[Federal Register Volume 68, Number 205 (Thursday, October 23, 2003)]
[Notices]
[Pages 60764-60768]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-26748]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-48639; File No. SR-Phlx-2003-65]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by the Philadelphia Stock 
Exchange, Inc. Relating to the Manner in Which a Contrary Exercise 
Advice Is Submitted and To Extend by One Hour the Cut-Off Time To 
Submit Contrary Exercise Advices

October 16, 2003.
    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 14, 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 
Phlx. The Exchange filed the proposed rule change under paragraph 
(f)(6) of Rule 19b-4 under the Act.\3\ The Commission is publishing 
this notice to solicit comments on the proposed rule change from 
interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 17 CFR 240.19b-4(f)(6).
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Phlx proposes to amend Phlx Rule 1042 to simplify the manner in 
which a Contrary Exercise Advice (``CEA'')\4\ is submitted to the 
Exchange and to extend by one hour the cut-off time by which members 
and member organizations must submit CEAs to the Exchange. The proposal 
also indicates when the Exchange could modify (expand or reduce) the 
cut-off time for decisions whether to exercise an option or submit a 
CEA. Below is the text of the proposed rule change. Proposed new 
language is italicized; proposed deleted text is [bracketed].
---------------------------------------------------------------------------

    \4\ The term CEA as used in the filing may also include Advice 
Cancels. Advice Cancels are documents used to cancel CEAs.
---------------------------------------------------------------------------

* * * * *

Rule 1042, Exercise of Equity Option Contract

    Rule 1042. (a) Exercise Notices. [Subject to the restrictions 
established by the Exchange pursuant to Rule 1002 and to such other 
restrictions which may be imposed by the Exchange pursuant to Rules 
1004 and 1005 or by the Options Clearing Corporation (``OCC'') pursuant 
to the OCC Rules, an outstanding option contract may be exercised 
during the time period specified in the OCC Rules by the tender to the 
OCC of an exercise notice in accordance with OCC Rules.] An outstanding 
option contract may be exercised by the tender to The Options Clearing 
Corporation (``OCC'') of an exercise notice made during the periods, 
and using the procedures, specified in OCC rules. An exercise notice 
may be tendered to OCC only by the clearing member in whose OCC account 
the option contract is carried. Option exercises are also subject to 
restrictions that are established by or may be imposed by the Exchange 
in Rules 1002, 1004 and 1005, and in this rule. Members and member 
organizations [shall] may establish fixed procedures as to the latest 
[hour at which] time they will accept exercise notices from their 
customers.
    (b) [Exercise Cut-Off] Exercise-by-Exception Procedure for Expiring 
Options. [Final exercise decisions of option holders to either exercise 
or not exercise expiring equity options must be indicated to the 
Exchange by the respective member or member organization no later than 
5:30 P.M. (EST) on the business day immediately prior to the expiration 
date (``exercise cut-off time'') in either of the following manners.] 
Special procedures apply to the exercise of equity options on the last 
business day before their expiration (``expiring options''). Unless 
waived by OCC, expiring options are subject to the Exercise-by-
Exception (``Ex-by-Ex'') procedure under OCC Rule 805. This rule 
provides that, unless contrary instructions are given, option contracts 
that are in-the-money by specified amounts shall be automatically 
exercised. In addition to OCC rules, the following Exchange 
requirements apply with respect to expiring options. Option holders 
desiring to exercise or not exercise expiring options must either:
    (i) take no action and allow exercise determinations to be made in 
accordance with OCC's Rule 805 [exercise-by-exception] Ex-by-Ex 
procedure where applicable; or
    (ii) submit a Contrary Exercise Advice (``CEA'') or Advice Cancel 
to the Exchange by the deadline specified in paragraph (c) below. A CEA 
[Contrary Exercise Advice] is a communication either [form approved by 
the Exchange for use by a member or member organization to submit a 
final exercise decision committing an options holder] to not exercise 
an option [position which] that would be automatically [be] exercised 
pursuant to OCC's [exercise-by-exception] Ex-by-Ex procedure, or to 
exercise an [equity] option [position which] that would not be 
automatically [be] exercised pursuant to OCC's [exercise-by-exception] 
Ex-by-Ex procedure. A CEA [Contrary Exercise Advice] may be submitted 
by a [any] member or member organization [(1)] either by using the 
Exchange's CEA Form, OCC's clearing system (ENCORE), or a CEA form of 
any other [at a place designated for that purpose by any] national 
[options] securities exchange of which they are a member and where the 
option is listed, or [(2) may be submitted to the Exchange via OCC in a 
form prescribed by OCC] via such other method as the Exchange may 
prescribe. A CEA may be canceled or resubmitted at any time up to the 
exercise cut-off time specified below.
    (c) Exercise Cut-Off Time. Option holders have until 5:30 p.m. 
(EST) on the business day immediately prior to the expiration date to 
make a final decision to exercise or not exercise an expiring option. 
For customer accounts, members and member organizations may not accept 
exercise instructions after 5:30 p.m. (EST) but have until 6:30 p.m. 
(EST) to submit a CEA. For non-customer accounts, members and member 
organizations may not accept exercise instructions after 5:30 p.m. 
(EST) but have until 6:30 p.m. (EST) to submit a CEA if such member or 
member organization employs an electronic submission procedure with an 
electronic time stamp (with fixed procedures to ensure security of the 
time stamp) to indicate the time of the submission of exercise 
instructions by option holders. Consistent with Commentary .04, members 
and member organizations are required to submit a CEA by 5:30 p.m. 
(EST) for non-customer accounts if such members and/or member 
organizations do not employ an electronic submission procedure with 
electronic time stamp for the submission of exercise instructions by 
option holders. [In those instances when the exercise by exception 
procedure has been waived by OCC (such that OCC will not for that 
security on that expiration effect automatic exercise or non-exercise 
of expiring equity option positions), a Contrary Exercise Advice is 
still

