[Federal Register Volume 61, Number 62 (Friday, March 29, 1996)]
[Notices]
[Pages 14177-14182]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-7701]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37011; File Nos. SR-CBOE-95-58; SR-Amex-95-47; Phlx-95-
90; SR-PSE-96-05; SR-NYSE-96-03]
Self-Regulatory Organizations; Order Approving Proposed Rule
Changes and Notice of Filing and Order Granting Accelerated Approval of
Related Amendments by the Chicago Board Options Exchange, Inc., the
American Stock Exchange, Inc. and the Philadelphia Stock Exchange,
Inc., and Notice of Filing and Order Granting Accelerated Approval of
Proposed Rule Changes by the Pacific Stock Exchange, Inc., and the New
York Stock Exchange, Inc., Relating to Listing Standards for Options on
Securities Issued in a Reorganization Transaction Pursuant to a Public
Offering or a Rights Distribution
March 22, 1996.
I. Introduction
On October 19, November 29, December 19, 1995, February 16, and
March 1, 1996 the Chicago Board Options Exchange, Inc. (``CBOE''), the
American Stock Exchange, Inc. (``Amex''), the Philadelphia Stock
Exchange, Inc. (``Phlx''), the Pacific Stock Exchange, Inc. (``PSE'')
and the New York Stock Exchange, Inc. (``NYSE'') (collectively the
``Exchanges''), respectively, submitted to the Securities and Exchange
Commission (``SEC'' or ``Commission''), pursuant to Section 19(b)(1) of
the Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4
thereunder,\2\ proposed rule changes to adopt listing standards for
options on securities issued in a reorganization transaction pursuant
to a public offering or a rights distribution.
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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Notices of the CBOE, Amex, and Phlx proposals were published for
comment in the Federal Register on December 6, 1995, December 11, 1995,
and December 29, 1995, respectively.\3\ No comments were received on
the proposals. The CBOE submitted to the Commission Amendment Nos. 1
and 2 to its proposal
[[Page 14178]]
on January 30, and February 5, 1996, respectively.\4\ The Phlx and Amex
submitted to the Commission Amendment No. 1 to their proposals on
February 21, and March 21, 1996, respectively.\5\ This order approves
the proposed rule changes, as amended, by the CBOE, Amex, and Phlx, and
the proposed rule changes by the NYSE, and PSE, on an accelerated
basis.
\3\ See Securities Exchange Act Release Nos. 36528 (November 29,
1995), 60 FR 62523 (File No. SR-CBOE-95-58); 36550 (December 4,
1995), 60 FR 63550 (File No. SR-Amex-95-47); and 36625 (December 21,
1995), 60 FR 67378 (File No. SR-Phlx-95-90).
\4\ The CBOE submitted Amendment Nos. 1 and 2 to clarify the
initial market price requirements, and the maintenance trading
volume requirements for shares of a Restructure Security issued
pursuant to a public offering or rights distribution, as described
more fully herein. See Letters from Michael Meyer, Attorney, Schiff
Hardin & Waite, to Sharon Lawson, Senior Special Counsel, Office of
Market Supervision (``OMS''), Division of Market Regulation
(``Market Regulation''), Commission, dated January 30, 1996 (``CBOE
Amendment No. 1''); and to John Ayanian, Attorney, OMS, Market
Regulation, Commission, dated February 5, 1996 (``CBOE Amendment No.
2'').
\5\ The Phlx and Amex submitted identical amendments to reflect
the changes set forth in CBOE's Amendment Nos. 1 and 2. As indicated
above, these amendments clarify the initial market price
requirements, and the maintenance trading volume requirements for
shares of a Restructure Security issued pursuant to a public
offering or rights distribution, as described more fully herein. See
Letter from Michele Weisbaum, Associate General Counsel, Phlx, to
Michael Walinskas, Branch Chief, OMS, Market Regulation, Commission,
dated February 21, 1996 (``Phlx Amendment No. 1''), and Letter from
Howard A. Baker, Senior Vice President, Derivative Securities, Amex,
to John Ayanian, Attorney, OMS, Market Regulation, Commission, dated
March 21, 1996 (``Amex Amendment No. 1'').
