[Federal Register Volume 68, Number 34 (Thursday, February 20, 2003)]
[Notices]
[Pages 8319-8322]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-4047]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-47352; File No. SR-PCX-2003-06]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by the Pacific Exchange, Inc. To 
Amend the Price Criteria for Securities That Underlie Options Traded on 
the Exchange

February 11, 2003.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'' or ``Exchange Act''),\1\ and Rule 19b-4

[[Page 8320]]

thereunder,\2\ notice is hereby given that on February 10, 2003, the 
Pacific Exchange, Inc. (``PCX'' or ``Exchange'') filed with the 
Securities and Exchange Commission (``SEC'' or ``Commission'') the 
proposed rule change as described in Items I and II 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 proposes to amend PCX Rule 3.6 in order to amend its 
pricing requirement for securities that underlie options traded on the 
Exchange (``underlying security''). The text of the proposed rule 
change follows. Additions are in italics. Deleted text is in brackets.

Rules of the Board of Governors

    Rule 3.6. The underlying securities of option contracts traded on 
the Exchange shall be approved for Exchange transactions by the Board 
of Governors following the recommendation of the Options Listing 
Committee. In approving underlying securities, both the Options Listing 
Committee and the Board shall give due regard to, and the Board shall 
promulgate guidelines relative to, the following factors:
    (a)--No change.
    (1)-(3)--No change.
    (4) [Either (i) the market price per share of the underlying 
security will have been at least $7.50 for the majority of business 
days during the three calendar months preceding the date of selection, 
as measured by the lowest closing price recorded in any market in which 
the underlying security traded on each of the subject days;] (A) If the 
underlying security is a ``covered security'' as defined under Section 
18(b)(1)(A) of the Securities Act of 1933, the market price per share 
of the underlying security has been at least $3.00 for the previous 
five consecutive business days preceding the date on which the Exchange 
submits a certificate to the Options Clearing Corporation for listing 
and trading. For purposes of this rule, the market price of such 
underlying security is measured by the closing price reported in the 
primary market in which the underlying security is traded.
    (B) If the underlying security is not a ``covered security'', the 
market price per share of the underlying security has been at least 
$7.50 for the majority of business days during the three calendar 
months preceding the date of selection, as measured by the lowest 
closing price reported in any market in which the underlying security 
traded on each of the subject days, or [(ii)](a) the underlying 
security meets the guidelines for continued listing in Rule 3.7; (b) 
options on such underlying security are traded on at least one other 
registered national securities exchange; and (c) the average daily 
trading volume for such options over the last three (3) calendar months 
preceding the date of selection has been at least 5,000 contracts; and
    (5)--No change.
    (b)-(c)--No change.
    Commentary:
    .01-.04--No change.
    .05 (a)-(c)--No change.
    (d) In the case of a Restructured Transaction that satisfies either 
or both of the conditions of subsections (a)(1) and (a)(2) to this 
Commentary .05 in which shares of a Restructured Security are sold in a 
public offering or pursuant to a rights distribution:
    (i)--No Change.
    (ii) the exchange may certify that the market price of the 
Restructure Security satisfies the requirement of Rule 3.6(a)(4) by 
relying on the market price history of the Original Security prior to 
the ex-date for the Restructuring Transaction in the manner described 
by subsection (a) to this Commentary .05, but only if the Restructure 
Security has traded ``regular way'' on an exchange or automatic 
quotation system for at least five trading days immediately preceding 
the date of selection, and at the close of trading on each trading day 
preceding the date of selection, as well as the opening of trading on 
the date of selection the market price of the Restructure Security was 
at least $7.50; or, if the Restructure Security is a Covered Security 
as defined in paragraph (a)(4) above, the market price of the 
Restructure Security was at least $3.00; and
    (iii)--No change.
    .06- .07--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 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 III 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
    The Exchange proposes to amend its pricing requirement for 
underlying securities. Currently, PCX Rule 3.6 requires that the market 
price per share of any underlying security must be at least $7.50 for 
the majority of business days during the three calendar months 
preceding the date of selection of an option class, as measured by the 
lowest closing price reported in any market in which the underlying 
security traded on each of the subject days.
    The Exchange now proposes to amend Rule 3.6 to provide that, for 
underlying securities that are deemed Covered Securities, as defined 
under section 18(b)(1)(A) of the Securities Act of 1933 (``1933 
Act''),\3\ the closing market price of the underlying security must be 
at least $3.00 per share for the five previous consecutive business 
days prior to the date on which PCX submits an option issue 
certification. For underlying securities that are not Covered 
Securities, the Exchange states that the current $7.50 price per share 
requirement would continue to apply.
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    \3\ Section 18(b)(1)(A) of the 1933 Act provides that, ``(a) 
security is a covered security if such security is--listed, or 
authorized for listing, on the New York Stock Exchange or the 
American Stock Exchange, or listed, or authorized for listing, on 
the National Market System of the Nasdaq Stock Market * * *'' 15 
U.S.C. 77r(b)(1)(A). The term Covered Security, for the operation of 
proposed amendments to Rule 3.6 and Commentary .05 herein, would not 
include those securities defined under Section 18(b)(1)(B) of the 
1933 Act. 15 U.S.C. 77r(b)(1)(B).
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    When the $7.50 price requirement was first implemented, the listed 
options market was in its infancy. Now more than twenty-eight years 
after the PCX first started trading listed options, the Exchange states 
the listed options market is a mature market with sophisticated 
investors. The Exchange does not believe that this particular criteria 
serves to accomplish its presumed intended purpose, i.e., to prevent 
the proliferation of option issues on overlying securities that lack 
liquidity needed to maintain fair and orderly markets. The Exchange 
states that it now seeks to move away from what it believes is a 
paternalistic approach to listing standards and allow the desires of 
its customers and the workings of the marketplace to determine the 
securities on which the Exchange will list options.
    In determining to list any number of new option classes, the 
Exchange must

