[Federal Register Volume 62, Number 116 (Tuesday, June 17, 1997)]
[Proposed Rules]
[Pages 32705-32713]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-15769]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 230

Release Nos. 33-7422, 34-38728, File No. S7-17-97
RIN 3235-AH18


Covered Securities Pursuant to Section 18 of the Securities Act 
of 1933

AGENCY: Securities and Exchange Commission.

ACTION: Proposed rule.

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SUMMARY: The Commission proposes for comment Rule 146(b) under section 
18 of the Securities Act of 1933, as amended. The Rule would designate 
securities listed on certain national securities exchanges, or tiers or 
segments thereof, as covered securities. Covered securities under 
section 18 of the Securities Act are exempt from state law registration 
requirements.

DATES: Comments should be submitted by July 17, 1997.

ADDRESSES: All comments should be submitted in triplicate and addressed 
to Jonathan G. Katz, Secretary, Securities and Exchange Commission, 
Mail Stop 6-9, 450 Fifth Street, NW., Washington, DC 20549. Comments 
also may be submitted electronically at the following E-mail address: 
[email protected]. All comments should refer to File No. S7-17-97; 
this file number should be included in the subject line if E-mail is 
used. Comment letters will be available for public inspection and 
copying at the Commission's Public Reference Room at the same address. 
Electronically submitted comment letters will be posted on the 
Commission's web site (http://www.sec.gov).

FOR FURTHER INFORMATION CONTACT: Sharon M. Lawson, Senior Special 
Counsel, James T. McHale, Special Counsel, or David S. Sieradzki, Esq., 
at 202/942-0181, 202/942-0190, or 202/942-0135; Office of Market 
Supervision, Division of Market Regulation, Securities and Exchange 
Commission (Mail Stop 5-1), 450 Fifth Street, NW, Washington, DC 20549.

SUPPLEMENTARY INFORMATION:

I. Introduction

    On October 11, 1996, The National Securities Markets Improvement 
Act of 1996 (``NSMIA'') 1 was signed into law. Among other 
changes made to the federal securities laws, NSMIA amends section 18 of 
the Securities Act of 1933, as amended (``Securities Act'') 
2 to provide for exclusive federal registration of 
securities listed, or authorized for listing, on the New York Stock 
Exchange (``NYSE''), the American Stock Exchange (``Amex''), or listed 
on the National Market System of the Nasdaq Stock Market (``Nasdaq/
NMS''), or any other national securities exchange designated by the 
Commission to have substantially similar listing standards to those 
markets. More specifically, section 18(a) provides that ``no law, rule, 
regulation, or order, or other administrative action of any State * * * 
requiring, or with respect to, registration or qualification of 
securities * * * shall directly or indirectly apply to a security 
that--(A) is a covered security.'' Covered securities are defined in 
section 18(b)(1) to include those securities listed, or authorized for 
listing, on the NYSE, Amex, or listed on Nasdaq/NMS, or those 
securities listed, or authorized for listing, on a national securities 
exchange (or tier or segment thereof) that has listing standards that 
the Commission determines by rule are ``substantially similar'' to 
those of the NYSE, Amex, or Nasdaq/NMS.
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    \1\ Pub. L. No. 104-290, 110 Stat. 3416 (1996).
    \2\ 15 U.S.C. 77r.
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    The Pacific Exchange, Incorporated (``PCX''), the Chicago Board 
Options Exchange, Incorporated (``CBOE''), the Chicago Stock Exchange, 
Incorporated (``CHX''), and the Philadelphia Stock Exchange, 
Incorporated (``Phlx'') (collectively the ``Petitioners'') have 
petitioned the Commission to adopt a rule which finds their listing 
standards to be substantially similar to those of the NYSE, Amex, or 
Nasdaq/NMS and, therefore, entitling securities listed pursuant thereto 
to be deemed covered securities under section 18 of the Securities 
Act.3 After careful comparison, the Commission preliminarily 
believes that currently the listing standards of Tier I of the PCX and 
the listing standards of the CBOE are substantially similar to the 
listing standards of the NYSE, Amex, or Nasdaq/NMS. With regard to the 
CHX and Phlx, the Commission preliminarily believes that while most of 
their Tier I listing standards are substantially similar to those of 
the NYSE, Amex, or Nasdaq/NMS, they differ in several important areas. 
Accordingly, the Commission today is soliciting comments on proposed 
Rule 146(b), and on whether securities listed on Tier I of the CHX and 
Phlx should be included in the Rule.4 The proposed rule 
finds that the listing standards of Tier I of the PCX and the listing 
standards of the CBOE are substantially similar to those of the NYSE, 
Amex, or Nasdaq/NMS, and securities listed thereon should be deemed 
covered securities under section 18(b)(1) of the Securities Act. If 
adopted, the rule would provide those covered securities with an 
exemption from state blue sky provisions as set forth under section 
18(a) of the Securities Act.
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    \3\ See Letter from David P. Semak, Vice President, Regulation, 
Pacific Stock Exchange, Incorporated (n/k/a Pacific Exchange, Inc.), 
to Arthur Levitt, Jr., Chairman, Commission, dated November 15, 1996 
(``PCX Petition''); letter from Alger B. Chapman, Chairman, CBOE, to 
Jonathan G. Katz, Secretary, Commission, dated November 18, 1996 
(``CBOE Petition''); letter from J. Craig Long, Esq., Foley and 
Lardner, to Jonathan G. Katz, Secretary, Commission, dated February 
4, 1997 (``CHX Petition''); and letter from Michele R. Weisbaum, 
Vice President and Associate General Counsel, Phlx, to Jonathan G. 
Katz, Secretary, Commission, dated March 31, 1997 (``Phlx 
Petition'') (collectively the ``Petitions'').
    \4\ As discussed herein, if the CHX and Phlx decide to revise 
their Tier I listing standards in several areas to more closely 
conform to those of the NYSE, Amex, or Nasdaq/NMS, the Commission 
likely will include securities listed on these markets in the Rule. 
See Section III, C, infra.
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II. Background

    The development and enforcement of adequate standards governing the 
initial and continued listing of securities on an exchange is an 
activity of critical importance to financial markets and the investing 
public. Listing standards serve as a means for a self-regulatory 
organization (``SRO'') to screen issuers and to provide listed status 
only to bona fide companies with sufficient float, investor base and 
trading interest to maintain fair and orderly markets. Once a security 
has been approved for initial listing, maintenance criteria allow an 
exchange to monitor the status and trading characteristics of that 
issue to ensure that it continues to meet the exchange's standards for 
market depth and liquidity.
    Indeed, many States have recognized the importance of listing 
standards by excepting from state registration requirements securities 
traded on the NYSE, the Amex, or Nasdaq/NMS.5 In enacting 
section 18, Congress intended to codify in the Securities Act an 
exemption from state registration requirements similar to these state 
law

[[Page 32706]]

provisions.6 Finally, in order to avoid competitive 
disparities, Congress provided the Commission with the discretionary 
authority to extend similar preemption treatment to other national 
securities exchanges (or tiers or segments thereof) that have 
substantially similar listing standards.7
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    \5\ See, e.g., Del. Code Ann. tit. 6 Sec. 7309(a)(8) (1996).
    \6\ H.R. Rep. No. 622, 104th Cong., 2d Sess., pt. 1, at 30 
(1996) (``Legislative History''). As a result of this federal 
preemption of the state registration process, SRO listing standards 
have become all the more critical to preserving the integrity of U.S 
financial markets and protecting investors.
    \7\ See Legislative History supra note 6.
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III. Discussion

