[Federal Register Volume 66, Number 222 (Friday, November 16, 2001)]
[Notices]
[Pages 57764-57767]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-28720]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-45038; File No., SR-PCX-2001-43]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change and Amendment No. 1 Thereto by 
the Pacific Exchange, Inc. Relating to the Exchange's Delisting 
Criteria

November 6, 2001.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 \2\ thereunder, notice is hereby given 
that on October 29, 2001, the Pacific Exchange, Inc. (``Exchange'' or 
``PCX'') filed with the Securities and Exchange Commission (``SEC'' or 
``Commission'') the proposed rule change as described in Items, I, II, 
and III below, which Items have been prepared by the PCX. On November 
6, 2001, the PCX submitted Amendment No. 1 to the proposed rule 
change.\3\ The Commission is publishing this notice to solicit comments 
on the proposed rule change, as amended, from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See letter from Mai S. Shiver, Senior Attorney, PCX, to 
Nancy Sanow, Assistant Director, Division of Market Regulation 
(``Division''), Commission, dated November 5, 2001 (``Amendment No. 
1''). In Amendment No. 1, the PCX clarified in Commentary .01 and 
Commentary .02 to PCX rule 3.7 that it will look to the primary 
market in which the underlying security trades in determining 
whether the underlying security satisfies the price requirements for 
adding additional series of options contracts. The PCX also made a 
technical correction to subparagraph 4 of Commentary .01 to PCX rule 
3.7. The PCX also changed the word ``Thursday'' to the phrase ``the 
last trading day'' in subparagraph 3 of Commentary .02 to PCX rule 
3.7. The PCX also withdrew the proposed change of the word ``shall'' 
to ``will'' in paragraph (a) and commentary .01 to PCX rule 3.7. 
Lastly, the PCX added subparagraph 5 of Commentary .01 to PCX rule 
3.7 to add that an underlying security will not be deemed to meet 
the requirements for continued approval for Exchange options 
transactions when the issue, in the case of underlying security that 
is principally traded on a national securities exchange, is delisted 
from trading on that exchange and fails to meet certain criteria, or 
the issue, in the case of an underlying security that is principally 
traded through the facilities of a national securities association, 
is no longer designated as a National Market System security.
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The PCX proposes to amend PCX Rule 3.7, which governs the 
withdrawal of approval for securities underlying options traded on the 
Exchange (``Delisting Criteria Rule'' or ``PCX rule 3.7'').
    Below is the text of the proposed rule change. Proposed new 
language is italicized; deletions are in brackets.
* * * * *

para. 3597  Withdrawal of Approval of Underlying Securities

    Rule 3.7(a) The approval of an uderlying security for exchange 
transactions shall be withdrawn by the Exchange if the underlying 
security fails to meet the then current requirements necessary to 
maintain such approval or for any reason the Exchange deems necessary. 
In the event the Exchange withdraws approval, no additional series of 
option contracts of the class covering that underlying security shall 
be opened; provided, however, that where exceptional circumstances have 
cause the noncompliance of an underlying security with subsection (B) 
or (C) [or (D) of section 1 of Commentary .01 or section 2 or 3 of 
Commentary .01 hereunder, the Exchange may, in the interest of 
maintaining a fair and orderly market or for the protection of 
investors, open additional series of option contracts of the class 
covering the subject underlying security.
    (b) No change.
    Commentary:
    .01  In connection with rule 3.7(a), the Exchange has adopted 
certain requirements which must be met in order for an underlying 
security to maintain approval for exchange transactions. Therefore the 
Exchange shall take the action prescribed by rule 3.7(a) for the 
withdrawal of an underlying security when any one of the following 
occurs:
    1. The Exchange ordinarily relying upon information publicly 
available at the Securities and Exchange Commission determines that:
    (A) The issuer has failed to make timely reports as required by any 
applicable sections of the Securities Exchange Act of 1934, and such 
failure has not been corrected within 30 days after the date the report 
was due to be filed;
    (B) There is a failure to have a minimum off 6,300,000 shares of 
the underlying security held by persons other than those who are 
subject to the requirement of section 16(a) of the Securities Exchange 
Act of 1934, as amended; or

[[Page 57765]]