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II. Background
The Exchanges currently maintain uniform standards regarding the
approval for listing of underlying securities for options trading.\6\
Specifically, to be the subject of options trading, the underlying
security must meet the following guidelines: (1) Trading volume in all
markets of at least 2.4 million shares in the preceding twelve months
(``Volume Test''); (2) market price per share of at least $7.50 for the
majority of business days during the three calendar month period
preceding the date of selection (``Price Test''); (3) a minimum public
ownership of 7 million shares (``Public Ownership Requirement'');\7\
and (4) a minimum of 2,000 holders (``Holder Requirement'').\8\ An
exchange must determine that a security satisfies the above
requirements, as of the date it is selected for options trading
(``selection date''), which is the date the exchange files for
certification of the listing of the option with The Options Clearing
Corporation (``OCC''). Depending upon the interest and response from
other options exchanges, the exchange may generally begin options
trading from three to five business days after the selection date.
\6\ See Amex rule 915; CBOE Rule 5.3; PSE Rule 3.6; Phlx Rule
1009; and NYSE Rule 715.
\7\ Shares that are owned by persons required to report their
stock holdings under Section 16(a) of the Act (i.e., directors,
officers, and 10% beneficial owners) are excluded from this
calculation.
\8\ In addition to satisfying price, volume, public ownership,
and holder requirements, for a Restructure Security to meet initial
listing requirements, it must also comply with all requirements set
forth by the Exchanges in their options eligibility rules. For
example, the security must be registered, and listed on a national
securities exchange, or 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 Act, and
the issuer must be in compliance with any applicable requirements of
the Act.
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The Exchanges have adopted maintenance criteria for withdrawal of
approval of an underlying security subject to options trading.\9\ A
security previously approved for options transactions shall be deemed
not to meet the guidelines for continued listing if (1) trading volume
in all markets is less than 1.8 million shares in the preceding twelve
months (``Maintenance Volume Test''); (2) market price per share closes
below $5.00 on a majority of business days during the preceding six
calendar months (``Maintenance Price Test'');\10\ (3) public ownership
amounts to fewer than 6.3 million shares (``Maintenance Public
Ownership Requirement''); or (4) there are fewer than 1,600 holders
(``Maintenance Holders Requirement'').\11\
\9\ See Amex Rule 916; CBOE Rule 5.4; PSE Rule 3.7; Phlx Rule
1010; and NYSE Rule 716.
\10\ Additional criteria permits the underlying security under
certain circumstances to trade as low as $3.00 for a temporary
period of time. See Id.
\11\ In addition to satisfying the maintenance criteria for
market price and trading volume, for a Restructure Security to meet
maintenance requirements for an underlying security subject to
options trading, it must also comply with all other requirements set
forth by the Exchanges in their options eligibility rules.
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Both the initial and maintenance listing criteria are intended to
ensure, among other things, that options are only traded on stocks with
adequate depth and liquidity so that the options and their underlying
components are not readily susceptible to manipulation.
The five options exchanges recently amended their rules to
facilitate the earlier listing of options on securities issued in
certain corporate restructuring transactions.12 The amended rules
apply to securities (``Restructure Security'') issued by a public
company to existing shareholders, with existing publicly traded shares
subject to options trading, in connection with certain ``restructuring
transactions.'' 13
\12\ See Securities Exchange Act Release No. 36020 (July 24,
1995), 60 FR 39029 (July 31, 1995) (order approving SR-CBOE-95-11;
SR-Amex-95-07; SR-Phlx-95-12; and SR-PSE-95-04); See also Securities
Exchange Act Release No. 36029 (July 27, 1995), 60 FR 40637 (August
9, 1995) (order approving SR-NYSE-95-07) (``Restructuring
Transactions Approval Orders'').
\13\ A ``restructuring transaction'' is defined as a spin-off,
reorganization, recapitalization, restructuring or similar corporate
transaction.
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The amended rules facilitates the earlier listing of options on a
Restructure Security by permitting an exchange to determine whether a
Restructure Security satisfies the Volume Test and Price Test by
reference to the trading volume and market price history of an
outstanding equity security (``Original Security'') previously issued
by the issuer of the Restructure Security, or affiliate thereof.
