[Federal Register Volume 70, Number 239 (Wednesday, December 14, 2005)]
[Notices]
[Pages 74071-74074]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E5-7303]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-52910; File No. SR-ISE-2005-052]


Self-Regulatory Organizations; International Securities Exchange, 
Inc.; Notice of Filing and Immediate Effectiveness of a Proposed Rule 
Change Relating to the Requirements for Continued Approval of 
Securities that Underlie Options Traded on the Exchange

December 7, 2005.
    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 November 21, 2005, the International Securities Exchange, Inc. 
(``ISE'' or ``Exchange'') filed with the Securities and Exchange 
Commission (``Commission'') the proposed rule change as described in 
Items I and II below, which Items have been prepared by the ISE.\3\ The 
ISE filed

[[Page 74072]]

the proposal pursuant to 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, as amended, from 
interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ In one part of the proposal, ISE Rule 504(d)(6) is 
erroneously referenced, instead of current ISE Rule 503(b)(6). The 
staff corrected this reference, as per telephone conversation 
between Samir Patel, Assistant General Counsel, ISE, and Christopher 
Chow, Attorney, Division of Market Regulation, Commission, December 
5, 2005.
    \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 ISE proposes to amend certain of its rules governing the 
requirements for and the withdrawal of approval of securities 
underlying options traded on the Exchange. The text of the proposed 
rule change is below. Proposed new language is in italics; proposed 
deletions are in [brackets].
Rule 502. Criteria for Underlying Securities
    (a) Underlying securities with respect to which put or call options 
contracts are approved for listing and trading on the Exchange must 
meet the following criteria:
    (1) The security must be registered and be an ``NMS stock'' as 
defined in Rule 600 of Regulation NMS under the Exchange Act [(i) 
listed on a national securities exchange; or (ii) traded through the 
facilities of a national securities association and reported as a 
``national market system'' (``NMS'') security as set forth in Rule 
11Aa3-1 under the Exchange Act]; and
    (2) No change.
    (b)-(j) No change.
Rule 503. Withdrawal of Approval of Underlying Securities
    (a) No change.
    (b) Absent exceptional circumstances, an underlying security will 
not be deemed to meet the Exchange's requirements for continued 
approval whenever any of the following occur:
    (1)-(4) No change.
    [(5) The issuer has failed to make timely reports as required by 
applicable requirements of the Exchange Act, and such failure has not 
been corrected within thirty (30) days after the date the report was 
due to be filed.]
    [(6)] (5) The underlying security ceases to be an ``NMS stock'' as 
defined in Rule 600 of Regulation NMS under the Exchange Act. [The 
issuer, 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.] [(7)] (6) If an underlying security is 
approved for options listing and trading under the provisions of Rule 
502(c), the trading volume and price history of the Original Security 
(as therein defined) prior to but not after the commencement of trading 
in the Restructure Security (as therein defined), including ``when-
issued'' trading, may be taken into account in determining whether the 
trading volume and market price requirements of (3) and (4) of this 
paragraph (b) are satisfied.
    (c)-(j) No change.
* * * * *

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

    In its filing with the Commission, the ISE 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 ISE 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 ISE Rule 503(b)(5) pertaining to 
the continued approval of securities that underlie options traded on 
the Exchange. ISE Rule 503(b) sets forth various situations under which 
an underlying security previously approved for options trading will in 
usual circumstances be deemed to no longer meet Exchange requirements 
for the continuance of such approval. In such circumstances, ISE Rule 
503(a) 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 options series that have already been 
opened.
    Currently, ISE Rule 503(b)(5) provides that an underlying security 
will no longer be approved for options trading on the Exchange when:

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

    The Exchange proposes to eliminate this provision because (i) it 
limits investors' ability to use options to hedge existing equity 
positions in such securities, and (ii) it is not necessary in the 
context of the rest of ISE Rule 503(b).
    First, ISE Rule 503(b)(5) can and does impact investors' interests 
by preventing investors from using new options series to hedge 
positions that they may hold in the underlying security of companies 
that fail to make timely reports required by the Act. ISE believes such 
a restriction is inconsistent with the rules and regulations in the 
markets for the underlying securities because no similar trading 
restriction is placed upon the trading of the underlying security 
itself. Thus, ISE Rule 503(b)(5) only serves to limit the abilities of 
shareholders in such companies who may wish to hedge their positions 
with new options series, at a time when the ability to hedge may be 
particularly important.
    ISE believes that ISE Rule 503(b)(5) has outlived any usefulness 
and now serves to unnecessarily burden and confuse the investing 
public. ISE believes this provision was appropriate when it was first 
implemented in or around 1976 when the listing and trading of 
standardized options was still in its infancy and information 
pertaining to public companies was not readily available to the general 
investing public. The Exchange believes that today's listed options 
market, however, is a mature one with investors who have access to a 
significant amount of real-time market information to assist them in 
making informed investment decisions, including information as to 
whether companies have timely filed reports as required by the Exchange 
Act, and if not, why not. Therefore, ISE believes that there is no 
reason to continue limiting investors' ability to trade in options 
classes, including new series within those classes, simply because a 
company is not timely in filing its reports. The Exchange further 
states that this restriction is further misplaced, considering that 
investors are not similarly restricted from buying or selling shares of 
the underlying security in the equity markets.
    Moreover, the Exchange believes that ISE Rule 503(b)(5) limits an 
investor's ability to hedge his underlying stock positions at a time 
when he may be in most need to protect his investment. The failure of a 
public company to comply with its reporting requirements under the Act 
could cause a significant movement in the price of that

