[Federal Register Volume 69, Number 27 (Tuesday, February 10, 2004)]
[Notices]
[Pages 6350-6351]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-2806]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-49171; File No. SR-BSE-2004-03]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by the Boston Stock Exchange, 
Inc. Relating to Its Boston Options Exchange Trading Rules

February 2, 2004.
    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 January 29, 2004, the Boston Stock Exchange, Inc. (``BSE'' 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.\3\ The 
BSE has submitted the proposed rule change under Section 19(b)(3)(A) of 
the Act \4\ and Rule 19b-4(f)(6) thereunder,\5\ which renders the 
proposal effective upon filing with the Commission. 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.
    \3\ File No. SR-BSE-2004-03 replaces and supersedes File No. SR-
BSE-2003-24. See letter from John Boese, Vice President, Legal and 
Compliance, BSE, dated January 23, 2004.
    \4\ 15 U.S.C. 78s(b)(3)(A).
    \5\ 17 CFR 240.19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The BSE proposes to add new paragraph (f), relating to anticipatory 
hedging, to Chapter III, ``Business Conduct,'' Section 4, ``Prevention 
of the Misuse of Material Nonpublic Information,'' of the Boston 
Options Exchange trading rules (``BOX Rules''). Proposed new language 
is italicized.
* * * * *
Chapter III Business Conduct
    Sec. 4 Prevention of the Misuse of Material NonPublic Information
    (a)-(e) no change
    (f) It may be considered conduct inconsistent with just and 
equitable principles of trade for any Participant or person associated 
with a Participant who has knowledge of all material terms and 
conditions of:
    (i) an order and a solicited order,
    (ii) an order being facilitated or submitted to the Price 
Improvement Period, or
    (iii) orders being crossed;

the execution of which are imminent, to enter, based on such knowledge, 
an order to buy or sell an option for the same underlying security as 
any option that is the subject of the order, or an order to buy or sell 
the security underlying such class, or an order to buy or sell any 
related instrument until (a) the terms and conditions of the order and 
any changes in the terms and conditions of the order of which the 
Participant or person associated with the Participant has knowledge are 
disclosed to the trading crowd, or (b) the trade can no longer 
reasonably be considered imminent in view of the passage of time since 
the order was received. The terms of an order are ``disclosed'' to the 
trading crowd on BOX when the order is entered into the BOX Book or the 
Price Improvement Period, as defined in Chapter V, Section 18 of these 
Rules. For purposes of this Paragraph (f), an order to buy or sell a 
``related instrument'' means, in reference to an index option, an order 
to buy or sell securities comprising 10% or more of the component 
securities in the index or an order to buy or sell a futures contract 
on an economically equivalent index.
* * * * *

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the Exchange included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The Exchange has prepared summaries, set forth in 
sections (A), (B), and (C) below, of the most significant aspects of 
such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The purpose of the proposed rule change is to add new paragraph 
(f), relating to anticipatory hedging, to Chapter III, ``Business 
Conduct,'' Section 4, ``Prevention of the Misuse of Material Nonpublic 
Information,'' of the BOX Rules. Currently, Chapter III, Section 4 of 
the BOX Rules contains policies and procedural requirements, as well as 
definitional language, regarding the obligations of Boston Options 
Exchange participants (``BOX Participants'') to prevent the misuse of 
material nonpublic information. To remain consistent with similar rules 
of other options exchanges, the BSE is proposing to adopt new paragraph 
(f) regarding anticipatory hedging. The rest of Chapter III, Section 4, 
will remain unchanged.
    Paragraph (f) would expressly prohibit any BOX Participant or 
person associated with a BOX Participant who has knowledge of the 
material terms and conditions of a solicited order, an order being 
facilitated or submitted to the Price Improvement Period (``PIP''),\6\ 
or orders being crossed, the execution of which are imminent, from 
entering, based on such knowledge, an order to buy or sell an option 
for the same underlying security; an order to buy or sell the security 
underlying such class; or an order to buy or sell any related 
instrument. The prohibition would remain in effect until the terms and 
conditions of such solicited, facilitated, PIP or crossed order are 
disclosed to the trading crowd, or until the trade can no longer 
reasonably be considered imminent in view of the passage of time since 
the order was received.
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    \6\ See BOX Rules Chapter V, Section 18.
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    To allow BOX Participants to know what constitutes a ``related 
instrument''

