[Federal Register Volume 69, Number 59 (Friday, March 26, 2004)]
[Proposed Rules]
[Pages 16154-16158]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-6815]



[[Page 16153]]

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

Part V





Securities and Exchange Commission





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



17 CFR Part 230



Covered Securities Pursuant to Section 18 of the Securities Act of 
1933; Proposed Rule

  Federal Register / Vol. 69, No. 59 / Friday, March 26, 2004 / 
Proposed Rules  

[[Page 16154]]


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

SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 230

[Release No. 33-8404; File No. S7-17-04]
RIN 3235-AJ03


Covered Securities Pursuant to Section 18 of the Securities Act 
of 1933

AGENCY: Securities and Exchange Commission.

ACTION: Proposed rule.

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

SUMMARY: The Securities and Exchange Commission (``SEC'' or 
``Commission'') proposes for comment an amendment to a Rule under 
Section 18 of the Securities Act of 1933 (``Securities Act''), as 
amended, to designate securities listed on the International Securities 
Exchange, Inc. (``ISE'') as covered securities. Covered securities 
under Section 18 of the Securities Act are exempt from state law 
registration requirements.

DATES: Comments should be submitted on or before April 26, 2004.

ADDRESSES: Comments may be submitted electronically or by paper. 
Electronic comments may be submitted by: (1) Electronic form on the SEC 
Web site (http://www.sec.gov) or (2) e-mail to [email protected]. 
Mail paper comments in triplicate to Jonathan G. Katz, Secretary, 
Securities and Exchange Commission, 450 Fifth Street, NW., Washington, 
DC 20549-0609. All submissions should refer to File No. S7-17-04; this 
file number should be included on the subject line if e-mail is used. 
To help us process and review your comments more efficiently, please 
use only one method. The Commission will post all comments on the 
Commission's internet website (http://www.sec.gov). Comments are also 
available for public inspection and copying in the Commission's Public 
Reference Room, 450 Fifth Street, NW., Washington, DC 20549. We do not 
edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly.

FOR FURTHER INFORMATION CONTACT: Kelly Riley, Assistant Director, (202) 
942-0752, Gordon Fuller, Counsel to the Assistant Director, (202) 942-
0792 or Brian Trackman, Attorney, (202) 942-7951, Division of Market 
Regulation, Securities and Exchange Commission, 450 Fifth Street, NW., 
Washington, DC 20549-1001.

SUPPLEMENTARY INFORMATION: 

I. Introduction

    In 1996, Congress amended Section 18 of the Securities Act to 
exempt from state registration requirements securities listed, or 
authorized for listing, on the New York Stock Exchange (``NYSE''), the 
American Stock Exchange (``Amex''), or the National Market System of 
the Nasdaq Stock Market (``Nasdaq/NMS'') (collectively, the ``Named 
Markets''), or any national securities exchange designated by the 
Commission to have substantially similar listing standards to those 
markets.\1\ More specifically, Section 18(a) of the Securities Act 
provides that ``no law, rule, regulation, or order, or other 
administrative action of any State * * * requiring, or with respect to, 
registration or qualification of securities * * * shall directly or 
indirectly apply to a security that `` (A) is a covered security.''\2\ 
Covered securities are defined in Section 18(b)(1) to include those 
securities listed, or authorized for listing, on the Named Markets, or 
securities listed, or authorized for listing on a national securities 
exchange (or tier or segment thereof) that has listing standards that 
the Commission determines by rule are ``substantially similar'' to the 
Named Markets.\3\
---------------------------------------------------------------------------

    \1\ See National Securities Markets Improvement Act of 1996, 
Pub. L. 104-290, 110 Stat. 3416 (October 11, 1996).
    \2\ 15 U.S.C. 77r(a).
    \3\ 15 U.S.C. 77r(b)(1). In addition, securities of the same 
issuer that are equal in seniority or senior to a security listed on 
a Named Market or national securities exchange designated by the 
Commission as having substantially similar listing standards to a 
Named Market are covered securities for purposes of Section 18 of 
the Securities Act. 15 U.S.C. 77r(b)(1)(C).
---------------------------------------------------------------------------