In addition, the amended rules provide specific criteria for
evaluating the distribution of shares of a Restructure Security for
purposes of meeting the Public Ownership and Holder Requirements. To
the extent that the initial options listing requirements are satisfied
based upon these ``lookback'' provisions to the Original Security and
the other provisions of the proposal, then an exchange will permit
options trading to begin on the ex-date for the restructuring
transaction.14
\14\ Option contracts may not be initially listed for trading in
respect of a Restructure Security, whose shares are issued by the
Original Security to its existing shareholders, until the ex-date.
The ex-date occurs at such time when shares of the Restructure
Security become issued and outstanding and are the subject of
trading that are not on a ``when issued'' basis or in any other way
contingent on the issuance or distribution of the shares.
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In order to utilize the amended rules, the Restructure Security
must first satisfy one of four alternate conditions. The first three
alternate conditions are intended to ensure that the trading volume and
market price history of the Original Security represent a reasonable
surrogate for determining the likely future trading volume and price
data of the Restructure Security. Under these conditions either, (a)
the aggregate market value of the Restructure Security, (b) the
aggregate book value of the assets attributed to the business
represented by the Restructure Security (minimum $50 million) or (c)
the revenues attributed to the business represented by the Restructure
Security (minimum $50 million) must exceed one of two stated
percentages of the same measure for the Original Security.15 The
threshold percentages
[[Page 14179]]
will be 25% if the applicable measure determined with respect of the
Original Security represents an interest in the combined enterprise
prior to the restructuring transaction, and 33\1/3\% if the applicable
measure determined with respect of the Original Security represents an
interest in the remainder of the enterprise after the restructuring
transaction (``Percentage Tests''). The fourth alternate condition is
that the aggregate market value represented by the Restructure Security
be at least $500 million (``Aggreate Market Value Test''). This
condition is based on the Exchanges' view that even if a Restructure
Security does not meet the comparative tests outlined above, a
Restructure Security with an aggregate market value of $500 million, by
virtue of its absolute size, represents a substantial portion of the
Original Security, and thus should qualify for the ``lookback''
provision.
\15\ Aggregate market values will be based on share prices that
are either (a) all closing prices in the primary market on the last
business day preceding the selection date or (b) all opening prices
in the primary market on the selection date. The aggregate market
value of the Restructure Security may be determined from ``when
issued'' prices, if available.
Asset values and revenues will be derived from the later of (a)
the most recent annual financial statements or (b) the most recent
interim financial statements of the respective issuers covering a
period of not less than three months. Such financial statements may
be audited or unaudited and may be pro forma.
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If any one of the four conditions set forth above is satisfied, a
Restructure Security will qualify for the ``lookback'' provision. Under
the ``lookback'' provision, a Restructure Security may be eligible for
options trading immediately upon its issuance provided the following
requirements are satisifed. First, the Restructure Security must
satisfy the Volume and Price Tests. An exchange may be permitted to
determine whether a Restructure Security satisfies the Volume and Price
Tests by reference to the trading volume and market price history of
the Original Security. The trading volume and market price history of
the Original Security that occurs prior to the restructuring ex-date
can be used for these calculations (emphasis added). Volume and price
data may be derived from ``when issued'' trading in the Restructure
Security. However, once an exchange uses ``when issued'' volume or
prices for the Restructure Security to satisfy the relevant guidelines,
it may not use the Original Security for that purpose on any subsequent
trading day. In addition, both the trading volume and market price
history of the Original Security must be used, if either is so used.
Additionally, an exchange must determine whether a Restructure
Security will satisfy the Public Ownership and Holder Requirements.
This determination will either be based on facts and circumstances that
will exist on the intended date for listing the option, or based on
assumptions that are permitted under the proposal. Because the shares
of the Restructure Security are to be issued or distributed to the
shareholders of the issuer of the Original Security, these requirements
may be satisfied based upon the exchange's knowledge of the existing
number of outstanding shares and holders of the Original Security.
Moreover if a Restructure Security is to be listed on an exchange
or in an automatic quotation system that subjects it to an initial
listing requirement of no less than 2,000 holders, then the options
exchange may assume that the Holder Requirement will be satisfied.
