[Federal Register Volume 64, Number 235 (Wednesday, December 8, 1999)]
[Notices]
[Pages 68708-68709]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-31784]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-42187; File No. SR-CBOE-99-58]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by the Chicago Board Options 
Exchange, Incorporated To Adopt a Stated Policy that Clarifies the 
Maintenance Rules Governing the Replacement of Component Stocks in the 
Dow Jones High Yield Select Ten Index

November 30, 1999.
    Pursuant to Section 19(b)(1) of the Securities Exchange of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on October 28, 1999, the Chicago Board Options Exchange, Incorporated 
(``Exchange'' or ``CBOE'') 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)
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The Exchange seeks to adopt a stated policy that clarifies the 
maintenance rules governing the replacement of component stocks in the 
Dow Jones High Yield Select Ten Index (``Index''). The Exchange 
currently lists and trades option on the Index.
    The text of the proposed rule change is available at the Office of 
the Secretary, the Exchange, and at the Commission.

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 Exchange 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 Exchange 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
    In December 1997, the Commission approved a CBOE proposal to list 
and trade options on the Index (``Index Options Filing'').\3\ The Index 
is comprised of the ten highest yielding stocks in the Dow Jones 
Industrial Average (``DJIA''), as determined at the end of each 
calendar year.
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    \3\ See Securities Exchange Act Release No. 39453 (Dec. 16, 
1997), 62 FR 67101 (Dec. 23, 1997).
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    As part of the Index Options Filing, the Exchange represented that 
if it became necessary to remove a component from the Index the 
component would be replaced by the highest yielding DJIA component 
stock not already included in the Index. In making this representation, 
the Exchange intended to specify the action it would take if the shares 
of an Index component company became unavailable for trading due to a 
corporate action (e.g., takeover or merger) or bankruptcy. However, the 
Exchange did not address situations where a company is removed from the 
DJIA for discretionary reasons, but its outstanding shares nevertheless 
remain available for trading.
    The recent changes to the DJIA components, which resulted in the 
removal of four Index components from the DJIA, highlighted an 
ambiguity in CBOE's existing rules that govern the replacement of 
component stocks in the Index. Specifically, if an Index component is 
removed from the DJIA during the calendar year for discretionary 
reasons, must that Index component be immediately replaced, or may the 
component remain in the Index until the Index is reconstituted at the 
end of the calendar year? The Exchange believes that this proposed rule 
change will help clarify the maintenance

[[Page 68709]]

standards governing the composition of the Index, and is necessary 
because the Index Options Filing did not explain what action the 
Exchange might take in the event that discretionary changes were made 
to the DJIA.
    The ``Dogs of the Dow'' investment strategy, upon which the Index 
is based, generally requires that the portfolio of ten stocks selected 
from DJIA at the beginning of a calendar year be held for the entire 
year, even if certain of those ten stocks are removed from the DJIA 
before the end of the year. The Exchange represented that mutual funds 
employing the Dogs of the Dow investment strategy indicated that they 
will leave their ten stock portfolios unchanged through the end of 
1999. Moreover, market participants have informed the Exchange that 
they expect the composition of the Index to remain unchanged despite 
the recent DJIA component changes.
    In the Index Options Filing, the Exchange stated that the Index 
would be reconstituted annually using the ten highest yielding stocks 
in the DJIA, as determined at the end of each calendar year. From the 
time it first listed options on the Index, the Exchange did not intend 
to revise the Index before year end if discretionary changes were made 
to the DJIA components. Therefore, the Exchange seeks to adopt the 
stated policy specifying that Index components removed from the DJIA 
during the calendar year for discretionary reasons will not be replaced 
in the Index until the Index is reconstituted at year end.
    The Exchange believes that it is in the best interest of investors 
for the Exchange to act consistently with the investment community at-
large in applying the Dogs of the Dow investment strategy to determine 
the Index portfolio. Thus, the Exchange did not revise the composition 
of the Index when the DJIA component changes took effect on November 1, 
1999. The four DJIA components that were replaced (Chevron, Goodyear 
Tire & Rubber, Sears Roebuck, and Union Carbide) will remain in the 
Index until the Index is reconstituted after the end of 1999.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b)(5) of the Act \4\ in that it promotes just and 
equitable principles of trade, and removes impediments to and perfects 
the mechanisms of a free and open market. The Exchange further believes 
that clarification of the maintenance standards governing the Index 
will help provide for fair and orderly maintenance of the Index.\5\
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    \4\ 15 U.S.C. 78f(b)(4).
    \5\ In reviewing this proposal, the Commission has considered 
the proposal's impact on efficiency, competition, and capital 
formation. 15 U.S.C. 78c(f).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange believes that the proposed rule change will not impose 
any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants or Others

    The Exchange did not solicit or receive written comments with 
respect to the proposed rule change.

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

    Because the foregoing proposed rule change constitutes a stated 
policy, practice, or interpretation with respect to the meaning, 
administration, or enforcement of an existing rule of the Exchange, it 
has become effective upon filing pursuant to Section 19(b)(3)(A) of the 
Act 6 and Rule 19b-4(f)(1) thereunder.7 At any 
time within 60 days of the filing of the proposed rule change, the 
Commission may summarily abrogate such rule change if it appears to the 
Commission that such action is necessary or appropriate in the public 
interest, for the protection of investors, or otherwise in furtherance 
of the purposes of the Act.
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    \6\ 15 U.S.C. 78s(b)(3)(A).
    \7\ 17 CFR 240.19b-4(f)(1).
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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 20549-0609. 
Copies of the submissions, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any persons, 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 Section, Fifth Street, NW, Washington, DC 
20549. Copies of such filing will also be available for inspection and 
copying at the principal office of the Exchange. All submissions should 
refer to File No. SR-CBOE-99-58 and should be submitted by December 29, 
1999.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.8
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    \8\ 17 CFR 200.30-3(a)(12).
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Jonathan G. Katz,
Secretary.
[FR Doc. 99-31784 Filed 12-7-99; 8:45 am]
BILLING CODE 8010-01-M