[Federal Register Volume 62, Number 69 (Thursday, April 10, 1997)]
[Notices]
[Pages 17659-17661]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-9203]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-38479; File No. SR-Phlx-97-12]


Self-Regulatory Organizations; Order Granting Accelerated 
Approval of Proposed Rule Change and Notice of Filing and Order 
Granting Accelerated Approval of Amendment No. 1 Thereto by the 
Philadelphia Stock Exchange, Inc. Relating to the Maintenance Criteria 
for the Phlx Phone Index

April 3, 1997.
    On March 5, 1997, the Philadelphia Stock Exchange Inc. (``Phlx'' or 
``Exchange'') submitted to the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b) of the Securities Exchange 
Act of 1934 (``Act''),\1\ and Rule 19b-4 thereunder,\2\ a proposed rule 
change to amend the maintenance standards applicable to the Phlx Phone 
Index (``Index'') to allow the number of stocks in the Index to decline 
to six without having to delist the Index. Notice of the proposed rule 
change appeared in the Federal Register on March 19, 1997.\3\ No 
comments were received on the proposal. On April 2, 1997, the Phlx 
filed Amendment No. 1 to the proposal to address issues related to 
Index concentration and to request accelerated approval of its 
proposal.\4\ This order approves the proposal, as amended, on an 
accelerated basis.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Securities Exchange Act Release No. 38383 (March 11, 1997); 
62 FR 13203.
    \4\ Letter from Nandita Yagnik, Attorney, New Product 
Development, Phlx to Marianne H. Khawly, Staff Attorney, Division of 
Market Regulation (``Division''), Commission, dated April 2, 1997.
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I. Description of the Proposal

    On July 11, 1994, the Commission approved a proposal by the Phlx to 
list and trade options on the Index.\5\ The Index is a capitalization-
weighted index composed of eight widely held U.S.

[[Page 17660]]

companies created as a result of the divestiture of American Telephone 
and Telegraph Co. (``AT&T'') in 1983. The Index includes seven regional 
telephone companies spun off from AT&T and AT&T itself.\6\ Currently, 
the maintenance standards for the Index require that at least 90% of 
the component stocks in the Index by weight, and 80% by number, are 
eligible for options trading \7\ and the number of stocks in the Index 
not decrease to less than eight or increase to more than ten. If the 
Index were not to meet these maintenance criteria, the Exchange is 
required to wind down trading in options overlying the Index by 
restricting trading to closing only transactions and to not open any 
new series of options on the Index unless a new Rule 19b-4 filing is 
submitted to the Commission and approved.
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    \5\ Securities Exchange Act Release No. 34345 (July 11, 1994), 
59 FR 36245 (approval for index options on the Phone Index).
    \6\ Id. The components of the Index are as follows: Ameritech; 
AT&T; Bell Atlantic; BellSouth; Nynex Corporation (``Nynex''); 
Pacific Telesis (``PacTel''); SBC Communications, Inc. (``SBC''); 
and US West.
    \7\ See Phlx Rule 1009A for options eligibility standards.
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    On April 1, 1997, two components of the Index, PacTel and SBC 
consummated a merger in which SBC acquired all of the assets and 
liabilities of PacTel. After the close of trading on April 1, 1997, the 
surviving company, SBC, issued to former PacTel shareholders 0.73145 
shares of SBC common stock for each outstanding PacTel share as of 
close of trading on March 31, 1997. The actual number of new SBC shares 
issued in the merger, however, was not verified until after the close 
of trading on April 2, 1997. Because trading in PacTel was halted on 
the New York Stock Exchange (``NYSE'') at the close of trading on March 
31, 1997 as a result of the merger, the Phlx calculated the PacTel 
capitalization for purposes of determining the Index value on April 1, 
1997 and April 2, 1997 by using the March 31, 1997 PacTel closing 
market value on the NYSE as well as the number of PacTel shares as of 
that date. In addition, because SBC was the surviving company in the 
merger and has continued to trade on the NYSE, the Phlx calculated 
SBC's market capitalization for April 1, 1997 and April 2, 1997 by 
multiplying the real-time price of SBC by the outstanding shares of SBC 
before the merger. This approach, according to the Phlx, was consistent 
with that used for other indices containing these components.
    On April 3, 1997 and thereafter, the Phlx will calculate the Index 
value using the market capitalization for SBC by multiplying the real-
time price of SBC by the total outstanding shares of SBC after the 
merger. PacTel price and share information was dropped from the Index 
after the close of trading on April 2, 1997.\8\ Thus, beginning on 
April 3, 1997, the Phlx will calculate the Index using only seven 
component stocks.
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    \8\ Amendment No. 1 and telephone conversation between Michele. 
R. Weisbaum, Associate General Counsel, Phlx and John Ayanian, 
Special Counsel, Division, Commission, on April 1, 1997.
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    In addition, the Exchange expects that in the near future, another 
merger involving two other Index components may occur. NYNEX and Bell 
Atlantic are proposing a merger with Bell Atlantic as the surviving 
company. If this merger is consummated, the Index would have only six 
component stocks.
    The Exchange proposes to amend the maintenance standards to allow 
the number of component stocks in the Index to decrease to six without 
having to wind down trading in options overlying the Index by 
restricting trading to closing only transactions and to not open any 
new series of options on the Index unless a new Rule 19b-4 filing is 
submitted to the Commission and approved. In addition, in Amendment No. 
1, the Phlx proposes that no one single stock may comprise more than 
30% of the Index weight.\9\ The maintenance standards requiring the 
number of components not to exceed ten stocks and 90% of the component 
stocks in the Index by weight, and 80% by number, to be eligible for 
options trading will still apply. In the event that the Index fails to 
meet the Index maintenance standards, the Exchange immediately would 
contact the Commission's Division of Market Regulation and restrict 
trading in the Index options to closing only transactions and would not 
open any new series of options on the Index unless such failure is 
determined by the Exchange not to be significant and the Commission 
concurs in that determination or unless the continued listing of that 
class of Index options has been approved by the Commission under 
Section 19(b)(2) of the Act.
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    \9\ Currently, the largest component of the revised Index is 
AT&T representing 23.02% of the Index weight. See note 13, infra.
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II. Commission Findings and Conclusions