Similarly, if a Restructure Security is to be listed on an exchange or
in an automatic quotation system subject to an initial listing
requirement of no less than public ownership of 7 million shares, then
the options exchange may assume that Public Ownership Requirement will
be satisfied. Additionally, if an exchange determines that at least 40
million shares of a Restructure Security will be issued and outstanding
in a restructuring transaction, then it may assume that the Restructure
Security will satisfy both the Public Ownership, and Holder
Requirements.
An exchange, however, shall not rely on the above assumptions if,
after reasonable investigation, it determines that either the public
ownership of shares or the holder requirement, in fact, will not be
satisfied on the intended date for listing the option. Additionally,
other exchanges will have the opportunity to challenge the
certification by demonstrating, among other things, that the
Restructure Security will not meet the initial listing criteria with
respect to public ownership and holders.
Finally, the Exchanges adopted a similar ``lookback'' provision for
the Maintenance Volume Test and the Maintenance Price Test.
Specifically, for purposes of satisfying these requirements, the
trading volume and market price history of the Original Security, as
well as any ``when issued'' trading in the Restructure Security, can be
used for such calculations, provided that they are only used for
determining price and volume history for the period prior to
commencement of trading in the Restructure Security.
III. Description of the Proposals
The purpose of the proposed rule changes is to amend the Exchanges'
special listing standards \16\ that apply to options on equity
securities issued in certain restructuring transactions to include
securities issued pursuant to a public offering or a rights
distribution that is part of a restructuring transaction.
\16\ See CBOE Rule 5.3, Interpretation and Policy .05; Amex Rule
915, Commentary .05; Phlx Rule 1010, Commentary .05; PSE Rule 3.6,
Commentary .05; and NYSE Rule 715, Supplementary Material .50.
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As recently approved by the Commission, the Exchanges' accelerated
listing criteria for options on Restructure Securities does not extend
to restructuring transactions involving the issuance of shares of a
Restructure Security in a public offering or a rights distribution.\17\
\17\ As stated above, the special listing standards adopted by
the Exchanges currently apply to a Restructure Security, whose
shares are issued by a public company to its existing shareholders,
with existing public traded shares subject to options trading on an
exchange, in connection with certain restructuring transactions. See
Restructuring Transactions Approved Orders, supra note 10.
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The Exchanges note that when shares of a Restructure Security are
issued in a public offering or pursuant to a rights distribution, it
cannot automatically be assumed that the shareholder population of the
Restructure Security and the Original Security will be the same.
Instead, the shareholders of a Restructure Security issued in a public
offering will be those persons who subscribed for and purchased the
security in the offering, and the shareholders of a Restructure
Security issued in a rights distribution will be those persons who
received rights via such an offering, or purchased such rights and
elected to exercise them. Even in the case of a distribution of
nontransferable rights to shareholders of the Original Security, not
all such shareholders may choose to exercise their rights. As a result,
it cannot be assumed that the Restructure Security will necessarily
satisfy listing criteria pertaining to minimum number of holders,
minimum public ownership of shares, and trading volume simply because
the Original Security satisfied these criteria.
The Exchanges believe, however, that it is appropriate and
desirable to be able to list options overlying securities issued in
reorganizations involving public offerings or rights distributions
without significant delay, provided there are reasonable assurances
that the Restructure Securities satisfy applicable options listing
standards. That is, shareholders of an Original Security who utilize
options to manage the risks of their stock positions may well find
themselves to be shareholders of both the Original Security and the
Restructure Security following a reorganization because they chose to
purchase the Restructure Security in a public offering or to exercise
rights in order to maintain the same investment
[[Page 14180]]
position they had prior to the reorganization. Such holders may want to
continue to use options to manage the risks of their combined stock
position after the reorganization, but they can do so only if options
on the Restructure Security are available. The Exchanges believe that
it is important to avoid any undue delay in the introduction of options
trading in such a Restructure Security in circumstances where there is
sound reason to believe that the Restructure Security will in fact
satisfy options listing standards.
Accordingly, the Exchanges have proposed certain special listing
criteria to address the attendant concerns. As with the options listing
standards for shares of a Restructure Security issue to shareholders of
the Original Security in certain restructuring transactions, an
exchange will be able to assume the satisfaction of the Public
Ownership and Holder Requirements in public offerings and rights
distributions, if the Restructure Security is listed on an exchange or
an automatic quotation system subject to equivalent listing
requirements or at least 40,000,000 shares of the Restructure Security
are issued and outstanding. Moreover, after due diligence, an exchange
must have no reason to believe that the Restructure Security does not
satisfy these requirements.