[[Page 60765]]

required to be submitted prior to the exercise cut-off time by members 
and member organizations wishing to exercise an option that would not 
have been automatically exercised had the exercise-by-exception 
procedure been in effect, or not exercise an option that would have 
been automatically exercised had the exercise-by-exception procedure 
been in effect. The applicable underlying security price in such 
instances will be as described in OCC Rule 805(1), which is normally 
the last sale price in the primary market for underlying security. OCC 
rules may require submission of an affirmative exercise notice even in 
circumstances where Contrary Exercise Advice is not required.]
    [Members and member organizations which maintain proprietary or 
public customer positions in expiring options shall take necessary 
steps to ensure that final exercise decisions are properly indicated to 
the Exchange on behalf of such positions. Member organizations who have 
accepted the responsibility to indicate final exercise decisions on 
behalf of another member or non-member firm shall take necessary steps 
to ensure that such decisions are properly indicated. Member 
organizations may establish a processing cut-off time prior to the 
Exchange's exercise cut-off time at which it will no longer accept 
final exercise decisions in expiring options from customers.]
    (d) Waiver of Ex-by-Ex Procedure. If OCC has waived the Ex-by-Ex 
procedure for an options class, members and member organizations must 
either:
    (i) submit to the Exchange, a CEA, in a manner specified by the 
Exchange, within the time limits specified in paragraph (c) above if 
the holder intends to exercise the option, or
    (ii) take no action and allow the option to expire without being 
exercised.
    The applicable underlying security price in such instances will be 
as described in OCC Rule 805(j). In cases where the Ex-by-Ex procedure 
has been waived, OCC rules require that members and member 
organizations wishing to exercise such options must submit an 
affirmative Exercise Notice to OCC, whether or not a CEA has been filed 
with the Exchange.
    (e) Indicating Final Exercise Decisions. An Exchange member 
organization that has accepted the responsibility to indicate final 
exercise decisions on behalf of another member or non-member 
organization shall take the necessary steps to ensure that such 
decisions are properly indicated to the Exchange. Such member 
organization may establish a processing cut-off time prior to the 
Exchange's exercise cut-off time at which it no longer will accept 
final exercise decisions in expiring options from options holders for 
whom it indicates final exercise decisions. Each member or member 
organization that indicates final exercise decisions through another 
broker-dealer is responsible for ensuring that final exercise decisions 
for all of its proprietary (including market maker) and public customer 
account positions are timely indicated to such broker-dealer.
    (f) Exceptions to Submitting a CEA; Recordkeeping. Members and 
member organizations may [effect or amend] receive and submit final 
exercise decisions after the exercise cut-off time (but prior to 
expiration) without having submitted a CEA under the following 
circumstances:
    (i) in order to remedy mistakes made in good faith[,];
    (ii) to take appropriate action as the result of a failure to 
reconcile unmatched Exchange option transactions[,]; or
    (iii) where exceptional circumstances have restricted an 
