Federal Register / Vol. 65, No. 74 / Monday, April 17, 2000 / Notices 20501

10 15 U.S.C. 78f(b).

11 15 U.S.C. 78f(b)(4).

12 15 U.S.C. 78s(b)(3)(A)(ii).

13 17 CFR 240.19b–4(f)(2).

14 In reviewing this proposal, the Commission has

considered the proposed rule’s impact on

efficiency, competition, and capital formation. 15

U.S.C. 78c(f).

15 17 CFR 200.30–3(a)(12).

1 15 U.S.C. 78(s)(1).

2 17 CFR 240.19b–4.

3The Commission notes that the proposed rule

change would also eliminate the requirement that

FLEX equity call options follow the exercise price

intervals set out for standardized options in Phlx

Rule 1012.

4Section 1092(c)(4)(C) of the Code.

on the foreign currency options trading

floor. I would also give the Board of

Governors the opportunity to decide

whether this pilot program should be

implemented on a permanent basis.

2. Statutory Basis

The Exchange believes that the

proposed rule is consistent with Section

6(b) of the Act 10 in general, and furthers

the objectives of Section 6(b)(4) 11 in

particular, in that it provides for the

equitable allocation of reasonable dues,

fees and other charges among its

members and other persons using its

facilities.

B. Self-Regulatory Organization’s

Statement on Burden on Competition

The Exchange represents that the

proposed rule change will impose no

burden on competition.

C. Self-Regulatory Organization’s

Statement on Comments on the

Proposed Rule Change Received From

Members, Participants or Others

No written comments were solicited

or received with respect to the proposed

rule change.

III. Date of Effectiveness of the

Proposed Rule Change and Timing for

Commission Action

The foregoing proposed rule change

has become effective pursuant to

Section 19(b)(3)(A(ii) of the Act 12 and

Rule 19b–4(f)(2) thereunder 13 because it

involves a due, fee, or other charge. At

any time within 60 days of the filing of

the proposed rule change, the

Commission may summarily abrogate

such rule change if it appears to the

Commission that such action is

necessary or appropriate in the public

interest, for the protection of investors,

or otherwise in furtherance of the

purposes of the Act.

IV. Solicitation of Comments

Interested persons are invited to

submit written data, views, and

arguments concerning the foregoing,

including whether the proposed rule

change is consistent with the Act.14

Persons making written submissions

should file six copies thereof with the

Secretary, Securities and Exchange

Commission, 450 Fifth Street, N.W.,

Washington, D.C. 20549–0609. 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

Room. Copies of such filing will also be

available for inspection and copying at

the principal office of the Exchange.

All submissions should refer to File

No. SR–Phlx–00–24 and should be

submitted by May 8, 2000.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.15

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 00–9487 Filed 4–14–00; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–42655; File No. SR–Phlx–

00–25]

Self-Regulatory Organizations; Notice

of Filing and Immediate Effectiveness

of Proposed Rule Change by the

Philadelphia Stock Exchange, Inc.

Eliminating the Restriction on Exercise

Prices for FLEX Equity Call Options to

Those Prices That Apply to

Standardized Equity Call Options

April 10, 2000.

Pursuant to Section 19(b)(1) of the

Securities Exchange Act of 1934

(‘‘Act’’),1 and Rule 19b–4 thereunder,2

notice is hereby given that on March 15,

2000, the Philadelphia Stock Exchange,

Inc. (‘‘Phlx’’ or ‘‘Exchange’’) filed with

the Securities and Exchange

Commission (‘‘SEC’’ or ‘‘Commission’’)

the proposed rule change as described

in Items I and II below, which Items

have been prepared by the Exchange.

The Commission is publishing this

notice to solicit comments on the

proposed rule change.

1. Self-Regulatory Organization’s

Statement of the Terms of Substance of

the Proposed Rule Change

The Phlx proposes to delete the

provision in Exchange Rule 1079(a)(3)

that limits exercise prices for FLEX

equity call options to those that apply

to standardized equity call options.3

II. Self-Regulatory Organization’s

Statement of the Purpose of, and

Statutory Basis for, the Proposed Rule

Change

In its filing with the Commission, the

Exchange included statements

concerning the purpose of and basis for

the proposed rule change and discussed

any comments it received on the

proposed rule change. The text of these

statements may be examined at the

places specified in Item IV below. The

Exchange has prepared summaries, set

forth in Sections A, B, and C below, of

the most significant aspects of such

statements.

A. Self-Regulatory Organization’s

Statement of the Purpose of, and

Statutory Basis for, the Proposed Rule

Change

1. Purpose

The Exchange proposes to amend

Phlx Rule 1079(a)(3) to eliminate the

limitation of the exercise prices

available for FLEX equity call options to

those prices that are available for

standardized equity call options. Under

Phlx Rule 1079, FLEX call options allow

certain terms to be customized, such as

the underlying security, the type of

option, the exercise price, the exercise

style, and the expiration date. The

Exchange, however, restricted the strike

prices for FLEX equity call options to

those prices that are available for

standardized equity call options because

of a concern that the flexible strike price

feature could result in an available

standardized equity call option that

would not be classified as a ‘‘qualified’’

covered call under the Internal Revenue

Code (‘‘Code’’). The Exchange

represents that this would jeopardize

the modest tax treatment enjoyed by

writers of standardized equity call

options.