    As noted above, the PCX, CBOE, CHX, and Phlx all have petitioned 
the Commission to adopt a rule as contemplated by section 
18.8 The Petitioners assert that their Tier I listing 
standards 9 are substantially similar to those of the NYSE, 
the Amex, or Nasdaq/NMS, and that until the Commission acts to provide 
them with the benefits of the section 18 exemption, they will be at a 
competitive disadvantage to these markets. The Commission recognizes 
the competitive concerns raised by the Petitioners, but notes that the 
statute requires the Commission to make an independent finding that the 
petitioners' listing standards are substantially similar to those of 
the NYSE, the Amex or Nasdaq/NMS.
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    \8\ See Petitions, supra note 3.
    \9\ The Commission notes that presently the CBOE only has one 
tier, or segment, for listing purposes.
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    In addition, Congress intended that the Commission monitor the 
listing requirements of the regional exchanges, consistent with its 
supervisory authority under the Securities Exchange Act of 1934 
(``Exchange Act''), to ensure the continued integrity of these markets 
and the protection of investors.10 For example, if a 
regional exchange proposed to lower its listing standards for common 
stock, the Commission likely would consider this to be a substantive 
revision which may change the finding that the regional exchange's 
listing standards are substantially similar to those of the NYSE, Amex, 
or Nasdaq/NMS.11 Accordingly, in reviewing future proposed 
changes to SRO listing standards, the Commission will consider whether 
the proposed change(s) will require an amendment to Rule 146(b). In the 
event that the Commission determines that a proposed change in listing 
standards would require an amendment to Rule 146(b), and where the 
proposed rule change is subject to full notice and comment under 
section 19(b) of the Exchange Act, the Commission may conclude that it 
is unnecessary to provide notice and comment for the corresponding 
amendment to this Rule.12 Finally, the Commission notes that 
enforcement of an SRO's listing standards is subject to periodic 
inspections by Commission staff, as is enforcement of all SRO rules, 
and should the Commission find that an exchange designated in Rule 
146(b) is not adequately enforcing its requirements for initial and 
continued listing, the Commission will take appropriate action to 
``revoke'' that exchange's exemption.
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    \10\ See Legislative History, supra note 6.
    \11\ If, however, either the NYSE, Amex, or Nasdaq/NMS raised 
its listing standards with respect to a particular security, a 
conforming change by the exchanges designated in Rule 146(b) may not 
necessarily be required for two reasons. First, section 18(b)(1)(B) 
requires that the regional exchanges' listing standards be 
substantially similar to only one of the primary markets in order to 
qualify for the exemption. Second, a listing standard change made by 
the primary market should not force the regional exchanges to 
conform their listing standards. Otherwise, a single primary market 
would be, in effect, setting the listing standards for all the 
regional exchanges. If, however, all three primary markets were to 
raise their listing standards, and the Commission believed that the 
change was significant enough so that failure to adopt the new 
standard rendered the exchanges designated in Rule 146(b) to have 
substantially inferior standards, then the Commission may require 
the latter exchanges to raise their standards in order to maintain 
their exemption under the Rule.
    \12\ Although the Administrative Procedure Act states that an 
agency must provide general notice of the proposed rulemaking and an 
opportunity for comment, these requirements do not apply if the 
agency for good cause, finds that those procedures are 
``impracticable, unnecessary, or contrary to the public interest.'' 
5 U.S.C. 553(b)(B).
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    With regard to applying the ``substantially similar'' standard, the 
Commission notes that under section 18(b)(1)(B) of the Securities Act 
the Commission has the authority to compare the listing standards of a 
petitioner with those of either the NYSE, Amex, or Nasdaq/NMS. The 
Commission initially has attempted to compare a petitioner's listing 
standards for all securities with only one of these markets. 
13 If a petitioner's listing standards in a particular 
category did not meet the standards of that market, the Commission 
compared the petitioner's standards to the other two markets. 
Additionally, the Commission has interpreted the substantially similar 
standard to require listing standards at least as comprehensive as 
those of the markets named in section 18(b)(1)(A). If a petitioner's 
standards were higher than such markets, then the Commission still 
determined that the petitioner's standards were substantially similar 
to these markets. Finally, the Commission has reviewed the listing 
standards for each type of security in making the substantially similar 
determination. Differences in language or approach of the listing 
standards for a particular security did not necessarily lead to a 
determination that the listing standards of a petitioner are not 
substantially similar to those of the named exchange.
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    \13\ For purposes of comparing the listing standards of the CBOE 
and Tier I of the PCX, the Commission used the listing standards 
applicable to securities listed on the Amex.
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    The Commission has reviewed the current Tier I listing standards of 
the PCX, and the current listing standards of the CBOE and, for the 
reasons discussed below, preliminarily believes that these listing 
standards are substantially similar to those of the NYSE, the Amex or 
Nasdaq/NMS. As noted above, the Commission preliminarily believes that 
while most of the Tier I listing standards of the CHX and Phlx meet the 
substantially similar requirement, they differ from those of the NYSE, 
Amex, or Nasdaq/NMS in several important respects. Accordingly, the 
proposed Rule will designate securities listed on Tier I of the PCX and 
securities listed on the CBOE as covered securities under section 18 of 
the Securities Act.

A. Tier I of the Pacific Exchange, Inc.

1. Common Stock \14\
    With limited exceptions, the PCX's quantitative 15 
initial listing requirements for common stock listing on Tier I of the 
Exchange are identical to, or slightly higher than, those of the 
Amex.16 Amex and PCX have virtually identical requirements 
relating to net worth and pre-tax income of listed companies, public 
distribution of shares 17 and market value of shares 
publicly held. There are only two material differences between the 
initial listing standards of the PCX and Amex which render the PCX's 
standards slightly more restrictive than those of the Amex. First, the 
PCX requires that issuers applying for listed status have a net income 
of $400,000 in the last fiscal year, or two of the last three fiscal 
years, while the Amex does not have a net

[[Page 32707]]

