[Federal Register Volume 60, Number 146 (Monday, July 31, 1995)]
[Notices]
[Pages 39029-39034]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-18707]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-36020; File Nos. SR-CBOE-95-11; SR-PSE-95-04; SR-Phlx-
95-12; SR-Amex-95-07]
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
Pacific Stock Exchange, Inc., and the Philadelphia Stock Exchange,
Inc.; and Notice of Filing and Order Granting Accelerated Approval to
Proposed Rule Change and Related Amendments by the American Stock
Exchange, Inc., Relating to Listing Standards for Options on Securities
Issued in Certain Corporate Restructuring Transactions
July 24, 1995.
I. Introduction
On January 26, February 13, February 15, and February 17 the
Chicago Board Options Exchange, Inc. (``CBOE''), the Philadelphia Stock
Exchange, Inc. (``Phlx''), the Pacific Stock Exchange, Inc. (``PSE''),
and the American Stock Exchange, Inc. (``Amex'') (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 certain corporate restructuring
transactions.
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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On February 17, 1995, February 21, 1995, February 21, 1995 and July
11, 1995, the CBOE, PSE, Phlx and Amex, respectively, submitted to the
Commission Amendment No. 1 to their proposed rule changes in order to
make certain technical corrections to the text of the proposals.\3\ On
May 10, 1995, the CBOE submitted to the Commission Amendment No. 2 to
its proposed rule change.\4\ On June 13, 1995, the CBOE submitted to
the Commission Amendment No. 3 to its proposed rule change.\5\ On July
11, 1995, the Amex submitted to the Commission Amendment Nos. 2 and 3
to its proposed rule change.\6\ On June 26, July 11 and July 11, 1995,
the Phlx, PSE, and the Amex submitted to the Commission Amendment Nos.
2, 2, and 4, respectively, to their proposed rule changes.\7\ On July
11, 1995, the Phlx submitted to the Commission Amendment No. 3 to its
proposed rule changes.\8\
\3\ The CBOE, PSE, Phlx and Amex submitted identical revisions
to their proposed rule changes in order to clarify that comparative
asset values and revenues shall be derived from the later of the
most recent annual or most recently available comparable interim
financial statements of each of the respective issuers. See Letters
from Michael Meyer, Attorney, Schiff, Hardin & Waite, dated February
17, 1995, Michael Pierson, Senior Attorney, PSE, dated February 21,
1995, and Michele Weisbaum, Associate General Counsel, Phlx, dated
February 21, 1995, to Beth Stekler, Attorney, Office of Market
Supervision (``OMS''), Division of Market Regulation (``Market
Regulation''), Commission. See also Letter from Claire McGrath,
Special Counsel, Amex, to Michael Walinskas, Branch Chief, OMS,
Market Regulation, Commission, dated July 11, 1995 (``Amex Letter'')
(collectively ``Amendment No. 1'').
\4\ Amendment No. 2 to CBOE's proposal makes certain technical
changes and states that under narrowly defined circumstances, the
CBOE may determine that the public ownership of shares and holder
requirements for the Restructure Security are satisfied based on
these same characteristics of the Original Security. See Letter from
Michael Meyer, Attorney, Schiff Hardin & Waite, to Sharon Lawson,
Assistant Director, OMS, Market Regulation, Commission, dated May
10, 1995 (``CBOE Amendment No. 2'').
\5\ Amendment No. 3 to CBOE's proposed rule change makes further
technical changes, and eliminates the reference to rights offerings
in paragraph (c) of proposed new Interpretation and Policy .05 to
CBOE Rule 5.3. See Letter from Michael Meyer, Attorney, Schiff
Hardin & Waite, to Sharon Lawson, Assistant Director, OMS, Market
Regulation, Commission, dated June 13, 1995 (``CBOE Amendment No.
3'').
\6\ The Amex submitted Amendment No. 2 to its proposed rule
change in order to delete any and all references to restructuring
transactions involving shareholders other than existing shareholders
of the issuer of the Original Security. The Amex also submitted
Amendment No. 3 to its proposed rule change to correct a technical
error in proposed rule 916.01(6) by properly referencing various
commentaries. See Amex Letter, supra note 3.
\7\ The Phlx, PSE, and Amex amended the text of their proposed
rules to conform to the language filed by the CBOE. See Letter from
Michele Weisbaum, Associate General Counsel, Phlx, to Michael
Walinskas, OMS, Market Regulation, Commission, dated June 26, 1995
(``Phlx Amendment No. 2''), Letter from Michael Pierson, Senior
Attorney, PSE, to John Ayanian, Attorney, OMS, Market Regulation,
Commission, dated July 11, 1995 (``PSE Amendment No. 2''). See also
Amex Letter, supra note 3.