    The Commission finds that the proposed rule change is 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).\10\ Specifically, 
the Commission believes the proposal is consistent with the Section 
6(b)(5) \11\ requirements that the rules of an exchange be designed to 
promote just and equitable principles of trade, to prevent fraudulent 
and manipulative acts and practices, in general, and to remove 
impediments to and perfect the mechanism of a free and open market and 
a national market system, as well as to protect investors and the 
public interest.\12\
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    \10\ 15 U.S.C. 78f(b).
    \11\ 15 U.S.C. 78f(b)(5).
    \12\ In approving this rule, the Commission has considered the 
proposed rules' impact on efficiency, competition, and capital 
formation. 15 U.S.C. Sec. 78c(f).
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    Although the proposed maintenance standards for the Index allow six 
component stocks to comprise the Index, the Commission believes that, 
based on the liquidity, large capitalizations and relative weightings 
of the component securities, the options on the Index can continue to 
be traded on the Exchange.\13\ In addition, the Commission is satisfied 
that by limiting the most highly capitalized stock in the Index to no 
more than 30% of the Index weight, the Exchange has proposed 
maintenance criteria to prevent the Index from being dominated by any 
one stock. The Commission believes that these maintenance standards 
help to ensure that the Index is not used as a surrogate to trade 
equity options on a single component.
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    \13\ The total shares outstanding, market capitalization and 
index weight of the seven component securities as of April 3, 1997 
are as follows: Ameritech, 549,391,000 shares, $32,620,090,625, 
13.68% weight; AT&T, 1,620,284,000 shares, $54,887,120,500, 23.02% 
weight; Bell Atlantic, 437,769,000 shares, $26,101,976,625, 10.95% 
weight; BellSouth, 991,206,000 shares, $41,382,850,500, 17.35% 
weight; Nynex, 439,989,000 shares, $19,799,505,000, 8.30% weight; 
SBC, 916,956,000 shares, $47,796,331,500, 20.04% weight; and US 
West, 479,325,000 shares, $15,877,640,625, 6.66% weight.
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    The Commission reiterates that should the Index fail to meet the 
maintenance criteria, the Exchange immediately will contact the 
Division and restrict trading in the Index options to closing only 
transactions and would not open any new series of options on the Index 
unless such failure is determined by the Exchange not to be significant 
and the Commission concurs in that determination or unless the 
continued listing of that class of Index options has been approved by 
the Commission under Section 19(b)(2) of the Act.\14\
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    \14\ The Commission notes that if the Phlx should propose to 
list and trade options overlying a narrow-based, single-sector index 
with fewer stocks, it would be difficult for the Commission to allow 
the options to be traded as an index product pursuant to the Phlx's 
option rules.
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    The Commission finds good cause for approving the proposed rule 
change,

[[Page 17661]]

and Amendment No. 1 thereto, prior to the thirtieth day after the date 
of publication of the notices of filing thereof in the Federal 
Register. First, the Commission believes that it is in the public 
interest to allow the Exchange to continue listing series of options 
overlying the adjusted Index in a timely, efficient and consistent 
manner. Second, the Commission notes that it previously has approved a 
proposal to trade options overlying the Phlx Super Cap Index that 
consists of five highly-capitalized, actively-traded component stocks 
with no single security dominating the index weight.\15\ Finally, the 
proposal has been subject to a substantial portion of the 21-day notice 
and comment period and no comments have been received. Therefore, the 
Commission believes it is consistent with Sections 6(b)(5) and 19(b)(2) 
of the Act to approve the proposed rule, and Amendment No. 1 thereto, 
on an accelerated basis.
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    \15\ Securities Exchange Act Release No. 36369 (October 13, 
1995), 60 FR 54274.
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III. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing. 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 office of the Phlx. All 
submissions should refer to File No. SR-Phlx-97-12, and should be 
submitted by May 1, 1997.
    It therefore is ordered, pursuant to Section 19(b)(2) of the Act 
\16\ that the proposed rule change (SR-Phlx-97-12) is approved, as 
amended, on an accelerated basis.
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    \16\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\17\
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    \17\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-9203 Filed 4-9-97; 8:45 am]
BILLING CODE 8010-01-M