    Pursuant to Section 18(b)(1)(B) of the Securities Act, the 
Commission adopted Rule 146.\4\ Rule 146(b) lists those national 
securities exchanges, or segments or tiers thereof, that the Commission 
has determined to have listing standards substantially similar to those 
of the Named Markets and thus securities listed on such exchanges are 
covered securities.\5\ The ISE has petitioned the Commission to amend 
Rule 146(b) to determine that its listing standards for securities 
listed on the ISE are substantially similar to those of the Named 
Markets and, accordingly, that securities listed pursuant to such 
listing standards are covered securities for purposes of Section 18(b) 
of the Securities Act.\6\ If the Commission makes this determination, 
then securities listed on the ISE would be exempt from state law 
registration requirements.\7\
---------------------------------------------------------------------------

    \4\ Securities Act Release No. 7494, Securities Exchange Act 
Release No. 39542 (January 13, 1998), 63 FR 3032 (January 21, 1998).
    \5\ 17 CFR 230.146(b).
    \6\ See letter from Michael Simon, Senior Vice President and 
General Counsel, ISE, to Jonathan G. Katz, Secretary, Commission, 
dated October 9, 2003.
    \7\ 15 U.S.C. 77r.
---------------------------------------------------------------------------

II. Background

    In 1998, the Chicago Board Options Exchange, Inc. (``CBOE''), 
Pacific Exchange, Inc. (``PCX''), the Philadelphia Stock Exchange, Inc. 
(``Phlx''), and the Chicago Stock Exchange (``CHX'') petitioned the 
Commission to adopt a rule determining that specified portions of the 
exchanges' listing standards were substantially similar to the listing 
standards of the Named Markets.\8\ In response to the petitions, and 
after extensive review of the petitioners' listing standards, the 
Commission adopted Rule 146(b), determining that the listing standards 
of the CBOE, Tier 1 of the PCX, and Tier 1 of the Phlx were 
substantially similar to those of the Named Markets and that securities 
listed pursuant to those standards would be deemed covered securities 
for purposes of Section 18 of the Securities Act.\9\
---------------------------------------------------------------------------

    \8\ See letter from David P. Semak, Vice President, Regulation, 
PCX, to Arthur Levitt, Jr., Chairman, Commission, dated November 15, 
1996; letter from Alger B. Chapman, Chairman, CBOE, to Jonathan G. 
Katz, Secretary, Commission, dated November 18, 1996; letter from J. 
Craig Long, Esq., Foley & Lardner, Counsel to CHX, to Jonathan G. 
Katz, Secretary, Commission, dated February 4, 1997 (``CHX 
Petition''); and letter from Michele R. Weisbaum, Vice President and 
Associate General Counsel, Phlx, to Jonathan G. Katz, Secretary, 
Commission, dated March 31, 1997.
    \9\ Securities Act Release No. 7494, Securities Exchange Act 
Release No. 39542 (January 13, 1998), 63 FR 3032 (January 21, 1998). 
Review of CHX's listing program, including its listing standards and 
operations, is ongoing. CHX has petitioned the Commission to amend 
Rule 146(b) to include Tier 1 of CHX's listing standards. See letter 
from Paul B. O'Kelly, Executive Vice President, Market Regulation 
and Legal, CHX, to Jonathan G. Katz, Secretary, Commission, dated 
May 17, 2000.
---------------------------------------------------------------------------

    In its petition, ISE states that it currently trades only 
standardized options issued and guaranteed by the Options Clearing 
Corporation (``OCC''), which are also listed on at least one of the 
four other options exchanges--Amex, CBOE, PCX and Phlx. Accordingly, 
the options ISE currently trades are by definition ``covered 
securities'' for purposes of Section 18 of the Securities Act. However, 
ISE may, in the future, list standardized options issued and guaranteed 
by OCC that are not listed on one of the other options exchanges. 
Accordingly, ISE has petitioned the Commission to amend Rule 146(b) 
with a determination that its listing standards are substantially 
similar to those of the Named Markets, and that securities now listed 
on ISE are

[[Page 16155]]

``covered securities'' under Section 18(b) of the Securities Act.\10\
---------------------------------------------------------------------------

    \10\ The Commission notes that, currently, the ISE lists only 
standardized options and, accordingly, only has listing standards 
for equity and index options.
---------------------------------------------------------------------------