\8\ The Phlx submitted Amendment No. 3 to its proposed rule
change to make certain technical clarifications, and to revise
paragraph (b) of proposed new Commentary .05 to Phlx Rule 1009 to
state that option contracts may not be initially listed for trading
on a Restructure Security until shares of the Restructure Security
are issued and outstanding and are the subject of trading that is
not on a ``when issued'' basis. See Letter from Michele Weisbaum,
Associate General Counsel, Phlx, to John Ayanian, Attorney, OMS,
Market Regulation, Commission, dated July 11, 1995 (``Phlx Amendment
No. 3'').
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Notices of the CBOE, PSE and Phlx proposals and Amendment No. 1 to
PSE's and Phlx's proposed rule changes were published for comment in
the Federal Register on February 8, 1995, March 1, 1995 and March 1,
1995, respectively.\9\ No comments were
[[Page 39030]]
received on the proposals. This order approves the proposed rule
changes by the CBOE, PSE, Phlx and Amex. The proposed rule change by
the Amex, as amended, and certain amendments by the CBOE, PSE, and
Phlx, have been approved on an accelerated basis.
\9\ See Securities Exchange Act Release Nos. 35315 (February 1,
1995), 60 FR 7598 (File No. SR-CBOE-95-11); 35410 (February 22,
1995), 60 FR 11158 (File No. SR-PSE-95-04 and Amendment No. 1); and
35409 (February 22, 1995), 60 FR 11159 (File No. SR-Phlx-95-12 and
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.\10\
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''); \11\
and (4) a minimum of 2,000 holders (``Holder Requirement'').\12\ 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 begin options trading from
three or five business days after the selection date.
\10\ See Amex Rule 915; CBOE rule 5.3; PSE Rule 3.6; Phlx Rule
1009; and NYSE Rule 715.
\11\ 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.
\12\ This proposal addresses price, volume, public ownership,
and holder requirements specifically. For a Restructure Security to
meet initial listing requirements, however, it must additionally
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. See supra
note 10.
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The Exchanges have adopted maintenance criteria for withdrawal of
approval of an underlying security subject to options trading.\13\ 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''); \14\ (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 Holder Requirement'').\15\
\13\ See Amex Rule 916; CBOE Rule 5.4; PSE Rule 3.7; Phlx Rule
1010; and NYSE Rule 716.
\14\ Additional criteria permits the underlying security under
certain circumstances to trade as low as $3.00 for a temporary
period of time. See Id.
\15\ This proposal addresses maintenance criteria for market
price and trading volume specifically. For a Restructure Security to
meet maintenance requirements for an underlying security subject to
options trading, however, it must additionally comply with all
requirements set forth by the Exchanges in their options eligibility
rules. See supra note 13.
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.
III. Description of the Proposals
The Exchanges propose to amend their rules to facilitate the
earlier listing of options on securities issued in certain corporate
restructuring transactions. The proposals will 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.''\16\
\16\ The proposal defines a ``restructuring transaction'' as a
spin-off, reorganization, recapitalization, restructuring or similar
corporate transaction.
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Under the current standards, an exchange is generally precluded
from listing eligible options on newly issued securities for at least
three months, given that the guidelines require three months of price
history to determine if the underlying security meets the Price Test.
Additionally, an exchange may only list eligible options on newly
issued securities, if the underlying security meets the Volume Test
which requires trading volume in all markets of at least 2.4 million
shares in the preceding twelve months. The proposed rule changes,
however, would facilitate 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 Exchanges propose 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 transaction.\17\
\17\ Option contracts may not be initially listed for trading in
respect of a Restructure Security 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. See e.g., Phlx Amendment No.
3, supra note 8.
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Before an exchange may invoke this proposed ``lookback'' provision
and utilize the volume and price of the Original Security for purposes
of meeting the options eligibility criteria for the Restructure
Security, 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.\18\ The threshold percentages 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
[[Page 39031]]
of the enterprise after the restructuring transaction. The fourth
alternate condition is that the aggregate market value represented by
the Restructure Security be at least $500 million. 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 4500 million, by virtue of its
absolute size, represents a substantial portion of the Original
Security, and thus should qualify for the ``lookback'' provision.
\18\ Aggregate market value 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 satisfied. First, the Restructure Security must
satisfy the options Volume and Price Tests. Under the proposals, 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. Under the proposed
rule change, 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).\19\ 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.
\19\ See supra Section II.