[customer's or member's] option holder's ability to inform [the 
respective] a member organization of [such] a decision[s (] regarding 
exercise, or a member organization's ability to receive such 
decision[s] by the cut-off time[)]. The burden of establishing [an] any 
of the above exceptions for a proprietary or customer account of a 
member or member organization rests solely on the member or member 
organization seeking to rely on such exceptions.
    In the event a member or member organization does not timely submit 
a CEA [Contrary Exercise Advice] in accordance with the requirements of 
this rule or does not timely submit a CEA [Contrary Exercise Advice] 
for a final exercise decision pursuant to an exception in the paragraph 
above, the responsible member or member organization shall set forth in 
a written memorandum the surrounding circumstances and shall file a 
copy of the memorandum with the Exchange's Market Surveillance 
Department no later than 12:00 noon (EST) on the business day following 
the expiration. Such memorandum must additionally include the time when 
such final exercise decision was made or, in the case of a customer, 
was received, and shall be subject to the recordkeeping requirements of 
SEC Rules 17a-3(a)(6) and 17a-4(b).
    (g) Modifying the Time for Close of Trading in Options. In the 
event the Exchange provides advance notice on or before 5:30 p.m. (EST) 
on the business day immediately prior to the last business day before 
the expiration date indicating that a modified time for the close of 
trading in equity options on such last business day before expiration 
will occur, then the deadline to make a final decision to exercise or 
not exercise an expiring option shall be 1 hour 28 minutes following 
the time announced for the close of trading on that day instead of the 
5:30 p.m. (EST) deadline found in Rule 1042 (c). However, members and 
member organizations may deliver a CEA or Advice Cancel to the Exchange 
within 2 hours 28 minutes following the time announced for the close of 
trading in equity options on that day instead of the 6:30 p.m. (EST) 
deadline found in Rule 1042(c) for: (i) customer accounts; and, (ii) 
non-customer accounts where such member firm employs an electronic 
submission procedure with an electronic time stamp (with fixed 
procedures to ensure security of the time stamp) to indicate the time 
of receipt of exercise instructions.
    For non-customer accounts, members and member organizations that do 
not employ an electronic submission procedure with a time stamp for the 
submission of exercise instructions are required to deliver a CEA or 
Advice Cancel within 1 hour and 28 minutes following the time announced 
for the close of trading on that day instead of the 5:30 p.m. (EST) 
deadline found in Rule 1042(c).
    (h) Extending or Reducing the Cut-Off Time for Exercise Decisions.
    (i) The Exchange may establish extended cut-off times for a 
decision to exercise or not exercise an expiring option and for the 
submission of CEAs on a case-by-case basis due to an unusual 
circumstance.
    (ii) The Exchange, with at least one (1) business day prior advance 
notice, by 12:00 noon (EST) on such day, may establish a reduced cut-
off time for the decision to exercise or not exercise an expiring 
option and for the submission of CEAs on a case-by-case basis due to 
unusual circumstances; provided, however, that under no circumstances 
should the exercise cut-off time and the time for submission of a CEA 
be before the close of trading.