III. Discussion

    The Commission has reviewed the ISE listing standards for options 
traded on the ISE and preliminarily believes that they are 
substantially similar to those of Amex. The Commission notes that, 
under Section 18(b)(1)(A) of the Securities Act, the Commission has the 
authority to compare the listing standards of a petitioner with those 
of either the NYSE, Amex, or Nasdaq/NMS. Because Amex is the only Named 
Market that lists standardized options, the Commission has compared 
ISE's listing standards with Amex's listing standards.
    In addition, the Commission has interpreted the ``substantially 
similar'' standard to require listing standards at least as 
comprehensive as those of the Named Markets.\11\ If a petitioner's 
listing standards are stricter than the Named Markets, then the 
Commission may still determine that the petitioner's listing standards 
are substantially similar to the Named Markets. Finally, the Commission 
notes that differences in language or approach would not necessarily 
lead to a determination that the listing standards of the petitioner 
are not substantially similar to those of a Named Market.
---------------------------------------------------------------------------

    \11\ Securities Act Release No. 7422, Securities Exchange Act 
Release No. 38728 (June 9, 1997), 62 FR 32705 (June 17, 1997).
---------------------------------------------------------------------------

    Equity Options. The ISE requirements for listing equity options and 
maintaining such listings, which are set forth in ISE Rules 502 and 
503, closely track Amex Rules 915 and 916. Specifically, the ISE's 
original listing requirements pertaining to the public float, 
distribution of shares and trading volume of the underlying security 
are identical to those of the Amex.\12\ At least 7 million shares of 
the underlying security must be held by persons other than those 
required to report their security holdings under Section 16(a) of the 
Securities Exchange Act of 1934 (``Exchange Act'').\13\ There must also 
be at least 2,000 holders of the underlying security. Trade volume of 
the underlying security must be at least 2.4 million shares during the 
preceding twelve-month period. For securities that are covered 
securities as defined under Section 18(b) of the Securities Act, the 
closing price of the underlying security must be at least $3 as 
measured by the highest closing price reported by the primary market in 
which the security is traded. For underlying securities that are not 
covered securities, the closing price must be at least $7.50 for a 
majority of the business days during the previous three months as 
measured by the lowest closing price reported in any market in which 
the security is traded. Finally, if an underlying security does not 
satisfy the previous closing price requirements, it may be eligible for 
trading if it satisfies all of ISE's maintenance requirements, is 
traded on at least one other exchange, and has an average trading 
volume of at least 5,000 contracts over the preceding three months.\14\
---------------------------------------------------------------------------

    \12\ Compare ISE Rule 502 with Amex Rule 915. The Commission 
notes that no exchange has standards establishing qualifications for 
issuers of exchange-traded options because all options are issued by 
the OCC. All options issued by the OCC have the equal protection of 
OCC's backup system of clearing members' obligations, margin 
deposits and clearing funds.
    \13\ 15 U.S.C. 78p(a).
    \14\ See ISE Rule 502(b).
---------------------------------------------------------------------------

    The rules of both ISE and Amex require issuers of the underlying 
securities to be in full compliance with the Exchange Act. Also, the 
requirements for securities underlying options are the same under ISE 
Rule 502 and Amex Rule 915. As is true for equity securities, the ISE 
and Amex impose the same initial listing requirements for options on 
American Depositary Receipts (``ADRs''), International Funds, 
Restructured Companies, Exchange-Traded Fund shares (``ETFs''),\15\ and 
Trust Issued Receipts.\16\
---------------------------------------------------------------------------

    \15\ ETFs are defined under Amex Rule 915 to include ``shares or 
other securities that are principally traded on a national 
securities exchange or through the facilities of a national 
securities association and reported as a national market security, 
and that represent an interest in a registered investment company 
organized as an open-end management investment company, a unit 
investment trust or a similar entity which holds securities 
constituting or otherwise based on or representing an investment in 
an index or portfolio of securities* * *.'' See Amex Rule 915 
Commentary .06. These securities are referred to as ``Fund Shares'' 
in the ISE rules. See ISE Rule 502(h).
    \16\ Compare Subsections (c), (f)-(h), and (j) of ISE Rule 502 
with Subsections .03-.07 of Amex Rule 915.
---------------------------------------------------------------------------