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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, the Exchanges
propose that these requirements may be satisfied based upon the
exchange's knowledge of the existing number of outstanding shares and
holders of the Original Security.
The Exchanges further proposes that 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.\20\
\20\ According to the CBOE, for most restructuring transactions,
it should be possible to know or to deduce from publicly available
information on the distribution of the Restructure Security (or a
worst case estimate of the number of shares that will be publicly
held and the number of shareholders) upon completion of the
restructuring transaction. As proposed, an exchange could make the
necessary determination prior to the ex-date and could certify the
Restructure Security for options trading on that basis. See Letter
from Michael Meyer, Attorney, Schiff Hardin & Waite, to Sharon
Lawson, Assistant Director, OMS, Market Regulation, dated January
25, 1995 (``CBOE Letter'').
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. In addition,
pursuant to the proposal, other exchanges will 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.
Finally, the proposal will adopt 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.
IV. Commission Finding 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, existing shareholders of an
issuer that becomes involved in a restructuring transaction, may be
precluded for a significant period from employing an adequate hedging
strategy involving options on any newly acquired Restructure Security
received in connection with such transaction.
Accordingly, to determine whether the earlier listing of options
overlying a Restructure Security is reasonable, the Commission must
balance the benefits of providing adequate hedging strategies to
shareholders of the issuer of the Restructure Security, and the risks
of approving certain securities for options trading before such
securities actually satisfy the options eligibility criteria, which
currently, for newly issued securities, can not occur, at the very
least, prior to three months after the security begins trading.\22\ The
Commission believes that the proposed limited exception to established
equity options listing procedure 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, the Commission believes
that investors formerly holding the Original Security, upon which
options are currently traded, should be able to
[[Page 39032]]
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 to 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 addressed this concern by
adding conditions to the proposal that require that Restructure
Security to either satisfy certain comparative test (comparing the
Restructure Security, or its related business with that of the Original
Security, or its related business),\24\ or meet a very high aggregate
market value standard ($500 million).
\24\ See supra note 18 and accompanying text. The Commission
notes that the Exchanges proposed that 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.
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The Commission believes that if one of the comparative tests is
satisfied, the Restructure Security should adequately resemble the
Original Security to qualify for the ``lookback'' provision. Under the
``lookback'' provision, a Restructure Security will be able to satisfy
the Volume and Price Tests if the trading volume and market price
history of the Restructure Security, together with the trading volume
and market price history of the Original Security occurring prior to
the ex-date, meet the existing related requirements. Moreover, the
Commission believes that, given the limited scope of the proposal, it
is appropriate to conclude that a Restructure Security with an
aggregate market value of at least $500 million appropriately qualifies
for the ``lookback'' provision.
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 Volume and
Price Tests 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 Volume or Price
Tests, it may not use the Original Security for such purposes 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. For example, if in order to satisfy the Volume Test for a
Restructure Security for which the ex-date is expected to be February
1, 1996, an exchange may elect to base its determination on the trading
volume of the Original Security from February 1, 1995 through December
27, 1995, and then utilize the trading volume in the when-issued market
for the Restructure Security from December 28, 1995 through January 31,
1996, in determining whether options covering the Restructure Security
may be listed on the February 1 ex-date. Under this example, after
December 28, 1995, only when-issued trading data for the Restructure
Security may be used in determining whether it meets the Volume and
Price Tests. An exchange, however, would be permitted to use the volume
and price history of the Original Security throughout the entire period
prior to February 1, 1996, provided that it did not rely on any when-
issued trading data during that period.
The Commission notes that an exchange shall 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 shall not be initially listed for
trading until such time as shares of the Restructure Security are
issued and outstanding and are the subject of trading that is not on a
``when issued'' basis or in any other way contingent on the issuance or
distribution of the shares will ensure that options will only be traded
a Restructure Security when it is certain the security is actually
issued and outstanding.
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. Under the most
typical restructuring transaction, a spin-off to existing shareholders
of the issuer of the Original Security, an exchange should be able to
determine from publicly available information or otherwise reasonably
deduce whether the Restructure Security will satisfy the 2,000
shareholders requirement and the public ownership of 7 million shares
requirement.\25\ As an example, if Issuer A, having public ownership of
10 million shares of common stock owned by 5,000 holders intends to
effect a spin-off of a subsidiary, whereby one share of the subsidiary
is issued to existing shareholders of Issuer A for each currently held
outstanding share of Issuer A, immediately following the spin-off the
former subsidiary will have public ownership of 10 million shares and
5,000 holders. As a result, the former subsidiary will satisfy both the
public ownership of 7 million shares and 2,000 holder requirements.