[[Page 6351]]

in reference to an index option, paragraph (f) clarifies that an order 
to buy or sell a related instrument means, in reference to an index 
option, an order to buy or sell securities comprising 10% or more of 
the component securities in the index or an order to buy or sell a 
futures contract on an economically equivalent index.
    Under the proposal, a violation of paragraph (f) may be considered 
conduct inconsistent with just and equitable principles of trade.\7\ 
The purpose of the proposed rule is to expressly prohibit anticipatory 
hedging that is based on inside information. The Exchange believes that 
a codified prohibition, and the proposed language stating that a 
violation of the rule may be considered conduct inconsistent with just 
and equitable principles of trade, should function as a deterrent to 
possible manipulative practices based on inside information.\8\
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    \7\ See BSE Rules of the Board of Governors Chapter II, Section 
14, stating that a member, member organization, or person associated 
with or employed by a member or member organization shall not engage 
in conduct inconsistent with just and equitable principles of trade. 
Other BOX Rules expressly reference just and equitable principles of 
trade. See, e.g., BOX Rules Chapter V, Section 18(f) and (i), 
Section 27.01 and Chapter VII, Section 1(d). The lack of express 
reference in other BSE rules should not be construed as waiving the 
ability to make a violation of Chapter II, Section 14 of the BSE 
Rules of the Board of Governors, co-exist with any other violation, 
depending on the facts and circumstances of the case. The Exchange 
believes that a violation of the existing crossing, facilitation and 
solicitation provisions of the BOX Rules could be a violation of 
just and equitable principles of trade and could be subject to 
disciplinary action as such. In addition, a violation of paragraph 
(f) of Chapter III, Section 4 of the BOX Rules, for instance, could 
be in and of itself a stand-alone violation.
    \8\ Depending on the facts and circumstances surrounding 
individual cases, anticipatory hedging activity may be a violation 
of other BSE Rules or rules under the Act.
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2. Statutory Basis
    The Exchange believes that the proposal is consistent with the 
requirements of Section 6(b) of the Act,\9\ in general, and Section 
6(b)(5) of the Act,\10\ in particular, in that it is designed to 
promote just and equitable principles of trade, 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 by 
granting the Exchange greater authority to regulate anticipatory 
hedging.
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    \9\ 15 U.S.C. 78f(b).
    \10\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The BSE does not believe that the proposed rule change 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

    The BSE has neither solicited nor received comments on the proposed 
rule change.

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

    The BSE has filed the proposed rule change pursuant to Section 
19(b)(3)(A) of the Act \11\ and subparagraph (f)(6) of Rule 19b-4 
thereunder.\12\ 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, the proposed rule change has become effective pursuant to 
Section 19(b)(3)(A) of the Act and Rule 19b-4(f)(6) thereunder. The BSE 
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.
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    \11\ 15 U.S.C. 78s(b)(3)(A).
    \12\ 17 CFR 240.19b-4(f)(6).
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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.\13\ The BSE has requested that the 
Commission waive the 30-day operative delay to allow the BSE to remain 
competitive with other options exchanges that currently have similar 
rules in effect. The Commission believes waiving the 30-day operative 
delay is consistent with the protection of investors and the public 
interest. Acceleration will allow the BSE to institute its anticipatory 
hedging rules immediately. For these reasons, the Commission, 
consistent with the protection of investors and the public interest has 
determined to make the proposed rule change operative as of January 29, 
2004.
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    \13\ 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).
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    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.

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. 
Comments may also be submitted electronically at the following e-mail 
address: [email protected]. All comment letters should refer to 
File No. SR-BSE-2004-03. This file number should be included on the 
subject line if e-mail is used. To help the Commission process and 
review comments more efficiently, your comments should be sent in 
hardcopy or by e-mail but not by both methods. 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 Section, 450 Fifth Street, NW., Washington, DC 20549. 
Copies of such filing will also be available for inspection and copying 
at the principal office of the BSE. All submissions should refer to 
File No. SR-BSE-2004-03 and should be submitted by March 2, 2004.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\14\
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    \14\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 04-2806 Filed 2-9-04; 8:45 am]
BILLING CODE 8010-01-U