Commentary

    .01 For purposes of this Rule 1042, the terms ``customer account'' 
and ``non-customer account'' have the same meaning as in OCC By-Laws 
Articles I(C)(28) and I(N)(2), respectively.
    .02 Reporting final exercise decisions contemplated by this rule 
does not serve to substitute as the effective ``exercise notice'' to 
OCC for

[[Page 60766]]

the exercise or non-exercise of expiring options.
    .03 In the event of ``unusual circumstances,'' Rule 1042(h)(i) 
provides that the Exchange may extend the cut-off times for exercise 
instructions and the submission of a CEA beyond the normal time frames 
specified in Rule 1042(c). For purposes of subparagraph (h)(i), an 
``unusual circumstance'' includes, but is not limited to, increased 
market volatility; significant order imbalances; significant volume 
surges and/or systems capacity constraints; significant spreads between 
the bid and offer in underlying securities; internal system 
malfunctions affecting the ability to disseminate or update market 
quotes and/or deliver orders; or other similar occurrences. Rule 1042 
(h)(ii) provides that the Exchange may also reduce such cut-off times 
for ``unusual circumstances.'' For purposes of subparagraph (h)(ii), an 
``unusual circumstance'' includes, but is not limited to, a significant 
news announcement concerning the underlying security of an option 
contract that is scheduled to be released just after the close on the 
business day immediately prior to expiration.
    .04 Although the deadline for options holders to make a final 
decision to exercise or not exercise is 5:30 p.m. (EST), the deadline 
for the submission of the CEA in the case of non-customer accounts will 
depend on the manner of the decision to exercise or not exercise as set 
forth below.
    (i) For electronic submissions of CEAs by non-customer option 
holders with an electronic timestamp indicating receipt of exercise 
instructions on or before 5:30 p.m. (EST), members and member 
organizations must submit CEAs to the Exchange by 6:30 p.m. (EST).
    (ii) For non-electronic submissions of CEAs by non-customer option 
holders, members and member organizations must submit CEAs to the 
Exchange via the Contrary Exercise Advice Box by 5:30 p.m. (EST).
    .05 Each member organization shall establish fixed procedures to 
insure secure time stamps in connection with their electronic systems 
employed for the recording of submissions to exercise or not exercise 
expiring options.
    [.02].06 It is contemplated by this rule that effecting an exercise 
decision in an expiring option on the basis of material information 
obtained after the exercise cut-off time is activity inconsistent with 
just and equitable principles of trade.
    [.03].07 The exercise cut-off requirements contained in this rule 
do not apply to any foreign currency or index option products listed on 
the Exchange.
    .08 Each Member Organization shall prepare a memorandum of every 
exercise instruction received showing the time when such instruction 
was so received. Such memoranda will be subject to the requirements of 
SEC Rule 17a-4(b).
* * * * *

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 and is 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 Phlx Rule 1042 
to simplify how CEAs are submitted to the Exchange in light of the 
Options Clearing Corporation's (``OCC'') Exercise-by-Exception (``Ex-
by-Ex'') procedure and to provide additional time for members and 
member organizations to submit CEAs for certain accounts to the 
Exchange. The purpose is also to provide the Exchange with flexibility 
to modify the time to close options trading prior to expiration and the 
time by which decisions whether to exercise must be made. The proposal 
provides guidance to those member organizations that indicate final 
exercise decisions on behalf of others. Additionally, the proposal 
conforms the language of the various parts of the rule in light of the 
changes.
    The OCC, issuer of all Phlx and other exchange-traded options 
contracts, has an established procedure pursuant to OCC Rule 805 for 
options holders wishing to exercise in-the-money options before they 
expire. Known as Ex-by-Ex, the procedure provides for the automatic 
exercise at expiration of any equity option contract that has an 
exercise price below (in the case of a call) or above (in the case of a 
put) the closing price of the underlying security by: `` of a point 
($.75) or more if the option contract is carried in a customer 
account,\5\ or \1/4\ of a point ($.25) or more if the option is carried 
in any other account. Options holders who wish to have their options 
contracts exercised in accordance with the Ex-by-Ex procedure need to 
take no further action. Those contracts that are in-the-money by the 
appropriate amount will be automatically exercised. Options holders who 
do not wish to have their options automatically exercised, or wish 
their options to be exercised under different parameters than the Ex-
by-Ex procedure, must file a CEA with the Exchange pursuant to Phlx 
Rule 1042, and thereby instruct OCC of their ``contrary intention''.\6\ 
Members and member organizations can satisfy the filing requirement by 
manually submitting a CEA to the Exchange or by electronically 
submitting the CEA through OCC's clearing system (ENCORE). Phlx Rule 
1042 is designed to, among other things, deter individuals from taking 
improper advantage of late-breaking news by requiring evidence of an 
option holder's intention regarding whether to exercise expiring equity 
options via the submission of a CEA.
---------------------------------------------------------------------------