    The only difference between the ISE and Amex original listing rules 
is that Amex members may propose the listing of an option that 
otherwise meets established listing requirements, but has not been 
listed on Amex, whereas ISE's members may not. Rather, the ISE 
exercises discretion in considering potential new listings. The 
Commission does not believe that this procedural difference in the way 
options may be considered for listing has any bearing on whether the 
substantive listing standards are substantially similar.
    As noted above, the Commission has interpreted the substantially 
similar standard to require listing standards at least as comprehensive 
as those of the Named Markets, and differences in language or approach 
of the listing standards are not dispositive. Accordingly, because the 
absence of a provision in the ISE rule permitting ISE members to 
propose the listing of options on the ISE is not germane to the quality 
of ISE's listing standards, the Commission preliminarily does not 
believe that this procedural distinction represents a substantial 
difference or renders the ISE listing standards less comprehensive than 
those of the Amex.
    As with its original listing standards, the ISE's maintenance 
requirements for its equity options substantively track those of the 
Amex.\17\ With respect to the underlying security of an equity option, 
the ISE and Amex have identical maintenance requirements regarding the 
number of publicly traded shares, their distribution, trade volumes and 
market price. At least 6.3 million shares of the underlying security 
must be held by persons other than those required to report their 
security holdings under Section 16(a) of the Exchange Act.\18\ There 
must also be at least 1,600 holders of the underlying security. Trade 
volume of the underlying security must be at least 1.8 million shares 
during the preceding twelve month period, and the closing price must be 
at least $3 as measured by the closing price reported by the primary 
market in which the security is traded.\19\ Failure to meet any one of 
these criteria may result in delisting the option.\20\
---------------------------------------------------------------------------

    \17\ Compare ISE Rule 503 with Amex Rule 916.
    \18\ 15 U.S.C. 78p(a).
    \19\ See ISE Rule 503(b).
    \20\ See ISE Rule 503.
---------------------------------------------------------------------------

    Both Amex and ISE may withdraw approval for options trading if the 
issuer of an underlying security that is principally traded on a 
national securities exchange is delisted from trading on that exchange 
and neither meets National Market System (``NMS'') criteria nor is 
traded through the facilities of a national securities association. 
Amex and ISE may also withdraw approval for options trading on a 
security that is principally traded through facilities of a national 
securities association, if such security is no longer designated as an 
NMS security.\21\
---------------------------------------------------------------------------

    \21\ See ISE Rule 503(b)(6); Amex Rule 916 Commentary .01(6).
---------------------------------------------------------------------------

    Likewise, the ISE and Amex impose the same maintenance requirements 
for continued listing of options on ADRs, ETFs, Trust Issued Receipts, 
and

[[Page 16156]]

Holding Company Depositary Receipts.\22\
---------------------------------------------------------------------------

    \22\ Compare Subsections (g)-(j) of ISE Rule 503 with 
Subsections .06-.09 of Amex Rule 916.
---------------------------------------------------------------------------

    The only difference between the ISE and Amex maintenance 
requirements is that the Amex rules include an express provision that 
the exchange will monitor on a daily basis news sources for information 
of corporate actions, which might indicate that an underlying security 
no longer meets the requirements for continued approval, whereas ISE 
Rule 503 does not.\23\ The Commission preliminarily believes that the 
absence of an express monitoring provision in ISE's rules does not 
represent a significant difference between ISE and Amex maintenance 
requirements. Each registered exchange has an obligation under Sections 
6 and 19(g) of the Exchange Act to comply with its own rules.\24\ To 
comply with these statutory requirements, the ISE must monitor 
corporate and other events, which may have a bearing on whether a 
security underlying an option continues to satisfy ISE's maintenance 
listing standards. The Commission, however, requests comment on whether 
this difference should impact the determination of whether ISE's rules 
are ``substantially similar'' to Amex's rules.
---------------------------------------------------------------------------

    \23\ Compare Amex Rule 916.10 with ISE Rule 503.
    \24\ 15 U.S.C. 78f(b), 78s(g).
---------------------------------------------------------------------------