\25\ The Commission notes that ``public ownership of shares, as
referred to herein, are shares that are owned by persons not
required to report their stock holdings under Section 16(a) of the
Act (i.e., directors, officers, and 10% beneficial owners).
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As an alternative to the above, the proposal provides that an
exchange may make certain limited assumptions based on facts and
circumstances that will exist on the intended date for listing the
options in order 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 the 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 requirement.
[[Page 39033]]
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, the proposal provides 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
holdings under Section 16(a) 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
contained in the proposal 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 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 upon completion of the restructuring transaction.\27\
\27\ See e.g. CBOE Letter, supra note 20.
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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 Volume and Price Tests. The
Commission believes that it is appropriate to use the trading volume
and 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
and volume history for the period prior to commencement of trading in
the Restructure Security.
The Commission notes that because the Maintenance Volume and Price
Test are 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 twelve months after the ex-date for the
Restructure Security with respect to the Maintenance Volume Test, and
for no more than six months after the ex-date for the Restructure
Security with respect to the Maintenance Price Test. For example, if in
order to satisfy the Maintenance Volume Test for a Restructure Security
on November 1, 1995, for which the ex-date is September 1, 1995, an
exchange may elect to base its determination on the trading volume of
the Original Security from November 1, 1994 through August 1, 1995, the
trading volume in the when-issued market for the Restructure Security
from August 2, 1995 through August 31, 1995, but must use the trading
volume in the Restructure Security from September 1, 1995 through
November 1, 1995. Similarly, in order to satisfy the Maintenance Price
Test for the same Restructure Security on November 1, 1995, an exchange
may elect to base its determination on the trading price of the
Original Security from August 1, 1995 through August 15, 1995, the
trading price in the when-issued market for the Restructure Security
from August 16, 1995 through August 31, 1995, but must use the trading
price in the Restructure Security form September 1, 1995 through
November 1, 1995.
The Commission notes that the Exchanges' proposals only permit them
to avail themselves of the accelerated listing procedures for a
traditional restructuring transaction that is limited to the
distribution of shares to existing shareholders of the issuer of the
Original Security. Accordingly, the Commission notes that this proposal
does not address or apply to restructuring transactions that involve a
sale of such securities to the general public, including, but not
limited to, initial public offerings or secondary offerings. The
Commission is approving the current proposal based, in part, on the
need for investors and other market participants with combined stock/
option positions in an Original Security to be able to maintain their
positions immediately following a restructuring transaction. Otherwise,
holders of the Original Security might be temporarily prevented (until
the Restructure Security independently satisfies the options listing
criteria) from adequately hedging their involuntarily received new
positions in the Restructure Security.
The Commission also notes that this proposal does not address or
apply to restructuring transactions that involve a sale of such
securities in a rights offering to existing holders of the Original
Security. The Commission believes that the contingencies in the terms
of such an offering make it too difficult to determine whether the
number of subscribers for such an offering would be adequate to meet
the Pubic Ownership and Holder Requirements and therefore such an
offering does not justify the immediate availability of options for the
underlying security.
The Commission believes that any future exchange proposing to
expand the scope of this proposal beyond that of restructuring
transactions involving distributions of securities to existing
shareholders or expanding the rule to include rights offerings must
address potential concerns associated with being able to adequately
determine the minimum number of publicly owned shares and holders of
the Restructure Security that will exist on the intended date for
listing the options in order to justify accelerated availability of
options trading.
The Commission finds good cause for approving the proposed rule
change by the Amex 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 Amex's proposed rule change
is substantively similar to those proposed by the CBOE, PSE, and Phlx.
The Amex rule change proposal raises no issues that are not raised by
the other exchanges. Additionally, the Commission notes that the CBOE,
PSE, 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 Amex's proposed rule change, as amended, on an accelerated
basis.
The Commission also finds good cause for approving identical
Amendment No. 1 to the proposed rule changes from the CBOE and Amex
prior to the thirtieth day after the date of publication of notice of
filing thereof in the Federal Register. This amendment clarifies that
comparative asset values
[[Page 39034]]
and revenues shall be derived from the later of the most recent annual
or most recently available comparable interim financial statements of
each of the respective issuers. The Commission believes that this
amendment helps to clarify the method of determining comparative asset
values and revenues and contains only minor variations from the
original proposals. Accordingly, the Commission believes that it is
consistent with Sections 6(b)(5) of the Act to approve Amendment No. 1
to CBOE's and Amex's proposed rule changes on an accelerated basis.