    \5\ A ``customer account'' is defined in OCC By-Laws as an 
account of a Clearing Member which is confined to Exchange 
transactions cleared and positions carried by the Clearing Member on 
behalf of its securities customers, other than those transactions of 
market-makers which are cleared through a market maker's account. 
See OCC By-Laws Article (I)(C)(28).
    \6\ A CEA may be cancelled by filing an Advice Cancel with the 
Exchange at any time up to the submission cut-off deadline specified 
in proposed Phlx Rule 1042(c).
---------------------------------------------------------------------------

    On occasion, OCC has had to waive or suspend its Ex-by-Ex 
procedure, such as when trading in the underlying stock has been 
halted, or where no accurate price was available to be used in the 
determination of the closing price. When this occurs and there is no 
automatic exercise per OCC Rule 805, all options holders must send 
exercise instructions to OCC if they wish to exercise an option 
regardless of whether the option is in or out-of-the-money. Currently, 
when OCC suspends its Ex-by-Ex procedure for an option class, Phlx Rule 
1042 requires the submission of a CEA. Thus, when OCC has waived the 
Ex-by-Ex procedure, option holders must determine what price would have 
been used, even though the only available price might be a ``stale'' 
last sale price, and then determine whether a CEA needs to be submitted 
to the Exchange to indicate the option holder's intention to exercise 
or not exercise. Option holders and options exchanges have long viewed 
this process as cumbersome and confusing.

[[Page 60767]]

    The Phlx proposes to amend Phlx Rule 1042 to eliminate the 
requirement that a CEA be submitted if the option holder does not want 
to exercise the option when OCC has waived its Ex-by-Ex procedure for 
that options class. As a result, the proposed rule change indicates 
that when Ex-by-Ex procedures have been waived by OCC, submission of 
instructions to exercise (CEAs) are only required when the options 
holder wants to exercise the option contract. If an options holder 
takes no action, the option will expire without being exercised.\7\
---------------------------------------------------------------------------

    \7\ Phlx Rule 1042, as amended, indicates that, unless waived by 
OCC, expiring options are subject to the Ex-by-Ex procedure found in 
OCC Rule 805, as noted above.
---------------------------------------------------------------------------

    Currently, Phlx Rule 1042 provides that option holders have until 
5:30 p.m. (EST) on the business day immediately prior to the expiration 
date \8\ to decide whether to exercise an expiring option. The Exchange 
proposes in Phlx Rule 1042(c) to extend the cut-off time for members 
and member organizations to deliver CEAs to the Exchange to 6:30 p.m. 
(EST) for customer accounts. The cut-off time would also be extended to 
6:30 p.m. (EST) for non-customer accounts \9\ provided that such 
submission was done electronically, with an electronic time stamp to 
record receipt of the exercise instruction by 5:30 p.m. (EST).\10\ The 
Exchange believes that this rule change is required because members or 
member organizations may sometimes find it difficult to deliver CEAs in 
compliance with the 5:30 p.m. (EST) cut-off time when the determination 
of final settlement prices are sometimes delayed as members and member 
organizations are confirming exercise instructions with their 
customers. Because of such logistical problems, members and member 
organizations must often process and immediately submit customer CEAs 
to the Exchange upon receiving instructions from customers in order to 
meet the existing 5:30 p.m. (EST) cut-off time. Accordingly, to allow 
sufficient time to process CEAs for customer accounts, the Exchange 
proposes to extend the cut-off time to 6:30 p.m. (EST) for members and 
member organizations to deliver CEAs for customer accounts to the 
Exchange and to deliver CEAs for non-customer accounts to the Exchange, 
as long as the submissions are done electronically (which includes, but 
is not limited to, e-mail), and the member or member organization 
received the CEAs by 5:30 p.m. (EST) as evidenced by a time-stamp. The 
Exchange believes that it is appropriate to extend the cut-off time for 
member and member organization submission of these CEAs, and any 
cancellation thereof, to the Exchange as all decisions to exercise (or 
not exercise) must still be made by 5:30 p.m. (EST) in accordance with 
Phlx Rule 1042.
---------------------------------------------------------------------------

