[Federal Register Volume 74, Number 91 (Wednesday, May 13, 2009)]
[Notices]
[Pages 22611-22613]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E9-11122]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-59877; File No. SR-ISE-2007-121]
Self-Regulatory Organizations; International Securities Exchange,
LLC; Notice of Filing of a Proposed Rule Change, as Modified by
Amendment No. 1, Relating to ISE's Margin Rule
May 6, 2009.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given
that on December 24, 2007, the International Securities Exchange, LLC
(the ``Exchange'' or the ``ISE'') filed with the Securities and
Exchange Commission the proposed rule change as described in Items I,
II, and III below, which items have been substantially prepared by the
self-regulatory organization. On April 29, 2009, ISE filed Amendment
No. 1. The Commission is publishing this notice, as amended, to solicit
comments on the proposed rule change from interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The ISE is proposing to amend its margin requirements to
facilitate, under certain circumstances, the ability of account holders
to use vested and currently exercisable compensatory employee stock
options (``Vested Employee Options'') issued by publicly traded
companies as collateral for writing call options that have the same
underlying security as the Vested Employee Options. The text of the
proposed rule change is available on the ISE's Web site (http://www.iseoptions.com), at the principal office of the ISE, 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 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 self-regulatory organization 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 amend its margin requirements to
facilitate, under certain circumstances, the ability of account holders
to use Vested Employee Options issued by publicly traded companies
(``Issuers'') as collateral for writing call options that have the same
underlying security as the Vested Employee Options. Specifically, the
proposal would allow account holders to sell, as a hedge, listed equity
call options on the same underlying security as the account holder's
Vested Employee Options without the requirement of margin (the
``Transactions'').\3\ The proposal would implement a concept developed
by iOptions Group, LLC (``iOptions''), a Chicago-based organization
founded in 1999 by former listed equity options traders. The proposal
would permit account holders to engage in the Transactions using their
Vested Employee Options as collateral. Currently, such Transactions
would be deemed ``naked'' for purposes of the margin rules and subject
to a deposit of cash margin, effectively making the strategies cost
prohibitive and impractical. iOptions and ISE have been collaborating
on the proposal since early 2000 and the Exchange believes that the
concept developed by iOptions--that is, enabling employees who hold
Vested Employee Options to generate income and liquidity on their
otherwise illiquid asset through the listed options markets--will
benefit investors by providing greater transparency and liquidity.
---------------------------------------------------------------------------
\3\ Absent relief from the Commission, broker-dealers would need
to take a capital charge for the amount of unsecured margin debt.
---------------------------------------------------------------------------
Under Section 220.12(f)(1) of Regulation T,\4\ the Exchange, as a
registered national securities exchange, is permitted to recognize the
type of transactions described below as eligible for margin treatment
subject to the approval of the Commission.
---------------------------------------------------------------------------
\4\ Section 220.12(f)(1) of Regulation T (12 CFR 220),
Supplement: Margin Requirements, grants authority to registered
national securities exchanges to promulgate rules relating to call
and put margin requirements.
---------------------------------------------------------------------------
There appears to be precedent to create liquidity for holders of
Vested Employee Options, as indicated by initiatives by Google Inc.
(``Google'') and Credit Suisse First Boston (``CSFB''). Specifically,
in the second quarter of 2007, Google implemented a program that
enables certain of its employees to sell their Vested Employee Options
to financial institutions that bid for their Vested Employee Options
through a competitive auction.\5\ Additionally, in March 2004, the
SEC's Division of Corporation Finance provided CSFB a no-action letter
(the ``CSFB No-Action Letter'') \6\ with respect to CSFB's plan to
enable persons subject to Section 16 of the Securities Exchange Act of
1934 (the ``Exchange Act''), e.g., directors, officers and 10-percent
shareholders (``Section 16 insiders''), with substantially in-the-money
vested employee stock options to use over-the-counter derivatives to
limit their exposure to fluctuations in the trading price of the
underlying common stock. Under CSFB's program, Section 16 insiders sell
CSFB a call option and buy from CSFB a put option on common stock
underlying their stock options. The exercise prices of the call and put
options (together, a ``collar'') are determined so as to provide the
Section 16 insiders a measure of protection against a fall in the
market value of the common stock during the collar's term in return for
diminishing the ability of the Section 16 insiders to profit from a
strong performance of the common stock during such period.
---------------------------------------------------------------------------
\5\ See http://www.google.com/intl/en/press/pressrel/ir_20061212.html.
\6\ Credit Suisse First Boston, SEC No-Action Letter, 2004 WSB
0712200401 (March 18, 2004).
---------------------------------------------------------------------------
Unlike Google's program, which will generally truncate the
remaining term of Google Vested Employee Options to two years upon
their sale (resulting in holders forfeiting any time value of their
Vested Employee Options beyond the two-year period), the ISE's proposal
would allow holders of Vested Employee Options to monetize the entire
remaining time value of their Vested Employee Options because the term
of the Vested Employee Options would be unaffected by the listed call
option.
[[Page 22612]]
Unlike CSFB's program, the ISE's proposal would make it possible
for not only Section 16 insiders (who would generally be able to meet
existing listed option margin deposit requirements) but also ``paper
rich/cash poor'' holders to monetize the value of their Vested Employee
Options. Also unlike CSFB's program, the proposal would permit account
holders to sell call options against their Vested Employee Options in
the listed options markets, which generally provide more liquidity and
transparency than the over-the-counter markets.