income requirement. Second, the Amex has a minimum market price 
requirement of $3 per share 18 for a reasonable period of 
time prior to the filing of a listing application. In contrast, the PCX 
requires a closing bid price of $5 at the time of filing of the listing 
application and for a majority of business days during the six month 
period prior to the filing of the application.
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    \14\ See generally, PCX Rules 3.2(c), 3.3, and 3.5(b) and Amex 
Sections 102, 120, 121, 122, 123 and 1003.
    \15\ As used herein, the term ``quantitative'' refers to listing 
standards bearing on the financial status of the issuer as well as 
the depth and liquidity of the issue.
    \16\ The Commission notes that it has used the listing standards 
applicable to securities listed on the Amex for the purposes of this 
comparison. See supra, note 13 and accompanying text. In addition, 
in the PCX Petition, the Exchange noted that the PCX's Tier I 
listing standards in most respects were ``substantially identical'' 
to those of the Amex.
    \17\ The term ``public distribution of shares'' refers to the 
issuer's ``float,'' or number of shares that are outstanding and 
available for public trading.
    \18\ Section 102(b) of the Amex rules permits the Exchange to 
consider listing an issue selling for less than $3 per share in 
certain instances.
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    PCX's qualitative 19 initial listing standards for 
common stock listed on Tier I of the exchange are either identical or 
substantially similar to those of the Amex. Amex and PCX have virtually 
identical requirements relating to the number of independent directors 
required, conflicts of interest, composition of the audit committee 
(both exchanges require the audit committee to be comprised of a 
majority of independent directors), and annual meetings. Moreover, the 
rules of both the PCX and the Amex have minimum voting rights standards 
that are substantially similar to each other and protect the voting 
rights of common shareholders.
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    \19\ The term ``qualitative'' as used here refers to listing 
standards that do not bear on the financial status of the issuer, 
and includes corporate governance standards.
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    Although the PCX requirements relating to quorum, corporate action 
requiring shareholder approval, publication and content of annual 
reports, and publication of interim reports differ slightly from those 
of the Amex, the Commission preliminarily believes that, taken as a 
whole, they are substantially similar to those of the Amex. Both 
exchanges have provisions regarding shareholder approval for certain 
corporate activities. Although Amex rules differ slightly from PCX's by 
specifically requiring a majority of shareholder votes cast (either in 
person or by proxy) to approve certain corporate action, whereas PCX 
rules do not provide for a minimum required number of 
votes,20 both exchanges have substantially similar 
requirements regarding which particular corporate actions require a 
shareholder vote.21
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    \20\ We note that although PCX rules do not specifically dictate 
the number of votes required, this would presumably be governed by 
the laws of the state of incorporation.
    \21\ See, e.g., PCX Rule 3.3(d) and Amex section 711 regarding 
applications to list additional shares reserved for options granted 
to officers, directors, or key employees of the company.
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    The Commission preliminarily believes that the maintenance 
requirements for common stock listed on Tier I of the PCX, while not 
identical, are substantially similar to those of the Amex. With respect 
to public distribution of shares, both the PCX and Amex require the 
same number of shares publicly held, but the PCX requires 400 (or 300 
round lot) public stockholders, while the Amex requires 300 public 
stockholders. Both the Amex and PCX have delisting criteria which are 
triggered by poor financial conditions and/or operating results of the 
issuer.22 In addition, the Amex may delist an equity issue 
(i) if the issuer has sustained losses from continuing operations or 
net losses for its five most recent fiscal years; or (ii) has sustained 
losses that are so severe that the ability of the issuer to continue 
operations or meet its obligations as they come due is 
questionable.23 The PCX has no provisions like (i) and (ii) 
above, although the PCX requires a minimum bid price for continued 
listing of $3 per share. The minimum bid price requirement, while not a 
complete substitute for the Amex criteria, can help to remove issuers 
in continuing financial distress or near bankruptcy. Based on the 
above, the Commission preliminarily believes that the differences in 
the maintenance criteria for common stock listed on the Amex and on 
Tier I of the PCX are not critical and that, taken as a whole, the 
criteria are substantially similar. 
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    \22\ See generally, PCX Rule 3.5(b)(3)(i),(ii) and Amex Section 
1003(a)(i),(ii).
    \23\ The Amex applies these delisting standards generally to all 
securities listed on the Exchange, and provides additional separate 
maintenance standards for certain specific securities.
    \24\ See generally, PCX Rules 3.2(d), 3.3(h) and 3.5(c) and Amex 
Sections 103, 124 and 1003.
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2. Preferred Stock \24\
    With one exception, the PCX's quantitative initial listing 
requirements for preferred stock on Tier I of the Exchange are 
identical to those of the Amex. Amex and PCX have identical 
requirements relating to net worth and pre-tax income of listed 
companies, share price, public distribution of shares, and market value 
of shares publicly held. As noted above in the discussion of listing 
requirements for common stock, the PCX has an issuer net income 
requirement of $400,000 in the last fiscal year, or two of the last 
three fiscal years, while the Amex has no corresponding requirement.
    The PCX and Amex have substantially similar provisions for voting 
rights for holders of preferred shares and redemption of preferred 
stock. With respect to conversion rights, if the preferred shares are 
convertible into common shares, the common shares must meet the PCX's 
Tier I listing requirements. In addition, the PCX will not list a 
convertible issue where the issuer can change the conversion price 
other than as allowed in the issuer's articles of incorporation. The 
Amex will not list a convertible issue where the issuer has discretion 
to reduce the conversion price unless the issuer establishes a minimum 
10 day period within which such price reduction will be in 
effect.25
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    \25\ It is important to emphasize that such transactions 
constitute tender offers subject to Rule 13e-4 of the Exchange Act. 
See, e.g., letter regarding Heritage Entertainment, Inc. (Apr. 10, 
1987). Accordingly, such an offer must remain open for a minimum of 
20 business days. See Exchange Act Rules 13e-4(f)(1)(i) and 14e-
1(a). 17 CFR 240.13e-4(f)(1)(i) and 17 CFR 240.14e-1(a).
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    The Commission preliminarily believes that the maintenance 
standards for preferred stock listed on PCX's Tier I, while not 
identical, are substantially similar to those of the Amex. In addition, 
where the maintenance standards of the PCX and Amex differ, the PCX's 
standards are, for the most part, more demanding than those of the 
Amex. The PCX requires a preferred issue to maintain a public float of 
at least 100,000 shares with a minimum of 150 public holders and a 
minimum market value of $1,000,000. The Amex requires a preferred issue 
to maintain a public float of at least 50,000 shares with a market 
value of at least $1,000,000. The Amex does not require a minimum 
number of public shareholders. Both Amex and PCX have identical 
maintenance requirements relating to the net worth of the issuer.
    3. Bonds and Debentures \26\
    While the PCX and the Amex take a different approach to regulating 
the listing of debt securities, the Commission believes that the rules 
of both exchanges are designed to ensure that issuers of debt 
securities can meet their debt obligations as they come due, thereby 
protecting investors. Accordingly, the Commission preliminarily 
believes that the PCX's rules relating to the initial and continued 
listing of debt securities on Tier I of the Exchange are substantially 
similar to those of the Amex.
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    \26\ See generally, PCX Rules 3.2(e) and 3.5(d) and Amex 
Sections 104 and 1003.
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    Under Amex rules, the Exchange may list a debt security if any of 
the following conditions are met: (a) The issuer of the debt security 
also has equity securities listed on the Amex or the NYSE; (b) an 
issuer of equity securities listed on the Exchange (or the NYSE) 
directly or indirectly owns a majority interest in, or is under common 
control with, the issuer of the debt security; (c) an issuer of equity

[[Page 32708]]