[[Page 8321]]

ensure that its own systems and those of the Options Price Reporting 
Authority (``OPRA'') have the capacity to handle the potential 
increased capacity requirements. Also, due to recent trends in the 
securities markets, there has been a marked increase in the number of 
underlying securities that, but for the pricing standard, would 
otherwise qualify for options listing on the Exchange. The Exchange 
states that changing the pricing standard to the proposed $3.00 market 
price per share requirement would allow the Exchange to evaluate 
whether to list options on a greater number of classes without 
compromising investor protection.
    The Exchange notes that although this proposal amends the closing 
market price for an underlying security which is deemed a Covered 
Security, as well as the time period for which it must trade at that 
price prior to it being listed on the Exchange, the Exchange will 
continue to maintain its initial listing standards. The Exchange does 
not propose to amend any of the other criteria in PCX Rule 3.6, 
including the requirements that: there must be a minimum of 7,000,000 
shares of the underlying security owned by public investors; there must 
be a minimum of 2,000 holders of the underlying security; and, that 
there must be a trading volume of at least 2,400,000 shares in the 
preceding twelve months. Additionally, by requiring the underlying 
security to be listed on the New York Stock Exchange, Inc., American 
Stock Exchange LLC (``Amex''), or Nasdaq National Market System 
(``Nasdaq''),\4\ the Exchange states that this would ensure that the 
underlying security meets the highest listing standards in the 
securities industry. However, if the underlying security does not 
qualify as a Covered Security, the $7.50 market price per share 
standard still will apply.
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    \4\ See 15 U.S.C. 77r(b)(1)(A).
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    The Exchange believes that the proposed $3.00 market price per 
share standard is also consistent with the guideline price in the PCX 
Delisting Criteria Rule 3.7 which is used to determine whether an 
underlying security previously approved for Exchange options 
transactions no longer meets the requirements for the continuance of 
approval. Commentary .02 to PCX Rule 3.7 sets a $3 market price per 
share as the threshold for determining whether the Exchange may 
continue listing and trading options on an underlying security that was 
previously approved for options trading under PCX Rule 3.6. As long as 
a $3.00 standard is recognized as an acceptable pricing standard for 
options trading, albeit as a standard for continued listing, the 
Exchange believes that the proposed $3.00 should be the threshold 
standard for initial listing standards as well.
    The Exchange also proposes, as a safeguard against price 
manipulation, that the underlying security have a closing market price 
of at least $3.00 per share for the previous five consecutive business 
days preceding the date on which the Exchange submits a certificate to 
the Options Clearing Corporation for listing and trading. The market 
price of such underlying security would be measured by the closing 
price reported in the primary market in which the underlying security 
is traded. The Exchange believes that a ``look back'' period of five 
consecutive days would provide a sufficient measure of protection from 
any attempts to manipulate the market price of the underlying security.
    The Exchange also believes that the proposed rule change would 
encourage the delisting of inactive option classes, particularly those 
classes in which the market price of the underlying security is below 
$7.50. Currently, a Lead Market Maker (``LMM'') on the Exchange to whom 
an option class has been allocated may be reluctant to delist an 
inactive option class if the market price of the underlying security is 
below $7.50 because once delisted, the Exchange's current initial 
listing criteria must be met to re-list the option class, including the 
requirement that the market price per share of the underlying security 
be at least $7.50 for the majority of business days during the 
preceding three months. The Exchange also notes that the Commission 
recently granted PCX approval to list additional series on an option 
class even though the market price of the underlying security is below 
$3, provided that at least one other options exchange trades the series 
to be added, and at the time the other options exchange added that 
series, it met the requirements to add new series, including the $3 
price requirement.\5\
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    \5\ See Securities Exchange Act Release No. 46406 (August 23, 
2002), 67 FR 55446 (August 29, 2002) (approving SR-PCX-2002-51). The 
Exchange represents that these rules are consistent with similar 
rules regarding listing and maintenance standards of the American 
Stock Exchange LLC (``Amex''), International Securities Exchange, 
Inc. (``ISE''), Chicago Board of Options Exchange, Inc. (``CBOE'') 
and the Philadelphia Stock Exchange, Inc. (``Phlx''). See 
Interpretation and Policy .02 to CBOE Rule 5.4; Commentary .02 to 
Amex Rule 916; Commentary .02 to Phlx Rule 1010; and ISE Rule 
503(c).
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    The proposed $3 price standard and the five-day look-back period 
would provide a reliable test for stability and, at the same time, 
presents a more reasonable time period for qualifying the price of an 
underlying security. The Exchange further believes that this proposed 
abbreviated qualification period, in combination with the Exchange's 
existing quarterly delisting program,\6\ would contribute to reducing 
unnecessary quote traffic.
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    \6\ The Exchange states that it maintains an active delisting 
program which requires the quarterly delisting of multiply listed 
option classes that do not trade more than 20 contracts per day on 
the Exchange.
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    Finally, for the purposes of consistency within the PCX Rules, the 
Exchange proposes to amend PCX Rule 3.6 Commentary .05 with respect to 
Restructure Securities. Currently, Commentary .05 provides a method to 
certify that the market price of a Restructure Security satisfies the 
pricing requirement of PCX Rule 3.6 and specifically references the 
$7.50 market price per share. In order to make the Rule consistent with 
the pricing standard change of this proposal, the amended rule would 
reflect that the market price standard for Restructure Securities also 
will be reduced from $7.50 to $3.00 as long as the Restructure Security 
is a Covered Security.
2. Statutory Basis
    The Exchange believes that the current proposal will allow the 
Exchange to provide investors with those options that are most useful 
and demanded by them without sacrificing any investor protection. As 
such, the Exchange believes that 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 will promote just and 
equitable principles of trade; facilitate transactions in securities, 
to remove impediments to and perfect the mechanism of a free and open 
market and a national market system; and protect investors and the 
public interest.
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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.