Additionally, the closing prices of the Restructure Security on
each of the five or more consecutive ``regular way'' trading days prior
to the selection date must be at least $7.50 per share.\18\ In addition
to this requirement, the Price Test must also be separately met.
Satisfaction of the Price Test may be based on the market price history
of the Restructure Security from the ex-date for the restructuring
transaction to the selection date, and the market price history of the
Original Security prior to the ex-date for restructuring
transaction.\19\ In the event the Restructure Security has a closing
price that is less than $7.50 on any of the trading days preceding its
selection date, or an opening price that is less than $7.50 on its
selection date, the Restructure Security itself will have to satisfy
the Price Test. This would require the Restructure Security to close at
or above $7.50 on a majority of trading days over a period of three
months before it can be certified as eligible for options trading. In
order to rely, in part, on the market price history of the Original
Security to satisfy the Price Test, the Restructure Security must still
meet the Percentage Tests or the Aggregate Market Value Test as
outlined above in Section II. Finally, trading volume in the
Restructure Security itself, without reliance on the Original Security,
must be at least 2,400,000 shares during a period of twelve months or
less up to the time the security is so selected.
\18\ This requires that the Restructure Security must have
actually been issued and traded for at least 5 consecutive trading
days before it can be selected for options trading.
\19\ See CBOE Amendment No. 1, supra note 4; see also Amex
Amendment No. 1, and Phlx Amendment No. 1, supra note 5.
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For any Restructure Security issued in a public offering or a
rights distribution that satisfies these requirements, the effect of
the proposed rule changes will be to permit its certification for
options trading to take place as early as on the sixth day after
trading in the Restructure Security commences.
Finally, the Maintenance Volume Test approved in the Restructuring
Transactions Approval Orders is proposed to be amended to provide that
in the case of a Restructure Security issued in a public offering or
pursuant to a rights offering and approved for options trading on an
accelerated basis, the Maintenance Volume Test may not be satisfied on
the basis of the trading volume history of the Original Security, but
instead it must be satisfied solely on the basis of the trading volume
history of the Restructure Security.\20\
\20\ See CBOE Amendment No. 1, supra note 4; see also Amex
Amendment No. 1, and Phlx Amendment No. 1, supra note 5.
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IV. Commission Findings and Conclusions
The Commission finds that the proposed rule changes are consistent
with the requirements of the Act and the rules and regulations
thereunder applicable to a national securities exchange, and, in
particular with the requirements of Section 6(b)(5),\21\ in that the
rules of an exchange be designed to promote just and equitable
principles of trade, to prevent fraudulent and manipulative acts, and,
in general, to protect investors and the public interest.
\21\ 15 U.S.C. 78f(b)(5).
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The Commission believes that it is necessary for securities to meet
certain minimum standards regarding both the quality of the issuer and
the quality of the market for a particular security to become options
eligible. These standards are imposed to ensure that those issuers upon
whose securities options are to be traded are financially sound
companies whose trading volume, market price, number of holders, and
public ownership of shares are substantial enough to ensure adequate
depth and liquidity to sustain options trading that is not readily
susceptible to manipulation. The Commission also recognizes that under
current equity options listing criteria, investors may be precluded for
a significant period from employing an adequate hedging strategy
involving options on any newly acquired Restructure Security acquired
pursuant to a public offering or rights distribution in connection with
a restructuring transaction.
Accordingly, to determine whether the earlier listing of options
overlying a Restructure Security issued pursuant to a public offering
or rights distribution is reasonable, the Commission must balance the
benefits of providing adequate hedging strategies to shareholders of
the Restructure Security, and the risks of approving certain securities
for options trading before such securities can conclusively be
determined to satisfy the options eligibility criteria.\22\ The
Commission believes that the proposed limited exception to established
equity options listing procedures where a public offering or rights
distribution is solely related to a restructuring of an Original
Security, and the Original Security is already the subject of options
trading, strikes such a reasonable balance.