The Commission finds good cause for approving Amendments Nos. 2 and
3 to the Amex's proposed rule change prior to the thirtieth day after
the date of publication of notice of filing thereof in the Federal
Register. Amendment No. 2 to Amex's proposal addresses the scope of
transactions qualifying for the proposed equity options listing
criteria by deleting any and all references to restructuring
transactions involving shareholders other than existing shareholders of
the issuer of the Original Security. This amendment ensures that the
accelerated options listing procedures as proposed by the exchanges,
apply only to a restructuring transaction involving existing
shareholders of the issuer of the Original Security. The Commission
believes that Amendment No. 2 to Amex's proposal effectively narrows
the scope, and accurately reflects the original intent, of the proposed
rule change. Amendment No. 3 to Amex's proposal corrects a technical
error in proposed rule 916.01(6) by properly referencing various
commentaries. The Commission does not believe the amendment raises any
new or unique regulatory issues. Therefore, the Commission believes it
is consistent with Sections 6(b)(5) of the Act to approve Amendment
Nos. 2 and 3 to Amex's proposal on an accelerated basis.
The Commission finds good cause for approving Amendments Nos. 2 and
3 to the CBOE's proposed rule changes, prior to the thirtieth day after
the date of publication of notice of filing thereof in the Federal
Register. Specifically, Amendment No. 2, to CBOE's proposal makes
certain technical changes to clarify the meaning of the proposed rule
changes to achieve greater uniformity with the language of the other
exchanges, and to properly reflect the original intent of the proposed
rule change. Additionally, Amendment No. 2 to CBOE's proposal states
that under narrowly defined circumstances, the CBOE may determine that
the public ownership of shares and holder requirements are satisfied
based on these same characteristics in respect of the Original
Security. Amendment No. 3 to CBOE's proposed rule changes makes further
technical changes, and eliminates the reference to rights offerings in
paragraph (c) of proposed new Interpretation and Policy .05 to CBOE
Rule 5.3. The Commission does not believe these amendments raise any
new or unique regulatory issues. In particular, the Commission believes
that the amendments clarify the meaning, and reflect the scope of the
proposed rule change, as originally intended. Therefore, the Commission
believes it is consistent with Sections 6(b)(5) of the Act to approve
Amendments Nos. 2 and 3 to CBOE's proposed rule changes, respectively,
on an accelerated basis.
The Commission finds good cause for approving Amendments Nos. 2, 2,
and 4 to the Phlx's, PSE's, and Amex's proposed rule changes,
respectively, prior to the thirtieth day after the date of publication
of notice of filing thereof in the Federal Register. These amendments
merely conform the Phlx's, PSE's, and Amex's proposed rule changes to
Amendment Nos. 2 and 3 to CBOE's proposal. The Commission does not
believe the amendments raised any new or unique regulatory issues.
Therefore, the Commission believes it is consistent with Sections
6(b)(5) of the Act to approve Amendments Nos. 2, 2 and 4 to Phlx's,
PSE's, and Amex's proposed rule changes, respectively, on an
accelerated basis.
The Commission finds good cause for approving Amendment No. 3 to
the Phlx's proposed rule changes prior to the thirtieth day after the
date of publication of notice of filing thereof in the Federal
Register. Specifically, Amendment No. 3 to Phlx's proposal makes
certain technical clarifications and revises paragraph (b) of proposed
new Commentary .05 to Phlx Rule 1009 to state that option contracts may
not be initially listed for trading on a Restructure Security until
shares of the Restructure Security are issued and outstanding and are
the subject of trading that is not on a ``when issued'' basis. Because
Phlx Amendment No. 3 merely reverses an unintended amendment to the
proposed rule change as originally filed, the Commission does not
believe the amendment raises any new or unique regulatory issues.
Therefore, the Commission believes it is consistent with Section
6(b)(5) of the Act to approve Amendment No. 3 to Phlx's proposal on an
accelerated basis.
Interested persons are invited to submit written data, views and
arguments concerning the Amex proposal Amendments Nos. 1, 2, 3 and 4 to
Amex's proposal; CBOE Amendment Nos. 1, 2 and 3; Phlx Amendment Nos. 2
and 3; and PSE Amendment No. 2. Persons making written submissions
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. 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-95-11; SR-PSE-95-04; SR-Phlx-
95-12; and SR-Amex-95-07 and should be submitted by August 21, 1995.
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. As noted above, the 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,\28\ that the proposed rule changes (SR-CBOE-95-11; SR-PSE-95-04;
SR-Phlx-95-12; and SR-Amex-95-07), as amended, are approved.
\28\ 15 U.S.C. 78s(b)(2).
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For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\29\
\29\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-18707 Filed 7-28-95; 8:45 am]
BILLING CODE 8010-01-M