[[Page 8322]]

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

    The foregoing rule change, as amended, has become effective 
pursuant to section 19(b)(3)(A) of the Act \9\ and subparagraph (f)(6) 
of Rule 19b-4 \10\ thereunder because it does not: (i) Significantly 
affect the protection of investors or the public interest; (ii) impose 
any significant burden on competition; (iii) become operative for 30 
days from the date on which it was filed, or such shorter time as the 
Commission may designate; and the Exchange has given the Commission 
written notice of its intention to file the proposed rule change at 
least five business days prior to filing. At any time within 60 days of 
the filing of such 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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    \9\ 15 U.S.C. 78s(b)(3)(A).
    \10\ 17 CFR 240.19b-4(f)(6).
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    Under Rule 19b-4(f)(6)(iii) of the Act,\11\ the proposal does not 
become operative for 30 days after the date of its filing, or such 
shorter time as the Commission may designate if consistent with the 
protection of investors and the public interest and the Exchange is 
required to give the Commission written notice of its intention to file 
the proposed rule change at least five business days prior to filing. 
The Exchange has requested that the Commission waive the 30-day 
operative date and the five-day pre-filing notice requirement in order 
for it to implement the proposed rule change as quickly as possible. 
The Exchange contends that this proposed rule is substantially similar 
to comparable rules the Commission approved for the CBOE, which was 
published for public notice and comment.\12\ As a result, the Exchange 
believes that the proposed rule change does not raise any new 
regulatory issues, significantly affect the protection of investors or 
the public interest, or impose any significant burden on competition. 
The Commission, consistent with the protection of investors and the 
public interest, has determined to waive the 30-day operative period as 
well as the five-day pre-filing notice requirement,\13\ and, therefore, 
the proposal is effective and operative upon filing with the 
Commission.
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    \11\ 17 CFR 240.19b-4(f)(6)(iii).
    \12\ See Securities Exchange Act Release No. 47190 (January 15, 
2003), 68 FR 3072 (January 22, 2003) (approving SR-CBOE-2002-62).
    \13\ For purposes only of waiving the five-day pre-filing notice 
requirement and the 30-day operative period for this proposal, the 
Commission has considered the proposed rule's impact on efficiency, 
competition, and capital formation. 15 U.S.C. 78c(f).
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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 at the Commission's Public Reference Room. 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-PCX-2003-06 and should be submitted by March 13, 2003.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\14\
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    \14\ 17CFR 200.30-3(a)(12)
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-4047 Filed 2-19-03; 8:45 am]
BILLING CODE 8010-01-P