securities listed on the Amex or NYSE has guaranteed the debt security; 
(d) a nationally recognized securities [sic] rating organization 
(``NRSRO'') 27 has assigned a current rating to the debt 
security that is no lower than an S&P Corporation ``B'' rating or 
equivalent rating by another NRSRO; or (e) if no NRSRO has assigned a 
rating to the issue, an NRSRO has currently assigned: (i) An investment 
grade rating to an immediately senior issue; or (ii) a rating that is 
no lower than an S&P Corporation ``B'' rating, or an equivalent rating 
by another NRSRO, to a pari passu or junior issue. In addition, a debt 
issue listed on the Amex must have an aggregate market value or 
principal amount of $5,000,000. These requirements are designed to 
ensure that the issuer (or guarantor) of a debt security listed on the 
Amex is in reasonably sound financial condition, while also providing 
the Amex with considerable flexibility in determining which debt issues 
qualify for listing on the Exchange.
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    \27\ The acronym ``NRSRO'' generally refers to Nationally 
Recognized Statistical Rating Organization. See, e.g. Regulation S-
B. 17 CFR 228.10(e).
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    While the PCX rules do not provide the Exchange with quite as much 
flexibility in determining which debt issues qualify for listing, the 
PCX's rules also focus on the financial condition of the issuer. PCX 
rules require an issuer of a debt security to have net worth, pre-tax 
income, and net income equal to those of issuers of common stock listed 
on Tier I, as well as to appear to have the ability to meet interest 
and principal payments as they come due. In addition, where the common 
stock of the issuer of a debt security is listed on the PCX, Amex or 
NYSE, PCX rules require the debt issue to have an aggregate market 
value and principal amount of at least $5,000,000, and at least 100 
public beneficial holders. Where the common stock of the issuer of the 
debt security is not listed on the PCX, Amex or NYSE, PCX rules require 
the debt issue to have an aggregate market value and principal amount 
of at least $20,000,000, and at least 100 public holders.
    PCX rules relating to redemption for debt securities are virtually 
identical to those of the Amex. With respect to conversion rights, if 
the debt security is convertible into common shares, the common shares 
must meet the PCX's Tier I listing requirements.28
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    \28\ Changes in conversion prices under PCX and Amex listing 
standards are handled the same as noted for preferred securities. 
See Section III, A(2), supra.
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    The Commission preliminarily believes that the maintenance 
requirements for debt securities listed on PCX Tier I, while not 
identical, are substantially similar to those of the Amex. The PCX and 
Amex have identical requirements relating to the continuing net worth 
of the issuer.29 Further, with regard to earnings, both 
exchanges may delist a debt issue if the issuer has sustained losses 
from continuing operations or net losses for its five most recent 
fiscal years. The Amex also may delist a debt security if the issuer 
has sustained losses that are so severe that the ability of the issuer 
to continue operations or meet its obligations as they come due is 
questionable. Finally, the PCX requires that debt securities maintain 
an aggregate market value and principal amount of at least $1,000,000 
each and have 100 public beneficial holders. The Amex requires the 
aggregate market value or the principal amount of the bonds publicly 
held to be $400,000, but has no minimum number of public holders.
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    \29\ See generally, PCX Rule 3.5(c)(3)(i),(ii) and Amex Section 
1003(a)(i), (ii).
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4. Options 30
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    \30\ See generally, PCX Rules 3.6, 3.7 and 7.3 and Amex Sections 
915, 916 and 901(C).
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    With respect to standardized options, the Commission preliminarily 
believes that the listing standards of the PCX are substantially 
similar to those of the Amex. The Commission notes that no exchange has 
standards establishing qualifications for issuers of exchange-traded 
options since all such options are issued by the Options Clearing 
Corporation (``OCC'').31 All of the exchanges that trade 
standardized options have minimum standards for the selection of 
underlying stocks and other underlying interest, and these standards 
are essentially the same on all exchanges that trade a particular type 
of option.32
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    \31\ All options issued by the OCC have the equal protection of 
OCC's backup system of clearing member obligations, margin deposits 
and clearing funds. See PCX, CBOE and Phlx Petitions, supra note 3.
    \32\ See PCX and Phlx Petitions, supra note 3.
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    With respect to initial selection criteria for underlying 
securities, both the Amex and the PCX have virtually identical 
quantitative requirements relating to number of shares publicly held, 
number of public shareholders, market price of the underlying security 
and trading volume. Both exchanges require that an underlying security 
be listed on a national securities exchange or designated a National 
Market System (``NMS'') 33 security. Under PCX rules, where 
a security has been listed on a national securities exchange or 
designated as a NMS security for less than one year preceding 
application for approval as an underlying security the Exchange may 
consider, in calculating the trading volume of the security, over-the-
counter volume as reflected in the Nasdaq system. The Amex has no 
corresponding provision.
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    \33\ See Exchange Act Rule 11Aa2-1. 17 CFR 240.11Aa2-1.
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    The Commission preliminarily believes that the maintenance 
requirements for underlying securities for options listed on PCX Tier 
I, while not identical, are substantially similar to those of the Amex. 
Amex and PCX have virtually identical requirements for the underlying 
security relating to number of shares publicly held, number of public 
shareholders, trading volume and market price per share.
    With regard to broad-based index options, the Commission notes that 
the listing of a class of index options on a new underlying index must 
be filed with the Commission as a proposed rule change under section 
19(b) of the Exchange Act. Both the PCX and the Amex, however, have 
substantially similar requirements for all stock index options listed 
on each respective exchange. More specifically, the PCX's position and 
exercise limits, requirements regarding dissemination of index values, 
margin requirements, and settlement terms are substantially similar to 
those of the Amex.
    Both the PCX and the Amex trade narrow-based index options which 
have separate initial listing and maintenance requirements. Both 
exchanges have rules allowing certain narrow-based index options to be 
listed using an expedited procedure which involves submitting to the 
Commission a proposed rule change to list the option under section 
19(b)(3)(A) of the Exchange Act. The Commission preliminarily believes 
that, while the requirements for the expedited listing of narrow-based 
index options differ slightly, they are substantially similar. The PCX 
and the Amex have virtually identical eligibility criteria for index 
components relating to market value, trading volume, calculation of the 
index, reporting the underlying index value and inclusion of non-U.S. 
component securities. Finally, the Commission preliminarily believes 
that the maintenance requirements for underlying securities comprising 
narrow-based index options listed on PCX Tier I, while not identical, 
are substantially similar to those of the Amex.

[[Page 32709]]

5. Warrants 34
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    \34\ See generally, PCX Rules 3.2(f) and 3.5(e), and Amex 
Sections 105 and 1001--1006.
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    The Commission preliminarily believes that the PCX's Tier I listing 
requirements for warrants, while not identical, are substantially 
similar to those of the Amex. First, both exchanges require that the 
security underlying the warrant be listed on the respective exchange 
(or the NYSE under Amex rules). Second, while the public distribution 
requirements are different,35 the Commission preliminarily 
believes that both exchanges' rules are sufficient to ensure the depth 
and liquidity of the issue. There are other notable differences between 
the listing standards of the PCX and the Amex. First, where the stock 
underlying a warrant has split 3 for 2 or greater, the Amex requires a 
corresponding split in the warrant. Second, the PCX and Amex have 
different rules relating to warrant exercise price provisions. In 
particular, the PCX will not list a warrant where the issuer may change 
the exercise price other than in accordance with the issuer's warrant 
agreement. The Amex will not list a warrant where the issuer has 
discretion to reduce the exercise price, unless the company establishes 
a minimum period of 10 days within which such price reduction will be 
in effect.36 Taken as a whole, however, the Commission 
preliminarily believes that the differences between the two exchanges 
are not significant for purposes of the substantially similar finding.
---------------------------------------------------------------------------

    \35\ PCX rules require a public distribution of 500,000 warrants 
to no less than 250 public holders, while the Amex requires either 
500,000 warrants held by at least 800 public holders or 1,000,000 
warrants held by at least 400 public holders.
    \36\ See supra note 25.
---------------------------------------------------------------------------

    With regard to maintenance standards, the Amex does not have a 
separate requirement for warrants, but will apply its general 
suspension and delisting policies in sections 1001 through 1006 of the 
Amex Company Guide. The PCX requires that the underlying security 
subject to the warrant continue to meet maintenance standards for that 
security. Taken as a whole, however, the Commission preliminarily 
believes that the listing standards for warrants on Tier I of the PCX 
are substantially similar to those of the Amex.
6. Currency and Index Warrants 37
---------------------------------------------------------------------------

    \37\ See generally, PCX Rule 8.3(a), and Amex section 106.
---------------------------------------------------------------------------

    The PCX and the Amex have nearly identical initial listing 
requirements regarding currency and index warrants. More specifically, 
standards relating to issuer net worth and net income, public 
distribution, term of the warrants, settlement value, automatic 
exercise provisions, inclusion of foreign country securities, and 
changes in the number of warrants outstanding are identical. Neither 
the PCX nor the Amex have separate maintenance requirements relating to 
currency and index warrants.38
---------------------------------------------------------------------------

    \38\ Unlike the PCX, Amex rules allow for the listing and 
trading of warrants on narrow-based, or industry group, indexes. 
Pursuant to Section 106(i) of the Amex Company Guide, narrow-based 
index warrants listed on the Amex must continuously be comprised of 
nine or more stocks. The PCX currently does not have such a 
maintenance requirement because the PCX is not currently approved 
for narrow-based index warrant trading. See Securities Exchange Act 
Release No. 37007 (March 21, 1996) at note 8.
---------------------------------------------------------------------------

7. Other Securities 39
---------------------------------------------------------------------------

    \39\ See generally, PCX Rule 3.2(j) and Amex Section 107.
---------------------------------------------------------------------------

    The Commission preliminarily believes that the listing standards 
for other securities on the PCX are substantially similar to those of 
the Amex.40 Both exchanges have provisions whereby they will 
consider listing any security not otherwise covered by the exchange's 
listing standards, provided the issue is otherwise suited for auction 
market trading. The Amex and the PCX have virtually identical 
requirements relating to the issuer's total assets, net 
worth,41 the number of trading units initially sold to the 
public and number of public holders of the security. The PCX requires 
that the security have a principal amount or aggregate market value of 
$20,000,000 while the Amex requirement is $4,000,000. The Commission 
preliminarily believes that, taken as a whole, the PCX's listing 
standards for other securities are substantially similar to those of 
the Amex.
---------------------------------------------------------------------------