    Index Options. The Commission preliminarily believes that the ISE 
and the Amex have substantially similar requirements for stock indices 
that may underlie index options. With regard to broad-based index 
options, both the ISE and the Amex require that the listing of a class 
of options on a new underlying index must be filed with the Commission 
as a proposed rule change under Section 19(b) of the Exchange Act.\25\ 
Furthermore, the Commission preliminarily believes that the exchanges 
have substantially similar provisions for the designation of narrow-
based indices as eligible to underlie index options, including rules 
that allow certain options to be traded on certain narrow-based indices 
using an expedited procedure, which involves submitting to the 
Commission a Form 19b-4(e) under Rule 19b-4(e) of the Exchange Act.\26\ 
The listing and maintenance requirements for component securities 
comprising narrow-based index options listed on the ISE appear in all 
material respects to be substantially similar to those of the Amex.\27\ 
Specifically, the ISE and the Amex appear to have substantially similar 
criteria for index components relating to market value, trading volume, 
calculation of the index, and inclusion of non-U.S. component 
securities or ADRs.\28\ In addition, the Commission preliminarily 
believes that ISE and Amex requirements for the index regarding 
weighting, index components, rebalancing, information barriers 
maintained by broker-dealers, and the dissemination of index values are 
substantially similar.\29\ Likewise, the ISE rules setting forth 
position and exercise limits, margin requirements, and settlement terms 
applicable to index options appear to be substantially similar to those 
of the Amex.\30\ Accordingly, the Commission preliminarily believes 
that the listing standards of the ISE and the Amex for index options 
are substantially similar.
---------------------------------------------------------------------------

    \25\ See ISE Rule 2002(a), Amex Rule 901C.01.
    \26\ Compare ISE Rule 2002(b) with Amex Rule 901C.02.
    \27\ Compare ISE Rules 502, 2002(c) with Amex Rules 915, 
901C.02(d).
    \28\ Compare ISE Rule 2002(b) with Amex Rule 901C.02.
    \29\ Compare ISE Rules 2002 and 2003 with Amex Rule 901C.
    \30\ Compare ISE Rules 413, 417, 418, 709, 1102, 2004-2010, 2012 
with Amex Rules 462, 903C, 904C, 905C, 909C, 916C, 918C, 951C, and 
980C. The ISE and Amex's disclaimer provisions relating to index 
options are also substantially similar. Compare ISE Rule 2011 with 
Amex Rule 902C.
---------------------------------------------------------------------------

IV. Solicitation of Comments

    Based on its review of each exchange's rules, for the reasons set 
forth above, the Commission preliminarily believes that the original 
listing standards as well as the continued listing standards for equity 
options and index options of the ISE are substantially similar to those 
of the Amex. Accordingly, the Commission preliminarily believes options 
listed on the ISE should be covered securities and entitled to an 
exemption from state blue sky provisions as set forth in Section 18(a) 
of the Securities Act.
    The Commission seeks comments on the desirability of amending Rule 
146(b) to include the ISE.\31\ In particular, commenters may wish to 
address whether they agree with the Commission's preliminary 
conclusions that ISE's listing and maintenance standards are 
substantially similar to those of the Named Markets.
---------------------------------------------------------------------------

    \31\ The Commission notes that it has received one comment 
letter from the OCC, which supports the ISE's petition. See letter 
to Kelly Riley, Senior Special Counsel, SEC, from James R. McDaniel, 
Counsel to OCC, Sidley Austin Brown & Wood LLP, dated November 4, 
2003.
---------------------------------------------------------------------------

    In addition, if ISE options are designated as covered securities 
under Rule 146(b)(1), then ISE's listing standards would be subject to 
Rule 146(b)(2). Rule 146(b)(2) under the Securities Act conditions the 
designation of securities as ``covered securities'' under Rule 
146(b)(1) on the identified exchange's listing standards continuing to 
be substantially similar to those of the Named Markets. Thus, under 
Rule 146(b)(2), the designation of its securities as covered securities 
would be conditioned on the ISE maintaining listing standards that were 
substantially similar to those of the Named Markets. Commenters may 
wish to address the application and effect of Rule 146(b)(2) on the 
proposal.
    The Commission invites commenters to provide views and data as to 
the costs, benefits and effects associated with the proposed 
amendments. Finally, in addition to the questions posed above, 
commenters are welcome to offer their views on any other matter raised 
by the proposed amendment to Rule 146(b).