    \8\ The ``expiration date'' of an options contract generally is 
the Saturday immediately following the third Friday of the 
expiration month of such option. See Phlx Rule 1000(b)21. See also 
OCC By-Laws Article (I)(E)(16).
    \9\ A ``non-customer account'' in respect of any person carrying 
an account with a broker or dealer generally means a person that is 
not a customer of a broker of dealer as defined in Rules 8c-1 and 
15c-2-1 under the Act. See OCC By-Laws Article I(N)(2).
    \10\ The use of an electronic time stamp requires establishment 
by members and member organizations of a fixed procedure to ensure 
that the electronic time stamp for the exercise instruction decision 
is secure. The time to submit CEAs for non-customer accounts, where 
a time stamp is not used as part of an electronic submission 
procedure, remains at 5:30 p.m. (EST).
---------------------------------------------------------------------------

    To address unusual circumstances, the Exchange proposes in Rule 
1042 (h) that it have the ability to establish different cut-off times 
for the option holder to make a decision to exercise or not exercise 
expiring options and for members and member organizations to submit 
CEAs. Proposed Phlx Rule 1042(h)(i) would permit the Exchange to extend 
the cut-off time for option holders to decide whether to exercise 
expiring options, as well as for members and member organizations to 
submit CEAs because of unusual circumstances. Unusual circumstances 
would include, for example, increased market volatility and significant 
order imbalances. Proposed Phlx Rule 1042(h)(ii) would likewise allow 
the Exchange to reduce the cut-off time for option holders to decide 
whether to exercise options as well as for members and member 
organizations to submit CEAs because of unusual circumstances that 
include a significant news announcement regarding the underlying 
security of an option contract that is scheduled to be released just 
after the close on the business day immediately prior to 
expiration.\11\ For example, a decision on whether a particular merger 
will be approved or whether a new product will receive regulatory 
approval that occurs after the close of trading would justify a reduced 
cut-off time so that persons holding short positions are not prejudiced 
by being unable to close out their positions. The Exchange believes 
that this will maintain a level playing field between persons holding 
long and short positions in expiring options.
---------------------------------------------------------------------------

    \11\ The Exchange would provide notice prior to reducing the 
cut-off time period. See proposed Phlx Rule 1042(h)(ii).
---------------------------------------------------------------------------

    In addition, proposed Phlx Rule 1042(g) provides customers and 
members and member organizations with added flexibility in connection 
with the delivery of CEAs or Advice Cancels if the Exchange announces a 
modified time for the close of trading in equity options prior to 
expiration. The Exchange proposes that, if the Exchange establishes a 
modified time for the close of trading in equity options on the day 
when expiration will occur and properly notifies its members about the 
modification, option holders would have 1 hour 28 minutes after the 
announced close of trading to make a final decision to exercise or not 
exercise an expiring option. The proposal would also give members and 
member organizations 2 hours 28 minutes after the close of trading to 
deliver CEAs for customer accounts and for non-customer accounts, as 
long as the submission were done electronically with an electronic 
time-stamp. However, members and member organizations that do not 
employ an electronic submission procedure for non-customer accounts 
would have to submit their CEAs within 1 hour 28 minutes following the 
close of trading.
    Proposed Phlx Rule 1042 (e) provides that if a member organization 
has accepted the responsibility to indicate final exercise decisions on 
behalf of another member or non-member organization, it must take the 
necessary steps to ensure that such decisions are properly indicated to 
the Exchange. Such member organization may establish a processing cut-
off time prior to the Exchange's exercise cut-off time after which it 
will not accept exercise decisions or other processing procedures.
    The Exchange also proposes new Commentaries to Phlx Rule 1042. 
First, new Commentary .01 clarifies that for purposes of Phlx Rule 
1042, the definitions of ``customer'' and ``non-customer'' in OCC's By-
Laws are applicable. Second, new Commentary .03 clarifies that cut-off 
times for the submission of a CEA may be extended or reduced because of 
``unusual circumstances'' and provides examples of such circumstances. 
Third, new Commentary .04 clarifies that the deadline for submission of 
CEAs for non-customer accounts will be 6:30 p.m. (EST) where they are 
submitted electronically with a timestamp indicating receipt of 
exercise instructions on or before 5:30 p.m. (EST), and will be 5:30 
p.m. (EST) if submission is manual. Fourth, new Commentary .05 requires 
member and member organizations that employ an electronic submission 
method to adopt specific written procedures for the electronic 
submission of CEAs. Finally, new Commentary .08 provides that

