[Federal Register Volume 63, Number 247 (Thursday, December 24, 1998)]
[Notices]
[Pages 71321-71322]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-34130]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-40795; File No. SR-AMEX-98-43]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change by the American Stock Exchange, Inc. Relating to Exercise Price
Intervals and Exercise Prices for FLEX Equity Call Options
December 15, 1998.
Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ notice is hereby given that on November 2, 1998, the
American Stock Exchange, Inc. (``Amex'' 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 Exchange. 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).
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I. Self-Regulatory Organization's Statement of the Terms of
Substance of the Proposed Rule Change
The Amex proposes to remove paragraph (c)(3) from Exchange Rule
903G which limits exercise price intervals and exercise prices for FLEX
Equity call options to those that apply to Non-FLEX Equity call
options.\2\
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\2\ Paragraph (c)(3) of Rule 903G was approved by the Commission
in 1996. Securities Exchange Act Release No. 37726 (September 25,
1996), 61 FR 51474 (October 2, 1996).
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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 Amex 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 Amex 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
On June 19, 1996, the Exchange received approval to list and trade
flexible options on individual stocks known as FLEX Equity options.\3\
Although the exercise prices and price intervals of FLEX Equity call
options were among the terms that could be specified, the Exchange
enacted paragraph (c)(3) of Exchange Rule 903G to limit the exercise
price intervals and exercise prices for FLEX Equity call options to
those that apply to Non-FLEX Equity call options due to a concern that
the flexible exercise price feature could result in an available call
option that would not be eligible to be a qualified covered call
(``QCC'') under section 1092(c)(4) of the Internal Revenue Code
(``IRC'') and thus would jeopardize a modest tax benefit enjoyed by
writers of standardized Non-FLEX Equity call options.\4\ The Exchange
notes that currently, under section 1092(c)(4)(B) of the IRC, certain
covered short positions in call options--or QCCs--qualify for
advantageous tax treatment if the options are not ``deep in the
money.'' Under certain conditions, a ``deep in the money'' call option
is defined to mean an option having an exercise price lower than the
highest available exercise price that is less than the applicable stock
price.\5\
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\3\ Securities Exchange Act Release No. 37336 (June 19, 1996),
61 FR 33558 (June 27, 1996).
\4\ It was unclear, for example, whether the existence of a
series of FLEX Equity call options with a strike price of 58, when
the price of the underlying stock is 59, would jeopardize a Non-FLEX
Equity call option's (with a strike price of 55) characterization as
a QCC.
\5\ For instance, using standardized options and a $5 price
interval, if stock XYZ closed yesterday at $54 and opened at that
price today, the standardized exercise price of $50 for a call
option would not be ``deep in the money'' because $50 would be the
highest available exercise price that is less than the applicable
stock price. A standardized exercise price of $45 would be ``deep in
the money'' and would not be a QCC.
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The Internal Revenue Service (``IRS'') has reviewed this issue and
has proposed rulemaking that would not require that strike prices
established by equity options with flexible terms be taken into account
in determining
[[Page 71322]]
whether standard term equity options are too ``deep in the money'' to
receive QCC treatment.\6\ The public comment period for the proposed
rulemaking ended on September 23, 1998, and the Exchange expects the
IRS to adopt final regulations on this topic some time after that date.
In light of the rule proposal by the IRS, the Exchange now proposes to
delete paragraph (c)(3) from Exchange Rule 903G. The Exchange intends
for the deletion of paragraph (c)(3) to coincide with the effective
date of final regulations by the IRS. The effect of the IRS proposed
rulemaking and the Exchange's proposed withdrawal of the limitation on
the exercise price of FLEX Equity call options would be that certain
taxpayers, particularly institutional and other large investors, could
engage in transactions in FLEX Equity call options with a wider range
of exercise prices (as was originally intended) without affecting the
applicability of Section 1092 of the IRC for QCC options involving
equity options with standard terms.
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\6\ Department of the Treasury, Internal Revenue Service REG-
104641-97, 63 FR 34616 (June 25, 1998).
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2. Basis
The proposed rule change is consistent with Section 6(b) of the
Act,\7\ in general, and furthers the objectives of section 6(b)(5),\8\
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 by eliminating a restriction on
FLEX Equity call options that has hampered their usefulness as a risk
managing mechanism.
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\7\ 15 U.S.C. 78f(b).
\8\ 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 any burden on competition.
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 Amex 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. Persons making written submissions
should file six copies thereof with the Secretary, Securities and
Exchange Commission, 450 Fifth Street, NW, Washington, DC 20549. 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, in Washington, DC. Copies of such
filing will also be available for inspection and copying at the
principal office of the Amex. All submissions should refer to File No.
SR-AMEX-98-43 and should be submitted by January 14, 1999.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\9\
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\9\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-34130 Filed 12-23-98; 8:45 am]
BILLING CODE 8010-01-M