Description of the Transactions
The proposal would permit account holders to sell listed call
options on the same security that underlies their Vested Employee
Options without the requirement of margin. Given the uncertificated
nature of employee stock options, in order to secure the account
holder's obligations under the Transactions, the proposal would
require:
1. The account holder to (A) pledge the Vested Employee Options to
the broker-dealer and (B) provide the broker-dealer with an irrevocable
power-of-attorney authorizing the broker-dealer to exercise the Vested
Employee Options on the account holder's behalf if the listed call
options are assigned or if the broker-dealer determines it is
necessary. The irrevocable power-of-attorney may also be used in the
event the account holder wishes to close the listed option position
prior to its expiration and instructs the broker-dealer to exercise
that number of Vested Employee Options necessary to cover the cost of
the closing purchase (the account holder will also have the option of
depositing additional cash in the account holder's account to cover the
cost of the closing purchase).
2. In the event any Vested Employee Options are exercised between
the date of the Transaction in the listed call options (the
``Commencement Date'') and the date the Transaction is closed (the
``Closing Date''), the shares issued upon exercise will be pledged to
the broker-dealer (thereby replacing the Vested Employee Options that
had been pledged prior to exercise). For example, during the time a
Transaction is pending, the account holder may resign from the account
holder's employment with the Issuer and may be required to exercise the
Vested Employee Options within a certain timeframe following the
account holder's departure. In such a scenario, the account holder
would ask the broker-dealer to exercise the Vested Employee Options and
the stock issued pursuant to the exercise would be pledged to the
broker-dealer.
3. The Issuer will promptly deliver the stock upon payment or
receipt of the exercise notice from the broker-dealer.\7\ The Issuer
will also agree prior to the Commencement Date to waive any forfeiture
conditions that otherwise might apply to the Vested Employee Options
(e.g., upon a termination of the account holder's employment with the
issuer) as well as any transfer restrictions that would preclude pledge
of the Vested Employee Options to the broker-dealer. In addition, the
Issuer will represent that the Vested Employee Options are covered by
an effective registration statement on Form S-8. If the registration
statement becomes ineffective the Issuer will notify the broker-dealer
immediately.
---------------------------------------------------------------------------
\7\ The Exchange will proscribe a set delivery period, which is
expected to be no later than three business days following
assignment of the listed options.
---------------------------------------------------------------------------
4. Because it is essential that the account holder, broker-dealer
and Issuer cooperate and are each fully informed, agree to and
acknowledge their own and each other's responsibilities, all
Transactions will be governed by an agreement (the ``Agreement'')
entered into by the account holder, Issuer and broker-dealer prior to
the Commencement Date of the first transaction. The Agreement would
generally set forth each party's obligations, representations and
acknowledgements and the terms and conditions governing the
Transactions and must be in a form acceptable to the Exchange.\8\
---------------------------------------------------------------------------
\8\ In this regard, the Exchange intends to recognize the Master
Vested Stock Option Monetization Agreement created by iOptions as
one acceptable agreement.
---------------------------------------------------------------------------
5. Such other terms and conditions proscribed by the Exchange in
accordance with such form, formats and procedures as may be established
by the Exchange from time to time. In this regard, upon approval of the
proposed rule change and for a period of one year, the Exchange will
require that, prior to the Commencement Date, a legal opinion with
respect to the account holder's and Issuer's legal right to enter into
the Transactions under the terms of the Issuer's employee stock option
plan and related documents (the ``Legal Opinion'') be obtained in a
form acceptable to the Exchange. During the one-year time period, the
Exchange may determine that such legal opinion is no longer necessary
and will revise its established forms, formats and procedures
accordingly.
2. Statutory Basis
The basis under the Act for this proposed rule change is the
requirement under Section 6(b)(5) that an exchange have rules that are
designed to prevent fraudulent and manipulative acts and practices, to
promote just and equitable principles of trade, to remove impediments
to and perfect the mechanism for a free and open market and a national
market system, and, in general, to protect investors and the public
interest. The Exchange believes that this new order type will offer
market participants new trading opportunities on the Exchange and
enhance the Exchange's competitive position.
B. Self-Regulatory Organization's Statement on Burden on Competition
The 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
The Exchange has not solicited, and does not intend to solicit,
comments on this proposed rule change. The Exchange has not received
any unsolicited written comments from members or other interested
parties.
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 is consistent with the Act. Specifically the Commission requests
comment on the following topics:
Are there other alternative steps that could be taken that
would enhance a broker-dealer's legal authority to exercise the Vested
Employee Options and receive the underlying stock? Please
[[Page 22613]]
describe any such alternatives and why those alternatives may be more
consistent with the Act.
If no margin is required for a Transaction, what steps, if
any, should be taken regarding liquidity or operational risks arising
from the Transactions? Should the margin rule include a minimum margin
requirement?
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 No. SR-ISE-2007-121 on the subject line.
Paper Comments
Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number SR-ISE-2007-121. 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 Commissions 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, 100 F Street, NE., Washington, DC
20549, on official business days between the hours of 10 a.m. and 3
p.m. Copies of such filing also will 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 Number SR-ISE-2007-121 and should be submitted on
or before June 3, 2009.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\9\
---------------------------------------------------------------------------
\9\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
Florence E. Harman,
Deputy Secretary.
[FR Doc. E9-11122 Filed 5-12-09; 8:45 am]
BILLING CODE 8010-01-P