listing criteria set forth in Phlx Rules 
803 through 805 for Tier I securities are for equity-type securities as 
opposed to options issued by the OCC. Nevertheless, because it is clear 
under Phlx's rule that listed options will still have to meet options 
listing criteria and that the Tier I designation for options is merely 
to eliminate the need to register such securities under certain state 
blue sky laws, we believe the change is appropriate and consistent with 
the Act.\12\
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    \12\ The Commission notes that Phlx's proposed rule is almost 
identical to the Pacific Stock Exchange's (``PSE'') current rule 
designating PSE listed options as PSE Tier I securities for blue sky 
purposes.
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    Finally, as noted above, in conjunction with this proposal, NASAA 
and Phlx have agreed that OCC issued options may be designated as Tier 
I securities for blue sky purposes,\13\ and NASAA has represented to 
the Commission that the Phlx MOU will be amended as soon as practical 
to reflect this agreement.\14\ Accordingly, this rule change will not 
become operative until NASAA amends the Phlx MOU to permit OCC issued 
options to be designated as Tier I securities.\15\ This amendment would 
ensure that the MOU is consistent with Phlx rules designating OCC 
cleared options as Tier I securities, and that those states that grant 
Phlx a blue sky exemption based on the MOU will recognize such 
exemption for Phlx listed options. In addition, in its letter to the 
Commission, NASAA states that this approach is similar to the structure 
adopted in the MOU between the PSE and NASAA.\16\
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    \13\ See Supra note 3.
    \14\ See supra notes 5 and 11.
    \15\ Id.
    \16\ See supra note 3.
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    It is therefore ordered, pursuant to Section 19(b)(2) of the Act, 
that the proposed rule change SR-Phlx-96-41 be, and hereby is, approved 
contingent upon NASAA's amendment of the Phlx MOU to permit OCC issued 
options to be designated as Tier I securities.

    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).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-3916 Filed 2-14-97; 8:45 am]
BILLING CODE 8010-01-M