    (C) There is a failure to have a minimum of 1,600 holders of the 
underlying security.
    2. The volume of trading in the underlying security is less than 
1,800,000 shares in the preceding twelve months.
    3. The market price per share of an underlying security closes 
below $3.00 on the previous trading day [$5.00], as measured by the 
highest closing price recorded in the primary [any] market on which the 
underlying security trades. [, on majority of the business days of any 
six-month period.]
    4. If an underlying security is approved for opotions listing and 
trading under the provisions of Rule 3.6, Commentary .05, the trading 
volume and price history of the Original Security (as therein defined) 
prior to but not after the commencement of trading in the Restructure 
Security (as therein defined), including ``when issued'', may be taken 
into account in determining whether the trading volume and market price 
requirements of subsections 2 and 3 of this Commentary .01 [as well as 
the trading volume and market price requirements of Rule 3.7, 
Commentary .04, subsections 3 and 4] are satisfied, provided, however, 
that in the case of a Restructure Security approved for options listing 
and trading under subsection (d) of Commentary .05 to Rule 3.6, such 
trading volume requirements must be satisfied based on the trading 
volume history of the Restructure Security.
    5. The issue, in the case of an underlying security that is 
principally traded on a national securities exchange, is delisted from 
trading on that exchange and neither meets NMS criteria nor is traded 
through the facilities of a national securities association, or the 
issue, in the case of an underlying security that is principally traded 
through the facilities of a national securities association, is no 
longer designed as a NMS security.
    .02  In connection with Rule 3.7(a) and Commentary .01.3 thereto, 
the Exchange shall direct that no additional series of options 
contracts of the class covering an underlying security be opened at any 
time when the market price per share of the subject underlying security 
is less than $3.00. [$5.00 as measured by the highest closing price 
recorded in any market on which the underlying security trades.] 
Subject to Paragraph 3 of Commentary .01 above, the market price per 
share of the underlying security will be determined as follows:
    1. for intra-day series additions, the last reported trade in the 
primary market in which the security is traded at the time the Exchange 
determines to add these additional series intra-day;
    2. for next-day series additions, the closing price reported in the 
primary market in which the security is traded on the last trading day 
preceding the day on which such series additions are authorized; and
    3. for expiration series additions, the closing price reported in 
the primary market in which the security is traded on the last trading 
day preceding expiration Friday.
    .03  No change.
    [.04  Notwithstanding paragraph 3 to Commentary .01 and Commentary 
.02, the Exchange may continue to open for trading additional series of 
option contracts of a class covering an underlying security, provided:
    1. The aggregate market value of the underlying security equals or 
exceeds $50 million;
    2. Customer open interest (reflected on a two-sided basis) equals 
or exceeds 4,000 contracts for all expiration months;
    3. Trading volume in the underlying security (in all markets in 
which the underlying security is trading) has been at least 2,400,000 
shares in the preceding twelve months; and
    4. The market price per share of the underlying security closed at 
$3 or above on a majority of the business days during the preceding six 
calendar months, as measured by the highest closing price reported in 
any market in which the underlying security traded, and further 
provided the market price per share of the underlying security is at 
least $3 at the time such additional series are authorized for trading. 
During the next consecutive six calendar month period, to satisfy this 
commentary .04, the price of the underlying security as referenced in 
this Commentary .04(4) shall be $4.]
    [.05-.12].04-.11 No change.
* * * * *

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 PCX included statements 
concerning the purpose of and basis for the proposed rule change, as 
amended, and discussed any comments its received on the proposed rule 
change. The text of these statements may be examined at the places 
specified in Item IV below. The PCX 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
    PCX rule 3.7 specifies maintenance requirements for securities 
underlying options classes traded on the Exchange and restricts the 
Exchange from adding new series of an options class in the event that 
the underlying security fails to meet certain criteria. The Delisting 
Criteria Rule currently provides that the Exchange may not list 
additional series if, inter alia, the underlying security has not 
closed above $5 for the majority of business days during the preceding 
six calendar months as measured by the highest closing price reported 
in the primary market in which the underlying security is traded (``$5 
guideline''). However, exceptions to the $5 guideline allow the 
Exchange to add series even if the underlying security does not satisfy 
the $5 guideline. Pursuant to the exceptions, the Exchange may add 
additional series where the underlying security has closed above $3 for 
the majority of business days during the preceding six calendar months 
and the underlying price is at least $3 at the time the new series are 
authorized (``$3 exception''). Once the Exchange relies upon the $3 
exception in adding new series, during the next consecutive six-month 
period, it must increase the $3 exception to $4 in order to authorize 
new series pursuant to the exception.
    The Exchange asserts the application of the Delisting Criteria Rule 
creates unnecessary confusion and administrative burdens on the 
Exchange. The Exchange believes that the Delisting Criteria Rule also 
results in disputes between the exchanges, as inconsistent application 
of the requirements competitively disadvantage an exchange, depending 
upon its interpretation. Further, the Exchange does not believe it is 
necessary or desirable to restrict the ability of investors to trade 
options on securities trading between $3 or $5. Accordingly, the 
Exchange proposes to amend PCX rule 3.7 to simplify the requirements 
and to clarify the circumstances under which the Exchange may add new 
options series. The proposal is based on, and is consistent with, a 
similar rule change by the Chicago Board Options Exchange (``CBOE Rule 
5.4'') that the Commission recently approved.\4\
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    \4\ See Securities Exchange Act Release No. 44964 (October 19, 
2001), 66 FR 54559 (October 29, 2001) (order approving File No. SR-
CBOE-2001-29).