    \40\ The Commission notes that the both the PCX's and Amex's 
rules provide for the trading of limited partnership interests, and 
that these listing standards are substantively identical.
    \41\ See Securities Exchange Act Release No. 30087 (Dec. 17, 
1991) (Order approving PCX's listing standards for other 
securities).
---------------------------------------------------------------------------

8. Contingent Value Rights (``CVRs'') 42
---------------------------------------------------------------------------

    \42\ See generally, PCX Rule 3.2(g) and 3.5(f) and NYSE Listed 
Company Manual Paragraph 703.18.
---------------------------------------------------------------------------

    The Amex does not have separate listing standards for CVRs, 
therefore, the Commission has compared the PCX's listing standards for 
CVRs with the NYSE's CVR listing standards. Both the PCX and the NYSE 
require that the issuer of the CVR meet the net worth and earnings 
requirements for common stock listed on the exchange, 43 and 
have $100,000,000 in assets. The PCX requires a public distribution of 
600,000 units to 1,200 holders while the NYSE requires a public 
distribution of 1,000,000 units to 400 holders. Additionally, the PCX 
requires that CVRs have a minimum aggregate market value of 
$18,000,000, while the NYSE requirement is $4,000,000. Finally, both 
exchanges require that CVR's have a minimum maturity of one year. The 
Commission preliminarily believes that, while different in some 
respects, the CVR listing standards of both exchanges will serve to 
ensure adequate depth and liquidity of the issue, and that the 
exchange's requirements are substantially similar.
---------------------------------------------------------------------------

    \43\ In the case of PCX, the issuer must meet the Tier I Listing 
Requirements for common stock.
---------------------------------------------------------------------------

    The maintenance requirements for CVRs of both the PCX and NYSE are 
substantially similar, requiring the CVR to maintain an aggregate 
market value of at least $1,000,000. In addition, under the rules of 
both exchanges a CVR may be delisted if the related equity security to 
which the cash payment at maturity is tied is delisted.
9. Equity Linked Notes (``ELNs'') 44
---------------------------------------------------------------------------

    \44\ See generally, PCX Rule 3.2(j)(3) and Amex section 107(B).
---------------------------------------------------------------------------

    The PCX and the Amex have virtually identical listing standards for 
ELNs. Both Exchanges have requirements relating to the term of the 
ELNs, net worth of the issuer, total original issue price, public 
distribution, market value of the ELNs, and the market capitalization 
and trading volume of the underlying ``linked'' security. While the 
exchanges' rules differ slightly with regard to requirements for non-
U.S. issuers, the Commission preliminarily believes that, as a whole, 
the PCX's listing standards for ELN's are substantially similar to 
those of the Amex.
10. Unit Investment Trusts (``UITs'') 45
---------------------------------------------------------------------------

    \45\ See generally, PCX Rule 3.2(h) and 3.5(g) and Amex Section 
118(B), 1002 and 1006.
---------------------------------------------------------------------------

    The PCX and the Amex have virtually identical listing requirements 
relating to UITs. Specifically, the net worth, number of interests 
distributed, number of holders, minimum term, and voting requirements 
of the two exchanges are nearly identical. Further, PCX rules requiring 
that the trustee of a UIT be a trust company or banking institution 
with substantial capital and surplus, as well as conflict of interest 
provisions, while not identical, are substantially similar to the 
requirements of the Amex. Finally, the PCX and Amex have substantially 
similar criterion for

[[Page 32710]]

determining whether or not to delist a UIT.46
---------------------------------------------------------------------------

    \46\ The Commission notes that the PCX maintenance requirements 
for UITs are more demanding because the PCX requires UITs to 
maintain an aggregate market value of $1,000,000, while the Amex has 
no corresponding provision. Additionally, the UIT will be delisted 
on the PCX if the security to which the cash payment of the UIT at 
term is tied is delisted. See PCX Rule 3.5(g).
---------------------------------------------------------------------------

B. Chicago Board Options Exchange 47
---------------------------------------------------------------------------

    \47\ Although the CBOE's business has been almost exclusively 
devoted to options, their rules give them the authority to list and 
trade non-option securities as well. See Chapter XXXI of CBOE Rules.
---------------------------------------------------------------------------

1. Common Stock 48
---------------------------------------------------------------------------

    \48\ See generally, CBOE Rules 31.5(A), 31.9, 31.10, 31.11, 
31.12 and 31.94(C)(a),(b)(i) and Amex Sections 102, 120, 121, 122, 
123 and 1003(a),(b)(i).
---------------------------------------------------------------------------

    With limited exceptions, the CBOE's quantitative initial listing 
requirements applicable to common stock listed on the Exchange are 
identical to those of the Amex.49 Amex and CBOE have 
virtually identical requirements relating to net worth 50 
and pre-tax income of listed companies, public distribution of shares 
51 and market value of shares publicly held. There are only 
two notable differences between the initial listing standards of the 
CBOE and Amex, but these render the CBOE's standards slightly more 
restrictive than those of the Amex. First, the CBOE requires that 
issuers applying for listed status have a net income of $400,000, while 
the Amex does not have a net income requirement. Second, the Amex has a 
minimum market price requirement of $3 per share 52 for a 
reasonable period of time prior to the filing of a listing application. 
In contrast, the CBOE requires a stock price of $5 per share at the 
time of filing.
---------------------------------------------------------------------------

    \49\ The Commission notes that it has used the listing standards 
applicable to securities listed on the Amex for the purposes of this 
comparison. See supra, note 13 and accompanying text. In addition, 
in the CBOE Petition the Exchange states that the Commission, in 
approving the CBOE's listing standards for non-option securities, 
noted that the new listing standards were, with slight variations, 
the same as the existing listing standards on the American Stock 
Exchange. See Securities Exchange Act Release No. 28556 (Oct. 19, 
1990), 55 FR 43233 (Oct. 26, 1990).
    \50\ CBOE defines net worth as total assets less total 
liabilities, while the Amex uses stockholder's equity to measure the 
financial size of a company applying for listed status.
    \51\ The term ``public distribution of shares'' refers to the 
issuer's ``float,'' or number of shares that are outstanding and 
available for public trading.
    \52\ Section 102(b) of the Amex rules permit the Exchange to 
consider listing an issue selling for less than $3 per share in 
certain instances. The $3,000,000 aggregate market value requirement 
may not be waived by the Exchange.
---------------------------------------------------------------------------

    CBOE's qualitative initial listing standards for common stock 
listed on the exchange, where they are not identical, are substantially 
similar to those of the Amex. Amex and CBOE have virtually identical 
requirements relating to the number of independent directors required, 
conflicts of interest, composition of the audit committee, 
53 corporate action requiring shareholder approval, 
54 publication and content of annual reports and annual 
meetings. Moreover, the rules of both the CBOE and the Amex have 
minimum voting rights standards that are substantially similar to each 
other and protect the voting rights of common shareholders. Although 
the CBOE requirements relating to quorum, and publication of interim 
reports differ slightly from those of the Amex, the Commission 
preliminarily believes that, taken as a whole, the qualitative initial 
listing standards of the CBOE are substantially similar to those of the 
Amex.
---------------------------------------------------------------------------

    \53\ Amex rules require that the audit committee be comprised of 
a majority of independent directors, while CBOE rules require that 
the audit committee be composed entirely of independent directors. 
See Securities Exchange Act Release No. 28556 (Oct. 19, 1990), 55 FR 
43233 (Oct. 26, 1990).
    \54\ See, e.g., CBOE Rules 31.79, 31.80 and 31.81 and Amex 
Section 711 regarding applications to list additional shares 
reserved for options granted to officers, directors, or key 
employees of the company.
---------------------------------------------------------------------------

