[Federal Register Volume 68, Number 90 (Friday, May 9, 2003)]
[Notices]
[Pages 25076-25079]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-11587]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-47794; File No. SR-Phlx-2003-27]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change, and Amendment No. 1 Thereto, by 
the Philadelphia Stock Exchange, Inc. Relating to the Amendment of 
Price Criteria for Certain Securities that Underlie Options Traded on 
the Exchange

May 5, 2003.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on April 23, 2003, the Philadelphia Stock Exchange, Inc. (``Phlx'' 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. On April 
30, 2003, the Phlx filed Amendment No. 1 to the proposal.\3\ The 
proposed rule change, as amended, has been filed by Phlx as a ``non-
controversial'' rule change under Rule 19b-4(f)(6) under the Act.\4\ 
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 Jurij Trypupenko, Counsel and Director of 
Litigation andOperations, Legal Department, Phlx to Terri Evans, 
Assistant Director, Division of Market Regulation (``Division''), 
Commission, dated April 29, 2003 (``Amendment No. 1''). In Amendment 
No. 1, the Exchange submitted a technical correction by inserting 
rule text that had been inadvertently omitted in the original 
filing.
    \4\ 17 CFR 240.19b-4(f)(6). For purposes of determining the 
effective date and calculating the sixty-day period within which the 
Commission may summarily abrogate the proposed rule change under 
Section 19(b)(3)(C) of the Act, the Commission considers that period 
to commence on April 30, 2003, the date Phlx filed Amendment No. 1. 
See 15 U.S.C. 78s(b)(3)(C).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Phlx proposes to amend Commentary .01 to Phlx Rule 1009 to 
allow the Exchange to list options series on covered securities, as 
defined under Section 18(b)(1)(A) of the Securities Act of 1933 
(``Covered Securities''),\5\ where the closing market price of the 
underlying Covered Securities was at least $3.00 per share for the five 
consecutive business days prior to the date that the Phlx submits an 
option class certification for listing and trading options to the 
Options Clearing Corporation (``OCC''). The listing criteria will 
remain the same for non--Covered Securities.
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    \5\ Section 18(b)(1)(A) of the Securities Act of 1933 (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 (or any successor to such entities) * * *.'' 15 U.S.C. 
77r(b)(1)(A). The term ``Covered Security,'' for the operation of 
proposed Commentary .01 to Phlx Rule 1009, will not include those 
securities defined in Section 18(b)(1)(B) of the 1933 Act. 15 U.S.C. 
77r(b)(1)(B).
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    The text of the proposed rule change, as amended, is below. 
Proposed additions are in italics and proposed deletions are in 
[brackets.]
* * * * *
Rule 1009. Criteria for Underlying Securities
    (a) No change.
    (b) No change.
    (c) No change.
    Commentary:
    .01 The Board of Governors has established guidelines to be 
considered by the Exchange in evaluating potential underlying 
securities for Exchange option transactions. Absent exceptional 
circumstances with respect to items 1, 2, 3, or 4 listed below, at the 
time the Exchange selects an underlying security for Exchange options 
transactions, the following guidelines with respect to the issuer shall 
be met:
    (1) No change.
    (2) No change.
    (3) No change.
    (4) (i) If the underlying security is a ``covered security'' as 
defined in 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 (5) 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.
    [Either (i)](ii) 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

[[Page 25077]]