V. Consideration of Promotion of Efficiency, Competition and Capital 
Formation

    As required under the Securities Act,\32\ the Commission has 
preliminarily considered the proposed rule's impact on efficiency, 
competition and capital formation. Options exchanges are prohibited by 
Commission rule from prohibiting, conditioning or limiting the listing 
of any stock options class first listed on another options 
exchange.\33\ Nevertheless, options exchanges do compete for listings 
of non-equity options such as index options. Thus, as noted above, the 
Commission preliminarily believes that amending Rule 146(b) to 
designate options traded on ISE as covered securities offers potential 
benefits for investors because it would facilitate the ability of ISE 
to compete for listings, which should increase competition and enhance 
the overall liquidity of the U.S. securities markets. In addition, the 
Commission believes that the proposed rule amendment, consistent with 
Congressional action, is designed to promote efficiency by removing a 
layer of duplicative regulation. The Commission also preliminarily 
believes that the proposed amendment to Rule 146(b) should permit ISE 
to compete with other markets whose options are exempt from state law 
registration requirements for new options products and listings. 
Finally, the proposed amendment would impose no recordkeeping or 
compliance burdens, and merely would provide a limited purpose 
exemption under the federal securities laws.
---------------------------------------------------------------------------

    \32\ 15 U.S.C. 77b(b).
    \33\ See 17 CFR 240.19c-5.
---------------------------------------------------------------------------

    Thus, the Commission preliminarily believes that the proposed 
amendment

[[Page 16157]]

to Rule 146(b) would promote efficiency, competition and capital 
formation. Commentators should consider the proposed amendment's effect 
on competition, efficiency and capital formation.

VI. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 does not apply because the 
proposed amendment to Rule 146(b) does not impose recordkeeping or 
information collection requirements or other collection of information, 
which require the approval of the Office of Management and Budget under 
44 U.S.C. 3501 et seq.

VII. Cost and Benefits of Proposed Rulemaking

    Congress amended Section 18 of the Securities Act to exempt covered 
securities from state registration requirements. These securities are 
listed on the Named Markets or any other national securities exchange 
determined by the Commission to have substantially similar listing 
standards to the Named Markets.\34\ Consistent with statutory 
authority, the Commission proposes to determine that the listing 
standards of the ISE are substantially similar to those of the Amex, 
the only Named Market that lists standardized options. Options listed 
on the ISE would therefore be covered securities subject only to 
federal regulation.
---------------------------------------------------------------------------

    \34\ 15 U.S.C. 77r(b)(1)(B).
---------------------------------------------------------------------------

    By exempting options listed on ISE from state law registration 
requirements, we expect that the listing process will become easier as 
one layer of regulation is eliminated. Moreover, we also expect 
adoption of the rule to reduce the administrative burden ISE and the 
OCC face inasmuch as compliance with state blue sky law requirements 
will be preempted.
    The Commission also preliminarily believes that the proposed 
amendment to Rule 146(b) should permit ISE to compete with other 
markets whose options are exempt from state law registration 
requirements for new options products and listings. This result would 
likely enhance competition and, potentially, liquidity, thus benefiting 
market participants and the public.
    The proposed amendment would eliminate state registration of 
options listed with the ISE. There may be a cost to investors through 
the loss of the benefits of state registration and oversight, although 
the cost is difficult to quantify. We nevertheless believe that 
Congress contemplated these costs in relation to the economic benefits 
of exempting covered securities from state regulation. The Commission, 
however, is considering the costs and benefits of the proposed 
amendment to Rule 146(b) and requests commenters to provide views and 
supporting information as to the costs and benefits associated with 
this proposal.

VIII. Regulatory Flexibility Act Certification

    Section 603(a) of the Regulatory Flexibility Act \35\ requires the 
Commission to undertake an initial regulatory flexibility analysis of 
the proposed amendment to Rule 146 on small entities unless the 
Commission certifies that the proposed amendment, if adopted, would not 
have a significant economic impact on a substantial number of small 
entities.\36\ For purposes of Commission rulemaking in connection the 
Regulatory Flexibility Act, an issuer is a small business if its 
``total assets on the last day of its most recent fiscal year were 
$5,000,000 or less.'' \37\ An exchange is a small business if it has 
been exempt from the reporting requirements of Rule 11Aa3-1 \38\ and it 
is not affiliated with any person other than a natural person that is 
not a small business.\39\ The Commission believes that the proposal to 
amend Rule 146(b) will not affect small entities because all options 
listed on the ISE are issued by the OCC, which is not a small entity 
because it has assets well in excess of $5 million.\40\ Further, the 
ISE is not a small business.\41\
---------------------------------------------------------------------------