    The Commission preliminarily believes that the maintenance 
requirements for common stock listed on the CBOE are virtually 
identical to those of the Amex. The Amex and CBOE have virtually 
identical requirements relating to the required number of shares 
outstanding, number of public shareholders and aggregate market value 
of shares publicly held. Moreover, the Amex and CBOE have virtually 
identical requirements relating to the financial condition of the 
issuer. Finally, while the CBOE has a minimum bid price of $3 per share 
and the Amex does not have a minimum bid price for continued listing, 
the Amex will consider delisting an issue that is selling for ``a 
substantial period of time'' at a low price per share.
2. Preferred Stock 55
---------------------------------------------------------------------------

    \55\ See generally, CBOE Rules 31.5(B), 31.13 and 
31.94(C)(b)(ii) and Amex sections 103, 124 and 1003(b)(ii).
---------------------------------------------------------------------------

    With one exception, the CBOE's quantitative initial listing 
requirements for preferred stock on the Exchange are identical to those 
of the Amex. Amex and CBOE have identical requirements relating to net 
worth and pre-tax income of listed companies, share price, public 
distribution of shares, and market value of shares publicly held. As 
noted above in the discussion of listing requirements for common stock, 
the CBOE has an issuer net income requirement of $400,000, while the 
Amex has no corresponding requirement.
    The CBOE and Amex have substantially similar provisions for voting 
rights for holders of preferred shares.56 Both Exchanges 
require a majority vote for the creation of a class of preferred stock 
equal in preference to the issue to be listed. The CBOE does not have 
any rule relating to conversion or redemption rights. The Amex will not 
list a convertible issue where the issuer has discretion to reduce the 
conversion price unless the issuer establishes a minimum 10 day period 
within which such price reduction will be in effect.57 The 
Commission preliminarily does not find these differences critical, and 
believes that the CBOE's listing standards for preferred securities are 
substantially similar to those of the Amex.
---------------------------------------------------------------------------

    \56\ The only substantive difference is that where the Amex 
requires a two-thirds vote of the preferred shareholders to create a 
class of preferred stock more senior to the issue to be listed, the 
CBOE requires a majority vote.
    \57\ See supra note 25.
---------------------------------------------------------------------------

    The Commission preliminarily believes that the maintenance 
standards for preferred stock listed on the CBOE are virtually 
identical to those of the Amex. CBOE and the Amex have virtually 
identical requirements relating to public float and minimum market 
value.
3. Bonds and Debentures 58
---------------------------------------------------------------------------

    \58\ See generally, CBOE Rules 31.5(C), 31.14 and 
31.94(C)(B)(iii) and Amex sections 104, 125 and 1003(b)(iii).
---------------------------------------------------------------------------

    The CBOE and the Amex have virtually identical listing requirements 
for bonds and debentures. Both Exchanges require the issue to have a 
market value or principal amount of at least $5,000,000 and have 
virtually identical requirements relating to conversion and redemption 
provisions. In addition, both Exchanges review the financial status of 
the issuer or bond rating of the issue to be listed.
    The Commission preliminarily believes that the maintenance 
requirements for debt securities listed on CBOE, are virtually 
identical to those of the Amex. The CBOE and Amex have identical 
requirements relating to the continuing net worth of the issuer.
4. Options 59
---------------------------------------------------------------------------

    \59\ See generally, CBOE Rules 5.3, 5.4 and 24.2 and Amex 
sections 915, 916 and 901(C).
---------------------------------------------------------------------------

    With respect to standardized options, the Commission preliminarily 
believes that the listing standards of the CBOE are substantially 
similar to those of the Amex. The Commission notes that no exchange has 
standards establishing qualifications for issuers of exchange-

[[Page 32711]]

traded options since all such options are issued by the Options 
Clearing Corporation (``OCC'').60 All of the exchanges that 
trade standardized options have minimum standards for the selection of 
underlying stocks and other underlying interest, and these standards 
are essentially the same on all exchanges that trade a particular type 
of option.61
---------------------------------------------------------------------------

    \60\ All options issued by the OCC have the equal protection of 
OCC's backup system of clearing member obligations, margin deposits 
and clearing funds. See PCX, CBOE and Phlx Petitions, supra note 3.
    \61\ See PCX and Phlx Petitions, supra note 3.
---------------------------------------------------------------------------

    With respect to initial selection criteria for underlying 
securities, both the Amex and the CBOE have virtually identical 
quantitative requirements relating to number of shares publicly held, 
number of public shareholders, market price of the underlying security 
and trading volume. Both Exchanges require that an underlying security 
be listed on a national securities exchange or designated as an NMS 
security.
    The Commission preliminarily believes that the maintenance 
requirements for underlying securities for options listed on CBOE, 
while not identical to the Amex standards, are substantially similar to 
those of the Amex. Amex and CBOE have virtually identical requirements 
for the underlying security relating to number of shares publicly held, 
number of public shareholders, trading volume and market price per 
share. In addition, Amex and CBOE have virtually identical rules 
relating to delisting options.
    With regard to broad-based index options, the Commission notes that 
the listing of a class of index options on a new underlying index must 
be filed with the Commission as a proposed rule change under section 
19(b) of the Exchange Act. Both the CBOE and the Amex, however, have 
substantially similar requirements for all stock index options listed 
on each respective exchange. More specifically, the CBOE's position and 
exercise limits, requirements regarding dissemination of index values, 
margin requirements, and settlement terms are substantially similar to 
those of the Amex.
    Both the CBOE and the Amex trade narrow-based index options which 
have separate initial listing and maintenance requirements. Both 
exchanges have rules allowing certain narrow-based index options to be 
listed using an expedited procedure which involves submitting to the 
Commission a proposed rule change to list the option under section 
19(b)(3)(A) of the Exchange Act. The Commission preliminary believes 
that, while the requirements for the expedited listing of narrow-based 
index options differ slightly, they are substantially similar. The Amex 
and the CBOE have virtually identical eligibility criteria for index 
components relating to market value, trading volume, calculation of the 
index, reporting the underlying index value and inclusion of non-U.S. 
component securities. Finally, the Commission preliminarily believes 
that the maintenance requirements for underlying securities comprising 
narrow-based index options listed on CBOE, while not identical, are 
substantially similar to those of the Amex.
5. Warrants 62
---------------------------------------------------------------------------

    \62\ See generally, CBOE Rule 31.5(D) and Amex section 105.
---------------------------------------------------------------------------

    The Commission preliminarily believes that the CBOE's listing 
requirements for warrants, while not identical, are substantially 
similar to those of the Amex. Both exchanges require that the security 
underlying the warrant be listed on the respective 
exchange.63 In addition, both CBOE and Amex have public 
distribution requirements identical to those for common stock. There 
are some differences, however, in each Exchange's listing standards for 
warrants. First, the Amex will not list a warrant where the issuer has 
discretion to reduce the exercise price unless the company establishes 
a minimum period of 10 days within which such price reduction will be 
in effect.64 Second, under Amex rules, redeemable issues 
must be redeemable pro rata or by lot. Third, the Amex requires at 
least 20 days notice if the issuer is going to extend the expiration 
date of the warrants. Finally, where the stock underlying a warrant has 
split 3 for 2 or greater, the Amex requires a corresponding split in 
the warrant. While the CBOE has no corresponding rules relating to 
exercise price, redemption, extension of expiration date or stock 
splits, the Commission preliminarily believes that, taken as a whole, 
the CBOE's listing standards for warrants are substantially similar to 
those of the Amex.
---------------------------------------------------------------------------

    \63\ CBOE rules require that the security underlying the warrant 
be listed on the CBOE, Amex or NYSE, while Amex rules require the 
security underlying the warrant to be listed on the Amex or the 
NYSE.
    \64\ See supra note 25.
---------------------------------------------------------------------------