the guidelines for continued listing in Rule 1010; (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 proceeding the 
date of selection has been at least 5,000 contracts.
    (5) No change.
    .02 No change.
    .03 No change.
    .04 No change.
    .05
    (a) through (c) No change.
    (d) In the case of a Restructured Transaction that satisfies either 
or both of the conditions of subparagraphs (a)(1) or (2) above in which 
shares of the restructure security are sold in a public offering or 
pursuant to a rights distribution: (i) the Exchange may assume the 
satisfaction of one or both of the requirements of paragraph (1) and 
(2) of Commentary .01 above on the date the restructure security is 
selected for options trading only if (A) the applicable conditions set 
forth in paragraph (c)(i) above are met with respect to whichever of 
these requirements is assumed to be satisfied, or (B) the condition set 
forth in paragraph (c)(ii) above is met, in either case subject to the 
limitations stated in said paragraph (c); (ii) the Exchange may certify 
that the market price of the restructure security satisfies the 
requirement of paragraph (4) of Commentary .01 above by relying on the 
market price history of the original security prior to the ex-date for 
the Restructure Transaction in the manner described in paragraph (a) 
above, 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 
at 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 (4) of 
Commentary .01 above, the market price of the restructure security was 
at least $3.00; and (iii) the Exchange may certify that the trading 
volume of the restructure security satisfies the requirement of 
paragraph (3) of Commentary .01 above only if the trading volume in the 
restructure security has been at least 2,400,000 shares during a period 
of 12 months or less ending on the date the restructure security is 
selected for options trading.
    .06 No change.
    .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 Phlx 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
    The purpose of the proposed rule change is to amend the pricing 
requirement to initially list options overlying Covered Securities that 
have traded at a price of $3.00 or higher for the five consecutive 
business days prior to the date that the Phlx submits an option class 
certification for listing and trading options to the OCC. The proposal 
would allow the Exchange to act competitively in listing options 
pursuant to a listing standard similar to one that has been adopted by 
other options exchanges.\6\
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    \6\ See Securities Exchange Act Release Nos. 47190 (January 15, 
2003), 68 FR 3072 (January 22, 2003) (SR-CBOE-2002-62); 47352 
(February 11, 2003), 68 FR 8319 (February 20, 2003) (SR-PCX-2003-
06); 47483 (March 11, 2003), 68 FR 13352 (March 19, 2003) (SR-ISE-
2003-04); and 47613 (April 1, 2003), 68 FR 17120 (April 8, 2003) 
(SR-Amex-2003-19).
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    The Exchange is proposing to amend its pricing requirement for 
underlying securities in Commentary .01 to Phlx Rule 1009 to provide 
that, for underlying securities that are deemed to be Covered 
Securities, the closing market price of the underlying security must be 
at least $3.00 per share for the five consecutive business days prior 
to the date on which Phlx submits an option issue certification to the 
OCC. The $7.50 price per share requirement would continue to apply to 
underlying securities that are not Covered Securities. In particular, 
for non-Covered Securities, Commentary .01 to Phlx Rule 1009 would 
continue to require 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.\7\ 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 Phlx first started trading listed options, the Exchange 
believes that the options market is a mature market with sophisticated 
investors. The Exchange does not believe that the $7.50 initial listing 
criteria serves to accomplish its presumed intended purpose of 
preventing the proliferation of option issues on overlying securities 
that lack liquidity needed to maintain fair and orderly markets. Phlx 
now seeks to move away from the current approach to listing standards 
and allow the desires of its customers and the workings of the 
marketplace to determine the securities that underlie the option that 
the Exchange will list.
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    \7\ In the alternative to the $7.50 price requirement, an option 
on a non-Covered Security may meet the requirements provided in 
Commentary .01 to Phlx Rule 1009 when: (a) The underlying security 
meets the guidelines for continued listing in Phlx Rule 1010; (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. Telephone conversation among Jurij Trypupenko, Counsel 
and Director of Litigation and Operations, Legal Department, Phlx, 
Terri Evans, Assistant Director, Division, Commission, and Tim Fox, 
Attorney, Division, Commission on April 28, 2003.
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    Due to recent trends in the securities markets, which include, 
among other things, a precipitous decline in the price of many 
securities, there has been a marked increase in the number of 
underlying securities that, but for the current pricing standard, would 
otherwise qualify for options listing on the Exchange. The Phlx states 
that changing the pricing standard to the proposed $3.00 market price 
per share requirement would allow it to evaluate whether to list 
options on a greater number of classes without compromising investor 
protection. In doing so, the Exchange would endeavor to ensure that its 
own systems and those of the Options Price Reporting Authority have the 
capacity to handle the potential increased capacity requirements.
    The Exchange notes that although this proposal amends the minimum 
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 before its overlying option can be listed on the Exchange, 
the Phlx will otherwise continue to maintain its initial listing 
standards. The Exchange does not

[[Page 25078]]