    \35\ 5 U.S.C. 603(a).
    \36\ 5 U.S.C. 605(b).
    \37\ 17 CFR 230.157. See also 17 CFR 240.0-10(a).
    \38\ 17 CFR 240.11Aa3-1.
    \39\ 17 CFR 240.0-10(e).
    \40\ 17 CFR 240.0-10(d). As of December 31, 2002, OCC reported 
total assets of nearly $1.5 billion ($1,492,480,906). See OCC 2002 
Annual Report, at 26 (Statements of Consolidated Financial 
Condition) (available at http://www.optionsclearing.com).
    \41\ 17 CFR 240.0-10(e).
---------------------------------------------------------------------------

    Accordingly, the Commission hereby certifies, pursuant to Section 
605(b) of the Regulatory Flexibility Act,\42\ that amending Rule 146(b) 
would not have a significant economic impact on a substantial number of 
small entities. The Commission encourages written comments regarding 
this certification. The Commission solicits comment as to whether the 
proposed amendment to Rule 146(b) could have an effect that we have not 
considered. We request that commenters describe the nature of any 
impact on small entities and provide empirical data to support the 
extent of such impact.
---------------------------------------------------------------------------

    \42\ 5 U.S.C. 605(b).
---------------------------------------------------------------------------

IX. Small Business Regulatory Enforcement Fairness Act of 1996

    For purposes of the Small Business Enforcement Fairness Act of 
1996, a rule is ``major'' if it results or is likely to result in:
    (i) an annual effect on the economy of $100 million or more;
    (ii) a major increase in costs or prices for consumers or 
individual industries; or
    (iii) significant adverse effects on competition, investment, or 
innovation.\43\
---------------------------------------------------------------------------

    \43\ Pub. L. 104-121, Title II, 110 Stat. 857 (1996) (codified 
in various sections of 5 U.S.C., 15 U.S.C., and as a note to 5 
U.S.C. 601).
---------------------------------------------------------------------------

    The Commission requests comment regarding the potential impact of 
the proposed amendment on the economy on an annual basis. Commenters 
should provide empirical data to support their views to the extent 
possible.

X. Statutory Authority

    The Commission is proposing an amendment to Rule 146 pursuant to 
the Securities Act of 1933 [15 U.S.C. 77a et seq.], particularly 
Sections 18(b)(1)(B) and 19(a) [15 U.S.C. 77r(b)(1)(B) and 77s(a)].

Text of the Proposed Rule

List of Subjects in 17 CFR Part 230

    Securities.

    For the reasons set forth in the preamble, Title 17, Chapter II of 
the Code of Federal Regulations is proposed to be amended as follows:

PART 230--GENERAL RULES AND REGULATIONS, SECURITIES ACT OF 1933

    1. The authority citation for Part 230 continues to read, in part, 
as follows:

    Authority: 15 U.S.C. 77b, 77c, 77d, 77f, 77g, 77h, 77j, 77r, 
77s, 77z-3, 77sss, 78c, 78d, 78l, 78m, 78n, 78o, 78t, 78w, 78ll(d), 
78mm, 79t, 80a-8, 80a-24, 80a-28, 80a-29, 80a-30, and 80a-37, unless 
otherwise noted.
* * * * *
    2. Section 230.146 is amended by revising paragraphs (b)(1)(ii), 
(b)(1)(iii), and (b)(2) and by adding paragraph (b)(1)(iv) as follows:


Sec.  230.146  Rules under section 18 of the Act.

* * * * *
    (b) * * *
    (1) * * *
    (i) * * *
    (ii) Tier I of the Philadelphia Stock Exchange, Incorporated;
    (iii) The Chicago Board Options Exchange, Incorporated; and

[[Page 16158]]

    (iv) Options listed on the International Securities Exchange, 
Incorporated.
    (2) The designation of securities in paragraphs (b)(1)(i) through 
(iv) of this section as covered securities is conditioned on such 
exchanges' listing standards (or segments or tiers thereof) continuing 
to be substantially similar to those of the NYSE, Amex, or Nasdaq/NMS.

    Dated: March 22, 2004.
    By the Commission.

 Jill M. Peterson,
Assistant Secretary.
[FR Doc. 04-6815 Filed 3-25-04; 8:45 am]
BILLING CODE 8010-01-P