6. Currency and Index Warrants 65
---------------------------------------------------------------------------

    \65\ See generally, CBOE Rule 31.5(e), and Amex Section 106.
---------------------------------------------------------------------------

    The CBOE and the Amex have nearly identical initial listing 
requirements regarding currency and index warrants. More specifically, 
standards relating to issuer tangible net worth and net income, public 
distribution, term of the warrants, settlement value, automatic 
exercise provisions, inclusion of foreign country securities, position 
and exercise limits and changes in the number of warrants outstanding 
are identical.
    Both the Amex and the CBOE provide a maintenance standard for stock 
index warrants in that they require the index to be comprised of at 
least nine stocks at all times. In addition, Amex rules allow for the 
listing of warrants on stock index industry groups pursuant to section 
19(b)(3)(A) of the Exchange Act, if the Exchange follows the procedures 
and criteria set forth in Commentary .02 to Amex Rule 901C 
(``Designation of Stock Index Options'').
7. Other Securities 66
---------------------------------------------------------------------------

    \66\ See generally, CBOE Rule 31.5(F), and Amex Section 107.
---------------------------------------------------------------------------

    The Commission preliminarily believes that the listing standards 
for other securities on the CBOE are substantially similar to those of 
the Amex.67 Both exchanges have provisions whereby they will 
consider listing any security not otherwise covered by the exchange's 
listing standards, provided the issue is otherwise suited for auction 
market trading. The Amex and the CBOE have virtually identical 
requirements relating to the issuer's total assets, stockholder's 
equity, the number of trading units initially sold and principal amount 
or aggregate market value of the issue. With respect to public 
distribution, both CBOE and Amex require a minimum of 400 public 
shareholders.68
---------------------------------------------------------------------------

    \67\ The Commission notes that the rules of both the CBOE and 
Amex allow for the trading of other miscellaneous securities. Both 
exchanges have substantially similar listing standards for the 
trading of limited partnership interests, paired securities, 
subscription rights, and foreign issuer securities.
    \68\ Where the security is traded in $1,000 increments, the CBOE 
requires a minimum of 100 shareholders while the Amex does not 
require a minimum number of shareholders.
---------------------------------------------------------------------------

8. Contingent Value Rights (``CVRs'') 69
---------------------------------------------------------------------------

    \69\ See generally, CBOE Rule 31.5(H), and NYSE Listed Company 
Manual Paragraph 703.18.
---------------------------------------------------------------------------

    As noted above, the Amex does not have separate listing standards 
for CVRs, therefore, the Commission has compared the CBOE's listing 
standards for CVRs with the NYSE's CVR listing standards. Both the CBOE 
and the NYSE require that the issuer of the CVR meet the net worth and 
earnings requirements for common stock listed on the exchange, and have 
$100,000,000 in assets. Moreover, both the CBOE and the

[[Page 32712]]

NYSE require a public distribution of 1,000,000 units to 400 holders, 
and a minimum aggregate market value of $4,000,000. Finally, both 
exchanges require that CVR's have a minimum maturity of one year. 
Accordingly, other than the greater size and earnings criteria 
applicable to all issuers listing on the NYSE, the CVR listing 
standards of the CBOE and NYSE are substantively identical.
    While the CBOE has no separate maintenance requirements for CVRs, 
the CBOE will apply its general suspension and delisting policies set 
forth in CBOE Rule 31.94 to CVRs.70 The NYSE will consider 
delisting a CVR if the market value of the publicly-held CVRs is less 
than $1,000,000 or when the related equity security to which the cash 
payment at maturity is tied is delisted.
---------------------------------------------------------------------------

    \70\ More specifically, CBOE Rule 31.94(C)(a) requires issuers 
of all securities listed on the Exchange, including CVRs, to meet 
certain minimum net worth and earnings standards.
---------------------------------------------------------------------------

9. Equity Linked Notes (``ELNs'') 71
---------------------------------------------------------------------------

    \71\ See generally, CBOE Rules 31.5(I), and Amex Section 107(B).
---------------------------------------------------------------------------

    The CBOE and the Amex have virtually identical listing standards 
for ELNs. Both Exchanges have requirements relating to the term of the 
ELNs, net worth of the issuer, total original issue price, public 
distribution, market value of the ELNs, and the market capitalization 
and trading volume of the underlying ``linked'' security. Moreover, 
both exchanges have substantially similar requirements for ELNs linked 
to non-U.S. stocks. Accordingly, the Commission preliminarily believes 
that the CBOE's listing standards for ELN's are substantially similar 
to those of the Amex.
10. Unit Investment Trusts (UITs) 72
---------------------------------------------------------------------------

    \72\ See generally CBOE Rules 31.5(G) and 31.94(E), and Amex 
Sections 118(B), 1002 and 1006.
---------------------------------------------------------------------------

    The CBOE and the Amex have virtually identical listing requirements 
relating to UITs. Specifically, the net worth, number of interests 
distributed, number of holders, minimum term, and voting requirements 
of the two exchanges are nearly identical. Further, CBOE rules 
requiring that the trustee of a UIT be a trust company or banking 
institution with substantial capital and surplus, as well as CBOE's 
conflict of interest provisions, while not identical, are substantially 
similar to the requirements of the Amex. Finally, the CBOE and Amex 
have virtually identical maintenance standards for UITs.

C. Philadelphia Stock Exchange and Chicago Stock Exchange

    The Commission also has reviewed the Tier I listing standards of 
the Phlx 73 and CHX,74 and preliminarily believes 
that, while most of their Tier I listing standards are substantially 
similar to those of the NYSE, Amex, or Nasdaq/NMS, they differ in 
several important respects. Unlike the NYSE, Amex, or Nasdaq/NMS, the 
Phlx does not have a maintenance standard for bonds and debentures 
listed on Tier I of the Exchange. Moreover, with respect to currency 
and index warrants, the Phlx has no public distribution, aggregate 
market value, nor term to maturity requirements. Additionally, issuers 
of ``other securities'' listed on Tier I of the Phlx are required to 
have pre-tax income of only $100,000 in three of the four last fiscal 
years, versus the Amex requirement 75 that issuers have 
$750,000 in pre-tax income in their last fiscal year, or in two of 
their last three fiscal years.76 With respect to the CHX, 
common stock listed on Tier I of the Exchange is not subject to any 
minimum share price requirement for continued listing.
---------------------------------------------------------------------------

    \73\ See generally, Phlx Rules 803, 804, 810, 812, 837, 839, 
842, 843, 846, 847-851.
    \74\ See generally, CHX Article XXVIII, Rule 8-17, 19, 20.
    \75\ Amex has the lowest requirement of the NYSE, Amex or 
Nasdaq/NMS with regard to pre-tax income for issuers of other 
securities.
    \76\ Section 107 of the Amex Company Guide generally requires 
issuers of other securities to meet the earnings requirements for 
issuers of common stock.
---------------------------------------------------------------------------

    The Commission preliminarily believes that these deficiencies are 
material and prevent the Commission from making a determination that 
the Tier I listing standards of the CHX and Phlx are substantially 
similar to those of the NYSE, Amex, or Nasdaq/NMS. Should the Phlx and 
CHX decide to revise their Tier I listing standards to conform them to 
the NYSE, Amex, or Nasdaq/NMS prior to adoption of the proposed Rule, 
however, the Commission likely would include securities listed on these 
markets in Rule 146(b). Alternatively, should the Phlx and CHX revise 
their Tier I structure to include within Tier I only those securities 
with listing standards substantially similar to those of the NYSE, 
Amex, or Nasdaq/NMS, the Commission would consider including securities 
listed on the revised Tier I of Phlx and CHX in the Rule.