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[[Page 57766]]

    The proposed requirement specifies the following: (1) New series 
may not be added for the next day unless, in addition to satisfying the 
other requirements of the rule, the underlying security closed at or 
above $3 on the previous trading day in the primary market in which the 
underlying security is traded; (2) new series may not be added intra-
day unless, in addition to satisfying the other requirements of the 
rule, the last reported trade in the underlying security at the time 
the Exchange determines to add the new series is at or above $3 on the 
primary market in which the underlying security is traded; \5\ and (3) 
new series may not be added following an options expiration unless, in 
addition to satisfying the other requirements of the rule, the closing 
price of the underlying security on the last trading day preceding 
expiration Friday is at or above $3 on the primary market in which the 
underlying security is traded.\6\ Except as otherwise provided in this 
proposal, the Exchange does not propose to change other requirements 
currently contained in Rule 3.7 (such as the number of share that must 
be held by non-insiders, number of holders and trading volume).
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    \5\ The Exchange will use the closing price per share in the 
primary market in which the underlying security trades and the price 
per share of the last reported trade in the primary market in which 
the underlying security trades at the time the Exchange determines 
to ad the series intra-day. See Amendment No. 1, supra note 3.
    \6\ The Exchange confirms that it will look to the primary 
market in which the underlying security trades for all three types 
of new series additions. Telephone conversation between Mai Shiver, 
Senior Attorney, PCX, and Frank N. Genco, Division of Market 
Regulation, Commission, on November 6, 2001.
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    The Exchange believes that this proposal removes unnecessarily 
complex requirements while it reasonably assures that securities 
underlying options have indicia of liquidity needed to maintain fair 
and orderly markets. In determining to list new options series under 
the new less restrictive standard, the Exchange believes that its own 
systems and those of the Options Price Reporting Authority are capable 
of handling increased capacity requirements.
2. Statutory Basis
    The Exchange believes the proposed rule change, as amended, is 
consistent with section 6 of the Act \7\ in general, with section 
6(b)(5) of the Act \8\ specially, in that it is designed to facilitate 
transactions in securities, to promote just and equitable principles of 
trade, and to protect investors and the public interest.
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    \7\ 15 U.S.C. 78f.
    \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, as 
amended, will 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 has not received any written comments from members or 
other interested parties.

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

    Because the foregoing proposed rule change, as amended: (1) Does 
not significantly affect the protection of investors or the public 
interest; (2) does not impose any significant burden on competition; 
and (3) does not become operative for 30 days after the date of filing, 
or such shorter time as the Commission may designate if consistent with 
the protection of investors and the public interest; provided that the 
self-regulatory organization has given the Commission written notice of 
its intent to file the proposed rule change, along with a brief 
description and text of the proposed rule change, at least five 
business days prior to the date of filing of the proposed rule change, 
or such shorter time as designated by the Commission, the proposed rule 
change, as amended, has become effective pursuant to section 
19(b)(3)(A) of the Act \9\ and rule 19b-4(f)(6) \10\ thereunder.
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    \9\ 15 U.S.C. 78s(b)(3)(A).
    \10\ 17 CFR 240.19b-4(f)(6).
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    A proposed rule change filed under rule 19b-4(f)(6) normally 
requires that the self-regulatory organization give the Commission 
written notice of its intent to file the proposed rule change, along 
with a brief description and text of the proposed rule change, at least 
five business days prior to the date of filing of the proposed rule 
change; however, rule 19b-4(f)(6)(iii) permits the Commission to 
designate a shorter time period. The PCX seeks to have the Commission 
waive the five-day notice. The Commission finds good cause to waive the 
five-day notice because the Commission acknowledges that this proposal 
is substantially similar and based on another exchange's rule recently 
noticed and approved by the Commission.\11\
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    \11\ See supra note 5.
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    A proposed rule change filed under rule 19b-4(f)(6) normally does 
not become operative prior to 30 days after the date of filing. 
However, rule 19b-4(f)(6)(iii) permits the Commission to designate a 
shorter time if such action is consistent with the protection of 
investors and the public interest. The PCX seeks to have the proposed 
rule change, as amended, become operative immediately. The Commission, 
consistent with the protection of investors and the public interest, 
has determined to make the proposed rule change, as amended, operative 
as of November 6, 2001.\12\ The Commission notes that the proposed rule 
change, as amended, is substantially similar in all material respects 
to the rule of another exchange that the Commission has already noticed 
for public comment and approved \13\ and, therefore, the proposed rule 
change raises no new issues of regulatory concern. At any time within 
60 days of the filing of the proposed rule change, as amended, 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.\14\
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    \12\ For purposes only of accelerating the operative date of 
this proposal, the Commission has considered the proposed rule's 
impact on efficiency, competition, and capital formation. 15 U.S.C. 
78c(f).
    \13\ See supra note 5.
    \14\ See Section 19(b)(3)(C) of the Act, 15 U.S.C. 78(b)(3)(C).
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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, as amended, 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 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. Copies of such 
filing will also be available for inspection and copying at the 
principal office of the PCX. All

[[Page 57767]]

submissions should refer to File No. SR-PCX-2001-43 and should be 
submitted by December 7, 2001.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\15\
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    \15\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-28720 Filed 11-15-01; 8:45 am]
BILLING CODE 8010-01-M