[Federal Register Volume 70, Number 240 (Thursday, December 15, 2005)]
[Notices]
[Pages 74409-74411]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E5-7364]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-52924; File No. SR-Phlx-2005-74]


Self-Regulatory Organizations; Philadelphia Stock Exchange, Inc.; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change 
Relating to Elimination of Commentary .01, Guideline 5 to Phlx Rule 
1010

December 7, 2005.
    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 December 5, 2005, 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 and II below, which Items have been prepared by the Phlx. The 
Phlx filed the proposed rule change pursuant to Section 19(b)(3)(A) of 
the Act \3\ and Rule 19b-4(f)(6) thereunder,\4\ 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\ 15 U.S.C. 78s(b)(3)(A).
    \4\ 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 Exchange proposes to eliminate Commentary .01, guideline 5 to 
Phlx Rule 1010 (``Withdrawal of Approval of Underlying Securities''), 
so that an underlying security may be deemed to meet the Exchange's 
requirements for continued approval for options transactions where an 
issuer has failed to make timely reports pursuant to the Act.
    The Exchange also proposes as a matter of housekeeping to amend 
Commentary .01, guideline 6 to Phlx Rule 1010 and Phlx Rule 
1009(a)(1)(ii) to substitute the term ``NMS stock'' for the previous 
description of a national market system security, for consistency with 
Regulation NMS.\5\ The text of the proposed rule change is below. 
Proposed new language is italicized, and deleted language is in 
brackets.
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    \5\ See Securities Exchange Act Release No. 51808 (June 9, 
2005), 70 FR 37496 (June 29, 2005).
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* * * * *
Rule 1010 Withdrawal of Approval of Underlying Securities
    Commentary:
    .01 The Board of Governors has established guidelines to be 
considered by the Exchange in determining whether an underlying 
security previously approved for Exchange option transactions no longer 
meets its requirements for the continuance of such approval. Absent 
exceptional circumstances, with respect to items 1, 2, 3, or 4 listed 
below, an underlying security will not be deemed to meet the Exchange's 
requirements for continued approval whenever any of the following 
occur:
    1. through 4.--No Change.
    5. [The issuer has failed to make timely reports as required by 
applicable requirements of the Securities Exchange Act of 1934, and 
such failure has not been corrected within 30 days after the date the 
report was due to be filed.
    6.] The underlying security ceases to be an ``NMS stock'' as 
defined in Rule 600 of Regulation NMS under the Securities Exchange Act 
of 1934. [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].
    [7]6. If an underlying security is approved for options listing and 
trading under the provisions of Commentary .05 of Rule 1009, 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 paragraph (3) and (4) of this 
Commentary .01 are satisfied provided, however, that in the case of a 
Restructure Security approved for options listing and trading under 
paragraph (d) of Commentary .05 under Rule 1009, such trading volume 
requirements must be satisfied based on the trading volume history of 
the Restructure Security.
    Commentaries .02 to .10--No Change.
* * * * *
Rule 1009 Criteria for Underlying Securities
    (a) Underlying securities in respect of which put or call option 
contracts are approved for listing and trading on the Exchange must 
meet the following criteria:
    (1) The security must be duly registered and be an ``NMS stock'' as 
defined in Rule 600 of Regulation NMS [(i) listed on the national 
securities exchange; or (ii) traded through the facilities of a 
national securities association and is a reported national market 
system (``NMS'') security as defined in Rule 11Aa3-1] under the 
Securities Exchange Act of 1934;
    (2) No Change.
    Remainder of Rule 1009--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 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. The Phlx 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 Phlx Commentary .01, guideline 5 
to Phlx Rule 1010. Phlx Commentary .01 sets forth the guidelines to be 
considered by the Exchange in determining whether an underlying 
security previously approved for options trading continues to be 
appropriate. Specifically, Phlx Rule 1010 and related Phlx Commentary 
.01 provide that if an underlying security previously approved by the 
Exchange does not meet the then current requirements for continuance, 
the Exchange will not open for trading additional series of such 
options class and may also limit any new opening transactions in those 
options series that have previously been opened for trading.
    Phlx Commentary .01, guideline 5 in particular provides that an 
underlying security will not be deemed to meet the Exchange's 
requirements for continued approval whenever:
    5. The issuer has failed to make timely reports as required by 
applicable requirements of the Securities Exchange Act of 1934, and 
such failure has not

[[Page 74410]]