[[Page 60768]]

members and member organizations will prepare a memorandum of every 
exercise instruction received showing the time of receipt, and that 
such memoranda will be subject to the requirements of SEC Rule 17a-
4(b).
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act \12\ in general, and furthers the objectives of Section 
6(b)(5) of the Act \13\ 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, among other 
things, simplifying the manner in which CEAs or Advice Cancels are 
submitted to the Exchange, extending the cut-off time by which members 
must submit to the Exchange CEAs for certain accounts, and indicating 
when the Exchange could modify the cut-off time to decide whether to 
exercise an option.
---------------------------------------------------------------------------

    \12\ 15 U.S.C. 78f(b).
    \13\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any inappropriate 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

    No written comments were either solicited or received.

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

    The proposed rule change has been filed by the Exchange pursuant to 
Section 19(b)(3)(A) of the Act \14\ and subparagraph (f)(6) of Rule 
19b-4 thereunder.\15\ Because the foregoing proposed rule change: (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 \16\ and Rule 19b-4(f)(6) \17\ thereunder.\18\
---------------------------------------------------------------------------

    \14\ 15 U.S.C. 78s(b)(3)(A).
    \15\ 17 CFR 240.19b-4(f)(6)
    \16\ 15 U.S.C. 78s(b)(3)(A).
    \17\ 17 CFR 240.19b-4(f)(6).
    \18\ As required under Rule 19b-4(f)(6)(iii), the Exchange 
provided the Commission with written notice of its intent to file 
the proposed rule change at least five business days prior to the 
filing date or such shorter period as designated by the Commission.
---------------------------------------------------------------------------

    A proposed rule change filed under Rule 19b-4(f)(6) \19\ normally 
does not become operative prior to thirty days after the date of 
filing. However, pursuant to Rule 19b-4(f)(6)(iii), the Commission may 
designate a shorter time if such action in consistent with the 
protection of investors and the public interest. The Phlx has requested 
that the Commission waive the thirty-day operative date in order to 
allow the Exchange's options exercise procedures to be in line with 
those of OCC and other options exchanges.
---------------------------------------------------------------------------

    \19\ 17 CFR 240.19b-4(f)(6).
---------------------------------------------------------------------------

    The Commission believes that waiving the thirty-day operative date 
is consistent with the protection of investors and the public 
interest.\20\ Accelerating the operative date will allow the Phlx to 
immediately implement rules similar to ones already in place at the 
American Stock Exchange LLC and the International Securities Exchange, 
Inc.,\21\ and will simplify and clarify the process by which members 
and member organizations accept exercise decisions from options holders 
and submit such decisions to the Exchange. For these reasons, the 
Commission designates the proposed rule change as effective and 
operative immediately. At any time within 60 days of the filing of the 
proposed rule change the Commission may summarily abrogate such 
proposed 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.
---------------------------------------------------------------------------

    \20\ 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).
    \21\ See Securities Exchange Act Release Nos. 47885 (May 16, 
2003), 68 FR 28309 (May 23, 2003) (SR-Amex-2001-92) and 48505 
(September 17, 2003), 68 FR 55680 (September 26, 2003) (SR-ISE-2003-
20).
---------------------------------------------------------------------------

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 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-2003-65 and 
should be submitted by November 13, 2003.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\22\
---------------------------------------------------------------------------

    \22\ 17 CFR 200.30-3(a)(29).
---------------------------------------------------------------------------

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-26748 Filed 10-22-03; 8:45 am]
BILLING CODE 8010-01-P