[Federal Register Volume 70, Number 196 (Wednesday, October 12, 2005)]
[Notices]
[Pages 59382-59384]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E5-5583]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-52562; File No. SR-CBOE-2004-37]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing of Proposed Rule Change and Amendment 
No. 1 Thereto Relating to the Deletion of Interpretation and Policy 
.01(e) to CBOE Rule 5.4

October 4, 2005.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'' or ``Exchange Act''),\1\ and Rule 19b-4 thereunder,\2\ notice 
is hereby given that on July 1, 2004, the Chicago Board Options 
Exchange, Incorporated (``CBOE'' 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 CBOE. On September 21, 2005, the Exchange filed 
Amendment No. 1 to the proposed rule

[[Page 59383]]

change.\3\ 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\ See Form 19b-4 dated September 21, 2005 (``Amendment No. 
1''). In Amendment No. 1, which replaced the original filing in its 
entirety, the Exchange conformed the definition of ``NMS security'' 
in CBOE Rules 5.3(a)(1) and Interpretation .01(f) of Rule 5.4 to 
that found in Regulation NMS. See Securities Exchange Act Release 
No. 51808 (June 9, 2005) 70 FR 37496 (June 29, 2005).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to eliminate an Interpretation and Policy to 
a CBOE Rule concerning the approval of securities that underlie options 
traded on the Exchange. The text of the proposed rule change is 
available on CBOE's Web site (http://www.cboe.com), at the CBOE's 
Office of the Secretary, and at the Commission's Public Reference Room.

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 CBOE 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 CBOE has prepared summaries, set forth in sections 
A, B, and C below, of the most significant aspects of such statements.

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

1. Purpose
    The Exchange proposes to eliminate subparagraph (e) of 
Interpretation .01 (hereafter, ``Interpretation .01(e)'') to CBOE Rule 
5.4. Interpretation .01 to Rule 5.4 sets forth various situations under 
which an underlying security previously approved for Exchange option 
transactions will no longer meet Exchange requirements for the 
continuance of such approval (``continued listing criteria''). Rule 5.4 
provides that the Exchange will not open for trading any additional 
series of options in that class and may also limit any new opening 
transactions in those option series that have already been opened. The 
Exchange also proposes to amend certain provisions of Exchange rules 
that govern the criteria for both the (1) initial listing and (2) the 
continued approval to list options on certain securities, as provided 
under Rule 5.3(a)(1) and Interpretation and Policy .01(f) to Rule 5.4.
    Currently, Interpretation .01(e) provides that an underlying 
security will no longer be approved for CBOE options transactions when:

    ''(e) The issuer has failed to make timely reports as required 
by applicable requirements of * * * [the Act], and such failure has 
not been corrected within 30 days after the date the report was due 
to be filed.''

    The Exchange proposes to eliminate this provision because the 
Exchange states that (1) it limits investors' ability to use options to 
hedge existing equity positions, and (2) it is not necessary in the 
context of the rest of Interpretation .01 to Rule 5.4.
    The Exchange contends that Interpretation .01(e) prevents investors 
from using new option series to hedge positions they may hold in the 
underlying security of companies that fail to make timely reports 
required by the Exchange Act.\4\ The Exchange states that this 
restriction is not consistent with the rules and regulations in the 
markets for the underlying securities where failure to file reports 
required by the Exchange Act does not result in a similar trading 
restriction. Accordingly, the Exchange maintains that Interpretation 
.01(e) limits the abilities of shareholders in such companies who may 
wish to hedge their positions with new option series, at a time when 
the ability to hedge may be particularly important.
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    \4\ The types of reports typically include both 10-K annual 
reports and 10-Q quarterly reports.
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    The Exchange believes that this provision may have been appropriate 
when first implemented around 1976 when the listing and trading of 
standardized options on exchanges was still in its infancy, and 
information pertaining to the operational soundness of public companies 
was not readily available to the investing public. However, the 
Exchange states that the listed options market is now a mature market 
with sophisticated investors with significant access to information to 
assist them in making informed investment decisions, such as 
information on a company's timely filing of Exchange Act reports.\5\ 
The Exchange concludes that there is no reason to continue limiting 
investors' ability to execute transactions in options classes 
(including new series within those classes) simply because a company is 
not timely in filing its Exchange Act reports when investors are not 
similarly restricted from purchasing or selling shares in the 
underlying company.
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    \5\ Despite this vastly improved degree of information 
education, it is still the responsibility of the CBOE to insure that 
no new options series is listed on an ineligible class.
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    Moreover, the Exchange has found that Interpretation .01(e) limits 
investors' ability to hedge underlying stock positions at a time when 
they may be in most need to protect their investment. The failure of a 
public company to comply with its reporting requirements under the 
Exchange Act could cause a significant movement in the price of the 
company's stock. Restricting the Exchange from opening new option 
series may leave investors with no means to hedge their positions with 
option contracts at strike prices that more accurately reflect the 
contemporaneous price trends of the underlying stock.
    Additionally, the Exchange maintains that there is a more 
appropriate means to protect investors from trading options on 
potentially unstable securities. Existing Interpretation and Policy 
.01(f) to Rule 5.4 (``Interpretation .01(f)'') provides that an 
underlying security will no longer be approved for the listing of new 
option series when:

    ``(f) The issue, in the case of an underlying security that is 
principally traded on a national securities exchange, is delisted 
from trading on that exchange and neither meets NMS criteria nor is 
traded through the facilities of a national securities association, 
or the issue, in the case of an underlying security that is 
principally traded through the facilities of a national securities 
association, is no longer designated as an NMS security.''