propose to amend any of the other criteria in Commentary .01 to Phlx 
Rule 1009, 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.
    Moreover, the Exchange believes that requiring in the proposal that 
the underlying security be listed on the New York Stock Exchange, Inc. 
(``NYSE''), the American Stock Exchange LLC (``Amex''), or the Nasdaq 
Stock Market, Inc. (``Nasdaq''), as provided for in the definition of 
``Covered Security'' from Section 18(b)(1)(A) of the 1933 Act \8\ would 
ensure that the underlying security meets the highest listing standards 
in the securities industry. Should the underlying security not qualify 
as a Covered Security, the $7.50 market price per share standard would 
still apply.
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    \8\ See note 5 supra.
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    The Exchange believes that the proposed $3.00 market price per 
share standard is also consistent with the Phlx maintenance and 
delisting criteria found in Phlx Rule 1010, which are used to determine 
whether an underlying security previously approved for Exchange options 
transactions no longer meets the requirements for listing. Commentary 
.02 to Phlx Rule 1010 sets a $3.00 market price per share of the 
underlying security threshold for determining whether the Exchange may 
continue listing and trading options on an underlying security that has 
been previously approved for options trading under Phlx Rule 1009. 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 as well.
    Consistent with the listing standards proposed by other options 
exchanges,\9\ the Exchange has proposed, as a safeguard against price 
manipulation, that the underlying security has a closing market price 
of at least $3.00 per share for the five consecutive business days 
preceding the date on which the Exchange submits a certificate to the 
OCC 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 this ``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.
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    \9\ See note 6 supra.
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    The Exchange also believes that the proposed rule change, as 
amended, would encourage specialists to delist inactive option classes, 
particularly those classes in which the market price of the underlying 
security is below $7.50. In particular, under Phlx Rule 1009 as it 
currently exists, a specialist 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 
Phlx believes that the proposed $3.00 price standard and the five-day 
look-back period would provide a reliable test for stability, would 
present a more reasonable time period for qualifying the price of an 
underlying security, and makes sense in today's economic conditions. 
The Exchange notes that the Commission recently granted Phlx and other 
options exchanges approval to list additional series on an option class 
when the market price of the underlying security is below $3.00, 
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 a new series, including the $3.00 price 
requirement.\10\
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    \10\ See Securities Exchange Act Release No. 46789 (November 7, 
2002), 67 FR 69284 (November 15, 2002) (SR-Phlx-2002-71). The 
Exchange represents that this rule (Commentary .02 to Phlx Rule 
1010)is consistent with similar rules regarding listing and 
maintenance standards of the Amex, International Securities 
Exchange, Inc. (``ISE''), Chicago Board Options Exchange, Inc. 
(``CBOE'') and the Pacific Exchange, Inc. (``PCX''). See Commentary 
.02 to Amex Rule 916; ISE Rule 503(c); Interpretation and Policy .02 
to CBOE Rule 5.4; and Commentary .02 PCX Rule 3.7.
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    Finally, for the purposes of consistency within the Phlx rules, the 
Exchange proposes to amend Commentary .05 to Phlx Rule 1009 which 
relates to Restructure Securities. Currently, Commentary .05 provides a 
method to certify that the market price of a Restructure Security 
satisfies the pricing requirement of Commentary .01 to Phlx Rule 1009, 
and specifically references the $7.50 market price per share in 
Commentary .05(d). In order to make all of Phlx Rule 1009 consistent 
with the pricing standard change of this proposal, the amended rule 
would reflect that the market price standard for Restructure Securities 
that are ``covered securities'' will also be reduced from $7.50 to 
$3.00.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act \11\ in general, and furthers the objectives of Section 
6(b)(5) of the Act \12\ in particular, in that by changing listing 
standards for Covered Securities, the Exchange can provide investors 
with those options that are most useful and demanded by them without 
sacrificing investor protection.
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    \11\ 15 U.S.C. 78f(b).
    \12\ 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 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

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

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

    The foregoing rule change, as amended, has been filed by the 
Exchange as a ``non-controversial'' rule pursuant to Section 
19(b)(3)(A) of the Act \13\ and subparagraph (f)(6) of Rule 19b-4 
thereunder.\14\ Consequently, because the foregoing 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 thirty days from the 
date on which it was filed, or such shorter time as the Commission may 
designate if consistent with the protection of investors and the public 
interest, it has become effective pursuant to Section 19(b)(3)(A) of 
the Act \15\ and Rule 19b-4 thereunder.\16\
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    \13\ 15 U.S.C. 78s(b)(3)(A).
    \14\ 17 CFR 240.19b-4(f)(6).
    \15\ 15 U.S.C. 78s(b)(3)(A).
    \16\ 17 CFR 240.19b-4.
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    The Phlx has requested that the Commission waive the five-day pre-
filing notice requirement and the thirty-day operative waiting period. 
The Commission is exercising its authority

[[Page 25079]]

to waive the five-day pre-filing requirement and believes that it is 
consistent with the protection of investors and the public interest to 
accelerate the operative date since the proposed rule change, as 
amended, is similar to the programs of other options exchanges, and 
raises no new regulatory issues.\17\ For these reasons, the Commission 
designates the proposal to be effective and operative upon filing with 
the Commission.\18\
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    \17\ For purposes of accelerating the operative date of the 
proposal, the Commission has considered the proposed rule's impact 
on efficiency, competition, and capital formation. 15 U.S.C. 78c(f).
    \18\ For purposes of determining the effective date and 
calculating the sixty-day period within which the Commission may 
summarily abrogate the proposed rule change under Section 
19(b)(3)(C) of the Act, the Commission considers that period to 
commence on April 30, 2003, the date Phlx filed Amendment No. 1. See 
15 U.S.C. 78s(b)(3)(C).
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    At any time within sixty 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.

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 Phlx. All submissions should refer to File No. 
SR-Phlx-2003-27 and should be submitted by May 30, 2003.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\19\
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    \19\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-11587 Filed 5-8-03; 8:45 am]
BILLING CODE 8010-01-P