been corrected within 30 days after the date the report was due to be 
filed.
    The Exchange proposes to eliminate this provision based on its 
experience in recent years applying this requirement. The Exchange 
believes that this provision limits the ability of investors to use 
options to hedge existing equity positions and is not necessary given 
the entire application of Phlx Commentary .01. In addition, the 
Exchange notes that the underlying security will continue to trade on 
national securities exchanges, regardless of the late filings or 
reports required by the Act.
    The Exchange submits that Phlx Commentary .01, guideline 5 
potentially harms investors and the marketplace by preventing the use 
of new options series to hedge positions in the underlying securities 
of companies that fail to make timely reports required by the Act. The 
Exchange states that this restriction is inconsistent with the 
underlying equity markets, whereby failure to properly file reports 
under the Act does not result in a similar trading restriction. 
Accordingly, the Exchange maintains that Phlx Commentary .01, guideline 
5 limits the ability of investors who may wish to hedge their 
underlying stock positions with new options series, at a time when the 
ability to hedge may be particularly important.
    The Exchange believes that Phlx Commentary .01, guideline 5 has 
substantially outlived any usefulness and now serves to unnecessarily 
burden and confuse the investing public. Phlx Commentary .01, guideline 
5 to Phlx Rule 1010 has been a part of the Exchange's continued listing 
criteria since about late 1976, shortly after the listing and trading 
of standardized options commenced on the Exchange. In contrast to 1976, 
the Exchange states that the standardized options market today is a 
mature market largely consisting of sophisticated investors with 
significant access to information, such as information on the failure 
of a company to make timely reports under the Act. Therefore, the 
Exchange contends that there is no reason to limit the opportunity for 
investors to execute transactions in options classes (including new 
series within those classes) simply because a company is not timely in 
filing its reports under the Act, when investors are not similarly 
restricted from purchasing or selling shares in the underlying 
security.
    Moreover, the limitation on new options series imposed pursuant to 
Phlx Commentary .01, guideline 5 causes considerable confusion and 
frustration in the options marketplace because it only restricts the 
trading of new series in a given option class. The Exchange has found 
that Phlx Commentary .01, guideline 5 tends to confuse both public 
customers and market professionals, who find themselves restricted from 
trading any new options series in a given class at the same time that 
trading occurs in pre-existing options series or the underlying stock 
itself. Still further confusion can arise in this process because the 
Exchange maintains that the Phlx, as well as the other options 
exchanges, have no independent means to verify whether any of the 
listed securities underlying options traded at the Exchange have failed 
to meet their reporting requirements under the Act. Accordingly, the 
options exchanges, including the Phlx, must rely on other self-
regulatory organizations or third parties for such notification, which 
is always difficult to monitor, particularly since such third-party 
reports are sometimes delayed or inaccurate.\6\
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    \6\ The Exchange notes that it has procedures in place to 
monitor when an underlying security previously approved for option 
transactions ceases to trade on or is delisted from its primary 
listed market. Exchange staff monitors: (1) The daily list services 
issued by the primary listing markets (such as the New York Stock 
Exchange, Inc., American Stock Exchange LLC, and The Nasdaq Stock 
Market, Inc.); (2) press releases issued by the primary listing 
markets and the news wires; and (3) information circulars issued by 
the primary listing markets. In the event of a delisting of the 
underlying security from its primary listed market, Phlx will cease 
opening new series of options in such security and allow the 
existing series of options to expire. Additionally, if the 
underlying security has been halted or suspended in the primary 
market, the Exchange may halt trading in the option class pursuant 
to Phlx Rule 1047 or halt trading pursuant to Phlx Rule 133.
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    The Exchange further submits that Phlx Commentary .01, guideline 5 
is unnecessary for the protection of investors and the marketplace. For 
example, underlying securities that are delisted or fail to be NMS 
securities are no longer approved for options trading under existing 
rules. Specifically, existing Phlx Commentary .01, guideline 6 to Phlx 
Rule 1010 provides that an underlying security will no longer be 
approved for options transactions when:
    6. 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 Phlx believes a better approach is to limit or suspend options 
trading when the underlying security itself has been delisted and not 
subject the process to the inherent uncertainty of a failure of the 
underlying company to timely file its reports under the Act. The 
Exchange accordingly submits that current Phlx Commentary .01, 
guideline 5 should be eliminated.\7\
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    \7\ The reference to guideline 6 in the prior paragraph, and the 
word current in the final sentence of this paragraph, were added 
pursuant to a telephone conference between Jurij Trypupenko, 
Director, Exchange, and David L. Orlic, Attorney, Division of Market 
Regulation, Commission, on December 7, 2005.
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    Finally, as a matter of ``housekeeping,'' the Exchange is amending 
Phlx Commentary .01, guideline 6 to Phlx Rule 1010 and Phlx Rule 
1009(a)(1)(ii) to substitute ``NMS stock'' for the term ``national 
market system security,'' for consistency with Regulation NMS. 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.'' \8\ 
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) under Regulation NMS also defines an ``NMS stock'' as any 
NMS security other than an option. As such, Phlx Commentary .01, 
guideline 6 to Phlx Rule 1010 and Phlx Rule 1009(a)(1)(ii) will be 
amended to reflect these new terms.
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    \8\ See supra note 5.
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2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b) of the Act,\9\ in general, and furthers the 
objectives of Section 6(b)(5) of the Act,\10\ 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.
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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 Exchange does not believe that the proposed rule change will 
impose

[[Page 74411]]

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

    Written comments on the proposed rule change were neither solicited 
nor received.

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

    The Phlx has designated the proposed rule change as one that: (i) 
Does not significantly affect the protection of investors or the public 
interest; (ii) does not impose any significant burden on competition; 
and (iii) does not become operative for 30 days from the date on which 
it was filed, or such shorter time as the Commission may designate. 
Therefore, the foregoing rule change has become effective pursuant to 
Section 19(b)(3)(A) of the Act \11\ and Rule 19b-4(f)(6) 
thereunder.\12\
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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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    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.
    Pursuant to Rule 19b-4(f)(6)(iii) under the Act,\13\ the proposal 
may not become operative for 30 days after the date of its filing, or 
such shorter time as the Commission may designate if consistent with 
the protection of investors and the public interest, and the self-
regulatory organization must file notice of its intent to file the 
proposed rule change at least five business days beforehand. The 
Exchange requests that the Commission waive the five-day pre-filing 
notice requirement and the 30-day operative delay so the proposed rule 
change can be implemented immediately. The Commission believes that 
waiving the five-day pre-filing provision and the 30-day operative 
delay is consistent with the protection of investors and the public 
interest.\14\
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    \13\ 17 CFR 240.19b-4(f)(6)(iii).
    \14\ 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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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-Phlx-2005-74 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-Phlx-2005-74. 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 offices of the Exchange. 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-Phlx-2005-74 and should be submitted on or before 
January 5, 2006.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\15\
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    \15\ 17 CFR 200.30-3(a)(12).
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Jonathan G. Katz,
Secretary.
 [FR Doc. E5-7364 Filed 12-14-05; 8:45 am]
BILLING CODE 8010-01-P