\22\ See supra Section II.
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As discussed in more detail below, the Commission believes that the
conditions of the new rule will help to ensure that only those
securities that are most likely to have adequate depth and liquidity
will be eligible for options trading prior to the establishment of a
recognized trading history. Additionally, by facilitating the earlier
listing of options on a Restructure Security issued pursuant to a
public offering or rights distribution, the Commission believes that
investors should be able to better hedge the risk of their newly
acquired stock position in the Restructure Security.\23\
\23\ Although the proposals do not specifically address it, the
Commission understands that the application of the proposals is
limited solely to those instances where options are listed on the
Original Security.
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Despite the benefits of the proposal, the Commission believes that
the proposal should only apply to restructuring transactions that
involve financially sound and sufficiently large companies. The
Commission believes that the Exchanges have adequately addressed this
concern by requiring the Restructure Security to either satisfy certain
comparative tests (comparing the Restructure Security, or its related
business with that of the Original Security, or its related
business,\24\ or
[[Page 14181]]
meet a very high aggregate market value standard ($500 million).\25\
\24\ The Commission notes that the comparative asset values and
revenues, when used to determine whether the above-mentioned
conditions are satisfied, shall be derived ``from the later of the
most recent annual or most recently available comparable interim
(not less than three months) financial statements.'' This provision
means that the interim financial statements must cover a period of
not less than three months.
\25\ See Restructuring Transactions Approval Orders, supra note
12.
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The Commission believes that if one of the comparative tests or the
aggregate market value standard is satisfied, the Restructure Security
should qualify for the ``lookback'' provision. Under the ``lookback''
provision, a Restructure Security will be able to satisfy the Price
Test if the market price history of the Restructure Security, together
with the market price history of the Original Security occurring prior
to the ex-date, meet the initial listing requirements for market price
of the Restructure Security. The Commission believes that the
additional requirement under the Exchanges' proposed rules that the
closing price of the Restructure Security on each of the five or more
consecutive ``regular way'' trading days prior to the selection date
must be at least $7.50 per share provides an exchange with a reasonable
sample price history of the Restructure Security before selection is
permitted.
The Commission also believes that it is appropriate for an exchange
to count ``when issued'' trading in the Restructure Security when
determining if the Restructure Security will satisfy the Price Test set
forth in the initial options listing requirements. However, once an
exchange begins to use ``when issued'' volume or price history for the
Restructure Security to satisfy the Price Test, it may not use the
Original Security for such purposes on any subsequent trading day. For
example, if in order to satisfy the Price Test for a Restructure
Security for which the ex-date is April 1, 1996, and the selection date
for the Restructure Security is April 8, 1996, an exchange may elect to
base its determination on the market price of the Original Security
from October 9, 1995 through March 1, 1996, the market price is the
when-issued market for the Restructure Security from March 7, 1996
through March 31, 1996, and the ``regular way'' trading market price of
the Restructure Security from April 1 through April 8, 1996, in
determining whether options covering the Restructure Security may be
certified for options trading on the April 8, 1996 selection date. An
exchange, however, would be permitted to use the price history of the
Original Security throughout the period from October 9, 1995 through
March 31, 1996, provided that it did not rely on any when-issued market
price history during that period.
The Commission notes that an exchange will not use trading history
relating to the Original Security after the ex-date to meet the initial
options listing requirements for the option contracts overlying the
Restructure Security. Additionally, the condition that option contracts
overlying a Restructure Security will not be initially listed for
trading until such time as shares of the Restructure Security are
issued and outstanding and are the subject of ``regular way'' trading
for at least 5 trading days will serve to (1) ensure that options will
only be traded on a Restructure Security when it is certain the
security is actually issued and outstanding, and (2) provide an
opportunity to better determine if the Holder and Public Ownership
Requirements have been met.
The Commission notes that the Exchanges may not apply the
``lookback'' provision to satisfy the Volume Test for a Restructure
Security issued pursuant to a public offering or rights distribution.
The trading volume in the Restructure Security must be at least
2,400,000 shares during a period of twelve months or less up to the
time the security is so selected. The Commission believes that this
requirement will ensure that there is adequate liquidity in the
Restructure Security, issued pursuant to a public offering or rights
distribution, to qualify for options trading.
