[Federal Register Volume 63, Number 247 (Thursday, December 24, 1998)]
[Notices]
[Pages 71321-71322]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-34130]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-40795; File No. SR-AMEX-98-43]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the American Stock Exchange, Inc. Relating to Exercise Price 
Intervals and Exercise Prices for FLEX Equity Call Options

December 15, 1998.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on November 2, 1998, the 
American Stock Exchange, Inc. (``Amex'' or ``Exchange'') filed with the 
Securities and Exchange Commission (``Commission''), the proposed rule 
change as described in Items I, II, and III below, which Items have 
been prepared by the Exchange. The Commission is publishing this notice 
to solicit comments on the proposed rule change from interested 
persons.
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    \1\ 15 U.S.C. 78s(b)(1).
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The Amex proposes to remove paragraph (c)(3) from Exchange Rule 
903G which limits exercise price intervals and exercise prices for FLEX 
Equity call options to those that apply to Non-FLEX Equity call 
options.\2\
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    \2\ Paragraph (c)(3) of Rule 903G was approved by the Commission 
in 1996. Securities Exchange Act Release No. 37726 (September 25, 
1996), 61 FR 51474 (October 2, 1996).
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II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the Amex included statements 
concerning the purpose of, and basis for, the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The Amex has prepared summaries, set forth in sections 
A, B, and C below, of the most significant aspects of such statements.

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

1. Purpose
    On June 19, 1996, the Exchange received approval to list and trade 
flexible options on individual stocks known as FLEX Equity options.\3\ 
Although the exercise prices and price intervals of FLEX Equity call 
options were among the terms that could be specified, the Exchange 
enacted paragraph (c)(3) of Exchange Rule 903G to limit the exercise 
price intervals and exercise prices for FLEX Equity call options to 
those that apply to Non-FLEX Equity call options due to a concern that 
the flexible exercise price feature could result in an available call 
option that would not be eligible to be a qualified covered call 
(``QCC'') under section 1092(c)(4) of the Internal Revenue Code 
(``IRC'') and thus would jeopardize a modest tax benefit enjoyed by 
writers of standardized Non-FLEX Equity call options.\4\ The Exchange 
notes that currently, under section 1092(c)(4)(B) of the IRC, certain 
covered short positions in call options--or QCCs--qualify for 
advantageous tax treatment if the options are not ``deep in the 
money.'' Under certain conditions, a ``deep in the money'' call option 
is defined to mean an option having an exercise price lower than the 
highest available exercise price that is less than the applicable stock 
price.\5\
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    \3\ Securities Exchange Act Release No. 37336 (June 19, 1996), 
61 FR 33558 (June 27, 1996).
    \4\ It was unclear, for example, whether the existence of a 
series of FLEX Equity call options with a strike price of 58, when 
the price of the underlying stock is 59, would jeopardize a Non-FLEX 
Equity call option's (with a strike price of 55) characterization as 
a QCC.
    \5\ For instance, using standardized options and a $5 price 
interval, if stock XYZ closed yesterday at $54 and opened at that 
price today, the standardized exercise price of $50 for a call 
option would not be ``deep in the money'' because $50 would be the 
highest available exercise price that is less than the applicable 
stock price. A standardized exercise price of $45 would be ``deep in 
the money'' and would not be a QCC.
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    The Internal Revenue Service (``IRS'') has reviewed this issue and 
has proposed rulemaking that would not require that strike prices 
established by equity options with flexible terms be taken into account 
in determining

[[Page 71322]]

whether standard term equity options are too ``deep in the money'' to 
receive QCC treatment.\6\ The public comment period for the proposed 
rulemaking ended on September 23, 1998, and the Exchange expects the 
IRS to adopt final regulations on this topic some time after that date. 
In light of the rule proposal by the IRS, the Exchange now proposes to 
delete paragraph (c)(3) from Exchange Rule 903G. The Exchange intends 
for the deletion of paragraph (c)(3) to coincide with the effective 
date of final regulations by the IRS. The effect of the IRS proposed 
rulemaking and the Exchange's proposed withdrawal of the limitation on 
the exercise price of FLEX Equity call options would be that certain 
taxpayers, particularly institutional and other large investors, could 
engage in transactions in FLEX Equity call options with a wider range 
of exercise prices (as was originally intended) without affecting the 
applicability of Section 1092 of the IRC for QCC options involving 
equity options with standard terms.
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    \6\ Department of the Treasury, Internal Revenue Service REG-
104641-97, 63 FR 34616 (June 25, 1998).
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2. Basis
    The proposed rule change is consistent with Section 6(b) of the 
Act,\7\ in general, and furthers the objectives of section 6(b)(5),\8\ 
in particular, in that it is designed to prevent fraudulent and 
manipulative acts and practices, to promote just and equitable 
principles of trade, to foster cooperation and coordination with 
persons engaged in facilitating transactions in securities, and to 
remove impediments to and perfect the mechanism of a free and open 
market and a national market system by eliminating a restriction on 
FLEX Equity call options that has hampered their usefulness as a risk 
managing mechanism.
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    \7\ 15 U.S.C. 78f(b).
    \8\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange 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

    No written comments were solicited or received with respect to the 
proposed rule change.

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

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the Amex 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, including whether the proposed rule 
change is consistent with the Act. Persons making written submissions 
should file six copies thereof with the Secretary, Securities and 
Exchange Commission, 450 Fifth Street, NW, Washington, DC 20549. Copies 
of the submission, all subsequent amendments, all written statements 
with respect to the proposed rule change that are filed with the 
Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for inspection and copying in the 
Commission's Public Reference Room, in Washington, DC. Copies of such 
filing will also be available for inspection and copying at the 
principal office of the Amex. All submissions should refer to File No. 
SR-AMEX-98-43 and should be submitted by January 14, 1999.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\9\
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    \9\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-34130 Filed 12-23-98; 8:45 am]
BILLING CODE 8010-01-M