04-13968. Order Temporarily Exempting Standardized Options and Security Futures From Rule 12d2-2 Under the Securities Exchange Act of 1934

June 15, 2004.

I. Background

Section 12(a) of the Securities Exchange Act of 1934 (“Exchange Act”) makes it unlawful for any member, broker, or dealer to affect any transaction in any security (other than an exempted security) on a national securities exchange unless a registration is effective as to such security on that exchange in accordance with the provisions of the Exchange Act and the rules thereunder.^[1] Section 12(d) of the Exchange Act provides that a security registered with a national securities exchange may be withdrawn or stricken from listing and registration on an exchange in accordance with the rules of the exchange, and upon such terms as the Commission may deem necessary, upon application by the issuer of the security or by the exchange to the Commission.

Section 12(a) of the Exchange Act does not apply to security futures products.^[2] In addition, the Commission exempted by rule security futures products from section 12(g) of the Exchange Act if traded on a national securities exchange and cleared by a clearing agency that is registered as a clearing agency under section 17A of the Exchange Act or exempt from registration under section 17A(b)(7).^[3] There is no similar exemption, however, for security futures products from section 12(d) of the Exchange Act. In addition, the Commission, by rule, exempted standardized options ^[4] from the provisions of section 12(a) of the Exchange Act,^[5] but was silent as to whether standardized options are exempt from section 12(d). Moreover, the options exchanges have continued to file applications under Rule 12d2-2 to delist options since the Commission exempted them from the provisions of section 12(a) of the Exchange Act and the Commission has issued orders approving such delistings.

The Commission, however, does not believe that the requirements of Rule 12d2-2 provide investors in options with any protections and has never applied the requirements of this rule to security futures products. For this reason, as part of its proposal issued today to streamline the procedures for delisting and deregistration of securities under section 12(d) of the Exchange Act,^[6] the Commission is proposing to amend Rule 12d2-2 to exempt standardized options that are issued by a clearing agency and traded on a national securities exchange, and to exempt security futures products that are traded on a national securities exchange, from section 12(d) of the Exchange Act and, thus, also the requirements of Rule 12d2-2.

II. Temporary Exemption for Standardized Options and Security Futures

Section 36 of the Exchange Act gives the Commission the authority to exempt any person, security or transaction from any Exchange Act provision by rule, regulation, or order, to the extent that the exemption is necessary or appropriate in the public interest and consistent with the protection of investors.^[7] The Commission believes it is consistent with the protection of investors and appropriate in the public interest to temporarily exempt certain standardized options and security futures products from Rule 12d2-2 under the Exchange Act.^[8]

The temporary exemption for standardized options and security futures products from Rule 12d2-2 will provide clarity to market participants while the proposal, as noted above, to permanently exempt standardized options and security futures products traded on a national securities exchange from section 12(d) of the Exchange Act, is pending. The Commission believes there is little practical benefit to requiring the delisting of standardized options and security futures to comply with Rule 12d2-2. Standardized options and security futures products are derivatives, and thus holders of such products have no ownership interest in the underlying security or index, unless the option is physically settled and the holder chooses to exercise the standardized option or hold the security future until expiration. For this reason, when a standardized option or security futures product fails to meet an exchange's maintenance standards, the exchange may not add new options series or expiration months in security futures products, but market participants are still allowed to do closing transactions in open series of options until expiration or until the settlement date of the security futures product.

Accordingly, it is ordered, pursuant to section 36 of the Exchange Act,^[9] that any standardized option issued by a clearing agency and traded on a national securities exchange, and any security futures product that is traded on a national securities exchange, is exempted from Rule 12d2-2 under the Exchange Act until October 31, 2004.

By the Commission.

Margaret H. McFarland,

Deputy Secretary.

Footnotes

1.  15 U.S.C. 78 l (a).

2.  15 U.S.C. 78c(a)(56).

3.  See Securities Exchange Act Release No. 47082 (Dec. 23, 2002), 68 FR 188 (Jan. 2, 2003).

4.  17 CFR 240.9b-1.

5.  See supra note 3.

6.  See Securities Exchange Act Release No. 49858 (June 15, 2004).

7.  15 U.S.C. 78mm.

8.  The temporary exemption would be in effect until October 31, 2004.

9.  15 U.S.C. 78mm.