[[Page 74073]]

company's stock. Restricting the Exchange from opening new options 
series may leave investors without means to hedge their positions with 
options contracts at strike prices that more accurately reflect the 
contemporaneous price trends of the underlying stock.
    The ISE states that new options series on a security should not be 
permitted to be opened if the underlying security ceases to be an ``NMS 
stock'' within the meaning of Rule 600(b)(47) of Regulation NMS.\6\ 
Typically, the Exchange becomes aware of issues that may impact the 
continued listing of a security well before that security is delisted 
from its primary market. Exchange staff routinely monitors daily press 
releases and informational releases disseminated by various entities, 
such as, the primary listing market of a security and private news 
services, in an effort to monitor the activities and news items 
pertaining to the issuers of securities that underlie options traded on 
the Exchange. In many cases, when an issuer fails to comply with its 
reporting requirements under the Act, the issuer is given a substantial 
amount of time to cure this deficiency before the primary listing 
market actually delists the issuer's security. Many times, the issuer 
is able to comply without its security ever being delisted. During this 
period, ISE staff continually monitors the status of the issuer's 
compliance with its reporting requirements to determine whether the 
security may be delisted. Finally, the primary listing market typically 
issues a press release well in advance of delisting an issuer's 
security to give investors and other market participants adequate 
notice.
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    \6\ 17 CFR 242.600(b)(47).
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    Given the availability of data and information relating to public 
issuers of securities in today's markets, and in light of the extensive 
amount of additional continued listing standards under ISE Rule 503(b), 
waiting until a security is actually delisted by its primary listing 
market is the appropriate point at which to restrict the issuance of 
new options series in an options class. Accordingly, the Exchange 
hereby proposes to eliminate ISE Rule 503(b)(5).
    Additionally, as a matter of ``housekeeping,'' the Exchange also 
proposes to clarify the texts of ISE Rules 502(a)(1) and 503(b)(6),\7\ 
which govern the criteria for the initial and continued listing of 
options on a particular security, respectively. Both of these 
provisions include as part of the criteria, a requirement that the 
underlying security must be a national market system security (``NMS 
security''). As part of the recently adopted Regulation NMS,\8\ among 
other things, the Commission revised the definition of an NMS security. 
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.'' As such, 
each of these ISE Rules will be amended to reflect these new terms.
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    \7\ ISE Rule 503(b)(6) would become ISE Rule 503(b)(5) to 
correspond with the elimination of current ISE Rule 503(b)(5), as 
discussed above.
    \8\ See Securities Exchange Act Release No. 51808 (June 9, 
2005), 70 FR 37496 (June 29, 2005).
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2. Statutory Basis
    The ISE believes that the basis under the Act for this proposed 
rule change is found in Section 6(b)(5), in that the elimination of ISE 
Rule 503(b)(5), which is both burdensome to investors and unnecessary 
for their protection, will serve to remove impediments to and perfect 
the mechanisms of a free and open market and a national market system 
and, in general, to protect investors and the public interest.

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

    The ISE does not believe that the proposed rule change will impose 
any burden on competition that is not necessary or appropriate in the 
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 ISE 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

    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) by its terms does not become operative for 30 days after the 
date of this filing, 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.
    A proposed rule change filed under Rule 19b-4(f)(6) normally does 
not become operative for 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. In addition, Rule 19b-4(f)(6)(iii) requires a 
self-regulatory organization to provide the Commission with written 
notice of its intent to file the proposed rule change, along with a 
brief description and text of the proposed rule change, at least 5 
business days prior to the date of filing of the proposed rule change, 
or such shorter time as designated by the Commission.
    The ISE has asked the Commission to waive the 5-day pre-filing 
notice requirement and the 30-day operative delay. The Commission 
waives the 5-day pre-filing notice requirement. Additionally, the 
Commission believes that waiving the 30-day operative delay is 
consistent with the protection of investors and the public interest 
because the proposed rule change is based upon a recently approved rule 
change by the Chicago Board Options Exchange, Incorporated 
(``CBOE''),\9\ which was published for notice and comment.\10\ For this 
reason, the Commission designates that the proposal has become 
effective and operative immediately upon filing with the Commission.
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    \9\ See Securities Exchange Act Release Nos. 52562 (October 4, 
2005), 70 FR 59382 (October 12, 2005) (notice for SR-CBOE-2004-037) 
and 52779 (November 16, 2005), 70 FR 70902 (November 23, 2005) 
(approval order for SR-CBOE-2004-037).
    \10\ For purposes only of waiving the 30-day operative delay, 
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 the 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.\11\
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    \11\ See Rule 19b-4(f)(6)(iii), 17 CFR 240.19b-4(f)(6)(iii).
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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. Comments may be submitted by any of 
the following methods:

[[Page 74074]]

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 No. SR-ISE-2005-052 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 20549-0903.
    All submissions should refer to File No. SR-ISE-2005-052. 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 will also be available for inspection and copying at the 
principal office of the ISE. 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 No. SR-ISE-2005-052 and should be submitted on or before January 
4, 2006.

    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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Jonathan G. Katz,
Secretary.
 [FR Doc. E5-7303 Filed 12-13-05; 8:45 am]
BILLING CODE 8010-01-P