    The Exchange acknowledges that new options series on a security 
should not be permitted to be opened if the underlying security is no 
longer trading in its primary listing market. Typically, the Exchange 
becomes aware of issues that may impact the continued listing of a 
security on its primary listing exchange (or Nasdaq) well before the 
primary listing exchange delists that security. Exchange staff 
routinely monitor the daily press and informational releases 
disseminated by the primary listing exchanges and Nasdaq and also 
utilize private news services to monitor the news items pertaining to 
the issuers of securities that underlie options traded on the 
Exchange.\6\ In many cases, when an issuer is delinquent in its 
Exchange Act reporting obligations, the issuer is given a substantial 
amount of time in which to comply before the listing market actually 
delists the issuer's security. In many situations, the issuer is able 
to comply with its reporting obligations

[[Page 59384]]

without being delisted. During this period, CBOE states that its staff 
is continually monitoring the status of the issuers' compliance with 
reporting obligations to determine whether the security may be 
delisted.\7\ Finally, the listing exchange or Nasdaq typically issue a 
press release well in advance of any delisting to give investors and 
other market participants ample notice.\8\
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    \6\ This is consistent with Interpretation .03 to Rule 5.4.
    \7\ Additionally, if the underlying security has been halted or 
suspended in the primary market, then the Exchange may halt trading 
in the option class pursuant to CBOE Rule 6.3(a) and shall halt such 
trading pursuant to CBOE Rule 6.3B. Telephone conversation between 
Jim Flynn, Attorney, CBOE, and Florence Harmon, Senior Special 
Counsel, Division of Market Regulation, Commission, October 3, 2005.
    \8\ The Commission posts delisting notices (or orders) on its 
Web site. See http://www.sec.gov/rules/delist.shtml.
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    Given the availability of information relating to public issuers of 
securities in today's markets, and in light of additional continued 
listing standards under Rule 5.4, the Exchange maintains that the 
appropriate point at which to restrict the issuance of new options 
series in an options class is when the security is delisted. Therefore, 
the Exchange proposes to eliminate Interpretation .01(e).
    Finally, as a matter of ``housekeeping,'' the Exchange also 
proposes to clarify Exchange Rule 5.3(a)(1) and Interpretation .01(f), 
which govern the criteria for the initial and continued listing of 
options on a particular security. Both of these provisions include a 
requirement that the underlying security must be a national market 
system security (``NMS security''). As part of the recently adopted 
Regulation NMS, among other things, the Commission revised the 
definition of an ``NMS security.'' \9\ Specifically, Rule 600(b)(46) 
under Regulation NMS defines an NMS security as ``any security or class 
of securities for which transaction reports are collected, processed, 
and made available pursuant to an effective transaction reporting plan, 
or an effective national market system plan for reporting transactions 
in listed options.'' Rule 600(b)(47) also defines an ``NMS stock'' as 
any NMS security other than an option. As such, Exchange Rule 5.3(a)(1) 
and Interpretation .01(f) will be amended to reflect these new terms.
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    \9\ See Securities Exchange Act Release No. 34-51808 (June 9, 
2005), 70 FR 37496 (June 29, 2005).
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2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
Section 6(b) of the Act,\10\ in general, and furthers the objectives of 
Section 6(b)(5) of the Act \11\ in particular, in that the proposed 
rule change will serve to remove impediments to and perfect the 
mechanism of a free and open market and a national market system.
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    \10\ 15 U.S.C. 78f(b).
    \11\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    This proposed rule change does not impose any 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 solicited or received with respect to the 
proposed rule change.

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

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) By order approve such proposed rule change, or
    (B) Institute proceedings to determine whether the proposed rule 
change should be disapproved.

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. Comments may be 
submitted by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an e-mail to [email protected]. Please include 
File Number SR-CBOE-2004-37 on the subject line.

Paper Comments

     Send paper comments in triplicate to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-9303.
    All submissions should refer to File Number SR-CBOE-2004-37. This 
file number should be included on the subject line if e-mail is used. 
To help the Commission process and review your comments more 
efficiently, please use only one method. The Commission will post all 
comments on the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). 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 also will be available for inspection and copying at the 
principal office of the CBOE. All comments received will be posted 
without change; the Commission does not edit personal identifying 
information from submissions. You should submit only information that 
you wish to make available publicly. All submissions should refer to 
File Number SR-CBOE-2004-37 and should be submitted by November 2, 
2005.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\12\
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    \12\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
 [FR Doc. E5-5583 Filed 10-11-05; 8:45 am]
BILLING CODE 8010-01-P