In addition to satisfying the Volume and Price Tests, a Restructure
Security must also meet certain distribution requirements before an
exchange can deem such security to be options eligible. Specifically,
the Restructure Security must have 2,000 holders, and 7 million shares
must be owned by persons not required to report their stock holdings
under Section 16(a) of the Act to be options eligible. The proposal
provides that an exchange may make certain limited assumptions to
determine the Public Ownership and Holder Requirements. First, if a
Restructure Security is to be listed on an exchange or in an automatic
quotation system that has, and applies to the Restructure Security, an
initial listing requirement that the issuer have no less than 2,000
holders, the Commission believes that it is reasonable for an exchange
to assume that its comparable option listing requirement will be
satisfied. Second, if a Restructure Security is to be listed on an
exchange or in an automatic quotation system that has, and applies to
the Restructure Security, an initial listing requirement of no less
than public ownership of 7 million shares, the Commission believes that
it is reasonable for an exchange to assume that its comparable option
listing requirement will be satisfied.
The Commission notes that currently no exchange or automatic
quotation system has a public ownership initial stock listing standard
that is as stringent as those required under the options eligibility
requirements. Moreover, a stock exchange may now be able to list stocks
pursuant to alternate listing standards. For example, the Commission
has recently approved alternate listing standards for companies listed
on the New York Stock Exchange (``NYSE''), including, among other
things, the distribution of shares.\26\ Under these alternate listing
standards, the NYSE is currently allowed to list certain companies with
500 shareholders that meet heightened requirements in other areas in
lieu of its 2,200 total shareholder requirements. Therefore, the
Exchanges should be careful to precisely determine which listing
standards are being applied to the listing of the Restructure Security
prior to making a determination as to whether the Restructure Security
meets the corresponding options listing criteria.
\26\ See Paragraph 102.01 of the NYSE's Listed Company Manual.
See also Securities Exchange Act Release No. 35571 (April 5, 1995),
60 FR 18649 (April 12, 1995) (order approving proposed rule change
relating to domestic listing standards).
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Additionally, current options listing criteria for securities
issued pursuant to restructuring transactions provide that if at least
40 million shares of a Restructure Security will be issued and
outstanding in a restructuring transaction, an exchange may assume that
the Restructure Security will satisfy both the public ownership of
shares and holder requirements. The Commission believes this is
appropriate because it appears unlikely that a Restructure Security
with at least 40 million issued and outstanding shares, will have fewer
than 2,000 holders or less than 7 million shares owned by persons not
required to report their stock holdings under Section 16(a) of the Act.
The Commission believes that concerns associated with the ability
of an exchange to make important listing decisions based on assumptions
rather than confirmed facts are alleviated by the crucial provision
that an exchange shall not rely on the above assumptions if, after a
reasonable investigation, it determines that either the public
ownership of shares or the holder requirement, in fact, will not be
satisfied on the intended date for listing the option. At the very
least, an exchange
[[Page 14182]]
should investigate the basis for its assumptions regarding the public
ownership of shares and number of shareholders just prior to selecting
the option and just prior to trading the option, utilizing a worst case
analysis in making its assumptions that the Restructure Security will
meet these listing standards.
In addition, other exchanges will continue to have the opportunity
to challenge the certification by demonstrating that the Restructure
Security will not meet the initial listing criteria with respect to
public ownership and holders. The Commission believes that this
provision provides an important check and should help to ensure that no
unqualified securities are listed for options trading.
The Commission also believes that it is appropriate for an exchange
to apply the ``lookback'' provision, to determine if a Restructure
Security will satisfy the Maintenance Price Test. The Commission
believes that it is appropriate to use the market price history of the
Original Security, as well as any ``when issued'' trading in the
Restructure Security for such calculations, provided that they are only
used for determining price history for the period prior to commencement
of trading in the Restructure Security.