D. Conclusion

    For the reasons discussed above, the Commission preliminarily 
believes that the listing standards applicable to PCX's Tier I 
securities, and the listing standards of the CBOE are substantially 
similar to those of the Amex. Accordingly, securities listed on these 
Exchanges should be deemed covered securities and entitled to an 
exemption from state blue sky provisions as set forth in section 18(a) 
of the Securities Act. With respect to the Tier I listing standards of 
the CHX and Phlx, the Commission preliminarily believes that while most 
of these standards are substantially similar to the listing standards 
of the NYSE, Amex, or Nasdaq/NMS, they differ in several important 
areas.77 Should the CHX and Phlx decide to revise their 
listing standards in these areas to more closely conform to those of 
the NYSE, Amex, or Nasdaq/NMS before adoption of the proposed rule, the 
Commission will likely include securities listed on these markets 
within the Rule.
---------------------------------------------------------------------------

    \77\ See Section III, C, supra.
---------------------------------------------------------------------------

    The Commission preliminarily believes that the proposed rule offers 
potential benefits for investors. If adopted, the proposed rule will 
facilitate listings on qualifying exchanges, or tiers or segments 
thereof, which should increase competition and enhance the overall 
liquidity of the U.S. securities markets. The Commission does not 
anticipate that the proposed rule would result in any costs for U.S. 
investors or others. The Commission preliminarily believes that the 
proposed rule would serve to reduce the cost of raising capital because 
it would streamline the registration process for issuers listing on the 
PCX Tier I or the CBOE. At the same time, the proposed rule does not 
undercut the state securities review of offerings because the listing 
standards of the PCX Tier I and the CBOE that would qualify for an 
exemption from state securities registration are substantially similar 
to other markets that are already exempt from state registration. Thus, 
the Commission has considered the proposed rule's impact on efficiency, 
competition and capital formation and preliminarily believes that it 
would promote these three objectives.78 Finally, the 
proposed rule would impose no recordkeeping or compliance burdens, and 
merely would provide a limited purpose exemption under the federal 
securities laws.
---------------------------------------------------------------------------

    \78\ 15 U.S.C. 77b(b).
---------------------------------------------------------------------------

IV. Request for Comments

    The Commission seeks comments on the desirability of adopting Rule 
146(b). Comments should address whether the listing standards of the 
CBOE and the listing standards applicable to PCX's

[[Page 32713]]

Tier I are substantially similar to those of the Amex, and whether the 
Tier I listing standards of the CHX and Phlx are substantially similar 
to those of the NYSE, Amex, or Nasdaq/NMS. Additionally, comments 
should address whether the Commission should consider a different 
approach in designating securities listed on certain national 
securities exchanges as ``covered securities.'' Commentators also may 
wish to discuss whether there are any legal or policy reasons for 
distinguishing between the NYSE, Amex, and Nasdaq/NMS and the regional 
exchanges for purposes of the Rule. The Commission also solicits 
comments on the costs and benefits of the proposed rule. Specifically, 
the Commission requests commentators to address whether the proposed 
amendment would generate the anticipated benefits, or impose any costs 
on U.S. investors or others. For purposes of the Small Business 
Regulatory Enforcement Fairness Act of 1996, the Commission is also 
requesting information regarding the potential impact of the proposed 
rule on the economy on an annual basis. Commentators should provide 
empirical data to support their views. Finally, commentators should 
consider the proposed rule's effect on competition, efficiency and 
capital formation.

V. Administrative Requirements

    Pursuant to section 605(b) of the Regulatory Flexibility Act, 5 
U.S.C. section 605(b), the Chairman of the Commission has certified 
that the proposed rule would not, if adopted, have a significant 
economic impact on a substantial number of small entities. This 
certification, including the reasons therefor, is attached to this 
release as Appendix A. The Paperwork Reduction Act does not apply 
because the proposed amendments do not impose recordkeeping or 
information collection requirements, or other collections of 
information which require the approval of the Office of Management and 
Budget under 44 U.S.C. 3501, et. seq.

VI. Statutory Basis

    The adoption of Rule 146(b) is being proposed pursuant to 15 U.S.C. 
77r et seq., particularly section 18 of the Securities Act unless 
otherwise noted.

Text of the Proposed Rule

List of Subjects in 17 CFR Part 230

    Securities.

    For the reasons set forth in the preamble, Title 17, Chapter II of 
the Code of Federal Regulations is proposed to be amended as follows:

PART 230--GENERAL RULES AND REGULATIONS, SECURITIES ACT OF 1933

    1. The authority citation for Part 230 continues to read, in part, 
as follows:

    Authority: 15 U.S.C. 77b, 77f, 77g, 77h, 77j, 77s, 77sss, 78c, 
78d, 78l, 78m, 78n, 78o, 78w, 78ll(d), 78t, 80a-8, 80a-29, 80a-30, 
and 80a-37, unless otherwise noted.
* * * * *
    2. Section 230.146 is amended by revising the section heading, 
redesignating the introductory text as paragraph (a), redesignating 
paragraphs (a) and (b) as paragraphs (a)(1) and (a)(2) and adding 
paragraph (b) to read as follows:


Sec. 230.146  Rules under Section 18 of the Act.

* * * * *
    (b) Covered securities for purposes of section 18. (1) For purposes 
of Section 18(b) of the Act (15 U.S.C. 77r), the Commission finds that 
the following national securities exchanges, or segments or tiers 
thereof, have listing standards that are substantially similar to those 
of the New York Stock Exchange (``NYSE''), the American Stock Exchange 
(``Amex''), or the National Market System of the Nasdaq Stock Market 
(``Nasdaq/NMS''), and that securities listed on such exchanges shall be 
deemed covered securities:
    (i) Tier I of the Pacific Exchange, Incorporated; and
    (ii) The Chicago Board Options Exchange, Incorporated.
    (2) The designation of securities in paragraphs (b)(1)(i) and (ii) 
of this section as covered securities is conditioned on such exchanges' 
listing standards (or segments or tiers thereof) continuing to be 
substantially similar to those of the NYSE, Amex, or Nasdaq/NMS.

    Dated: June 10, 1997.

    By the Commission.
Margaret H. McFarland,
Deputy Secretary.

    Note: Appendix A to the Preamble will not appear in the Code of 
Federal Regulations.

Appendix A--Regulatory Flexibility Act Certification

    I, Arthur Levitt, Jr., Chairman of the Securities and Exchange 
Commission, hereby certify, pursuant to 5 U.S.C. 605(b), that 
proposed Rule 146(b) (``Rule'') under the Securities Act of 1933 
(``Securities Act''), which will designate securities listed on 
certain national securities exchanges, or tiers or segments thereof, 
as covered securities under Section 18 of the Securities Act, and 
therefore provide them with an exemption from state registration 
requirements, will not have a significant economic impact on a 
substantial number of small entities for the following reasons. 
Under the Securities Act, a small entity is defined as ``an issuer 
whose total assets on the last day of its most recent fiscal year 
were $5,000,000 or less.'' Issuers of this size generally will not 
qualify for listing on the national securities exchanges, or tiers 
or segments thereof, designated in proposed Rule 146(b). More 
specifically, both the Chicago Board Options Exchange, Incorporated 
and Tier I of the Pacific Exchange, Incorporated require issuers of 
common stock to have net worth of at least $4,000,000. I do not 
believe that there are a substantial number of small entities which 
have total assets less than $5,000,000, yet a net worth of at least 
$4,000,000. For example, none of the issuers of common stock listed 
exclusively on Tier I of the Pacific Exchange have total assets of 
$5,000,000 or less. In addition, the proposed rule imposes no 
record-keeping or compliance burden, but merely exempts certain 
qualifying securities from state law registration requirements.

    Dated: June 9, 1997
Arthur Levitt, Jr.,
Chairman.

[FR Doc. 97-15769 Filed 6-16-97; 8:45 am]
BILLING CODE 8010-01-M