The Commission notes that because the Maintenance Price Test is
calculated on a rolling forward basis, ``when issued'' trading history
for the Restructure Security or trading history for the Original
Security prior to the ex-date may be used for maintenance calculations
for no more than six months after the ex-date for the Restructure
Security. For example, in order to satisfy the Maintenance Price Test
for a Restructure Security on April 1, 1996, with an ex-date of
February 1, 1996, an exchange may elect to base its determination on
the trading price of the Original Security from October 1, 1995 through
January 15, 1996, the trading price in the when-issued market for the
Restructure Security from January 16, 1996 through January 31, 1996,
but must use the ``regular way'' trading price in the Restructure
Security from February 1, 1996 through April 1, 1996.
The Commission believes that it is appropriate not to rely on the
trading volume of the Original Security in satisfying the Maintenance
Volume Test, because the trading volume of the Restructure Security
must solely satisfy the initial listing requirements for trading volume
before it is eligible for options trading.
The Commission finds good cause for approving the proposed rule
change by the PSE and the NYSE prior to the thirtieth day after the
date of publication of notice of filing thereof in the Federal
Register. Specifically, the Commission notes that the PSE's and NYSE's
proposed rule changes are substantively similar to those proposed by
the CBOE, Amex, and Phlx. The PSE and NYSE rule change proposals raises
no issues that are not raised by the other exchanges. Additionally, the
Commission notes that the CBOE, Amex, and Phlx proposals were subject
to a full notice and comment period, and no comments were received.
Accordingly, the Commission believes that it is consistent with Section
6(b)(5) of the Act to approve PSE's and NYSE's proposed rule changes on
an accelerated basis.
The Commission also finds good cause for approving CBOE Amendment
Nos. 1 and 2, Amex Amendment No. 1, and Phlx Amendment No. 1, all
comprising the same substantive changes to their respective proposals,
prior to the thirtieth day after the date of publication of notice of
filing thereof in the Federal Register. Specifically, the amendments
clarify the initial market price requirements,\27\ and the maintenance
trading volume requirements \28\ for shares of a Restructure Security
issued pursuant to a public offering or rights distribution. Because
the amendments accurately reflect the intent of the rule as originally
proposed, and merely provide clarifying language, the Commission does
not believe that the amendments raise any new or unique regulatory
issues. Accordingly, the Commission believes that it is consistent with
Sections 6(b)(5) and 19(b)(2) of the Act to approve the foregoing
amendments to CBOE's, Amex's, and Phlx's proposed rule changes on an
accelerated basis.
\27\ See supra note 19 and accompanying text.
\28\ See supra note 20 and accompanying text.
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Interested persons are invited to submit written data, views and
arguments concerning the PSE and NYSE proposals; CBOE Amendment Nos. 1
and 2; Amex Amendment No. 1; and Phlx Amendment No. 1. Persons making
written submission should file six copies thereof with the Secretary,
Securities and Exchange Commission, 450 Fifth Street, N.W., Washington,
D.C. 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. Sec. 552, will be available for inspection and
copying at the Commission's Public Reference Section, 450 Fifth Street,
N.W., Washington, D.C. 20549. Copies of such filing will also be
available for inspection and copying at the principal offices of the
Exchanges. All submissions should refer to SR-CBOE-95-58; SR-Amex-95-
47; SR-Phlx-95-90; SR-PSE-96-05; and SR-NYSE-96-03 and should be
submitted by April 19, 1996.
V. Conclusion
Based on the above findings, the Commission believes the proposals
are consistent with Section 6(b)(5) of the Act by facilitating
transactions in securities while at the same time ensuring continued
protection of investors. The new accelerated listing procedures only
apply where a public offering or rights distribution is solely related
to a restructuring of the Original Security, and the Original Security
is already subject to options trading. This fact, along with the other
strict conditions of the rule should help to identify for accelerated
options eligibility only those Restructure Securities that will have
adequate depth and liquidity to support options trading. At the same
time it will provide investors with a better opportunity to hedge their
positions in both the Original and the Restructure Security.
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\29\ that the proposed rule changes (SR-CBOE-95-58; SR-Amex-95-47;
Phlx-95-90; SR-PSE-96-05; and SR-NYSE-96-03), as amended, are approved.
\29\ 15 U.S.C. 78s(b)(2).
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For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\30\
\30\ 17 CFR 200.30-3(a)(12).
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Jonathan G. Katz,
Secretary.
[FR Doc. 96-7701 Filed 3-28-96; 8:45 am]
BILLING CODE 8010-01-M