Currently under Section 1092(c)(4)(B)

of the Code, writers of such qualified

covered short positions in equity call

options receive advantageous tax

treatment if the options are exchangetraded and not ‘‘deep-in-the-money.’’

An option is ‘‘deep-in-the-money’’ if the

strike price of the option is lower than

the lowest qualified benchmark price for

stock.4 The Code defines this

benchmark price as generally the

highest strike price available for trading

20502 Federal Register / Vol. 65, No. 74 / Monday, April 17, 2000 / Notices

5Section 1092(c)(4)(D) of the Code.

6See Department of Treasury, IRS REG–104641–

97, 65 FR 3812 (January 25, 2000).

7 15 U.S.C. 78f(b). 8 15 U.S.C. 78f(b)(5).

9See Securities Exchange Act Release No. 42371

(January 31, 2000), 65 FR 5921 (February 7, 2000)

(Order approving SR-CBOE-99–63); see also

Securities Exchange Act Release No. 42389

(February 7, 2000), 65 FR 8224 (February 17, 2000)

(Order approving SR–PCX–00–01 and SR–Amex–

00–02).

10 15 U.S.C. 78s(b).

11The Commission notes that the discussion of

the same restrictions on exercise price intervals and

exercise prices for FLEX equity call options has

been eliminated from the October 1996 Supplement

to the Options Clearing Corporation options

disclosure document. See Securities Exchange Act

Release No. 42491 (March 2, 2000), 65 FR 13351

(March 13, 2000) (Order approving SR–ODD–00–

01).

12 In reviewing this proposal, the Commission has

considered its impact on efficiency, competition,

and capital formation. 15 U.S.C. 78c(f).

that is less than the current price of the

underlying stock.5

The Exchange implemented Phlx Rule

1079(a)(3) to remove uncertainty

concerning what constitutes a qualified

covered call under Section 1092(c)(4) of

the Code. If the exercise prices of FLEX

equity call options were not subject to

the same prices and intervals that apply

to standardized equity call options, this

could raise the question of whether the

existence of a series of FLEX equity call

options with a strike price of, for

example, $58 when the price of the

underlying stock is $59, would

disqualify a standardized equity call

option with a strike price of $55, which

would otherwise be the lowest qualified

benchmark price, i.e., the highest strike

price available for trading that is less

than the price of the stock. The

Exchange represents that it was

concerned that the Internal Revenue

Service (‘‘IRS’’) may interpret the short

covered standardized call equity option

with a $55 strike price as deep-in-themoney and not grant it qualified

covered call treatment under Section

1092(c)(4) of the Code.

On January 25, 2000, the IRS resolved

this question by issuing a final rule

which states that strike prices

established by the equity options with

flexible terms will not be taken into

account when determining whether

standardized equity call options are

deep-in-the-money and therefore do not

receive qualified covered call

treatment.6 Therefore, the Exchange

now proposes to modify Phlx Rule

1079(a)(3)(B) to lift the restriction on

exercise prices for FLEX equity call

options. The Exchange represents that

the effect of the IRS regulations and the

Exchange’s proposal is to permit certain

taxpayers, particularly institutional and

other large Exchange’s proposal is to

permit certain taxpayers, particularly

institutional and other large investors,

to engage in transactions in FLEX equity

call options with a wider range of

exercise prices (as was originally

intended) without affecting the

applicability of Section 1092 of the

Code for qualified covered call options

involving equity call options with

standard terms.

2. Statutory Basis

The Exchange believes that the

proposed rule change is consistent with

Section 6(b)(5) of the Act 7 in general,

and furthers the objectives of Section

6(b)(6)(5) 8 in particular, in that it is

designed to facilitate transactions in

securities, 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 by eliminating

the restriction on FLEX equity call

options that has limited their usefulness

as a risk management tool.

B. Self-Regulatory Organization’s

Statement on Burden on Competition

The Phlx does not believe that the

proposed rule change will impose any

burden on competition.

C. Self-Regulatory Organization’s

Statement on Comments on the

Proposed Rule Change Received From

Members, Participants or Others

The Exchange has neither solicited

nor received comments on the proposed

rule change.

III. Date of Effectiveness of the

Proposed Rule Change and Timing for

Commission Action

The proposed rule change has become

effective pursuant to Section 19(b)(3)(A)

of the Act and Rule 19b–4(f)(6)

thereunder because the foregoing

proposed rule change: (1) Does not

significantly affect the protection of

investors or the public interest; (2) does

not impose any significant burden on

competition; and (3) does not become

operative for 30 days after the date of

filing or such shorter time as the

Commission may designate if consistent

with the protection of investors and the

public interest; provided that the

Exchange has given the Commission

written notice of its intent to file the

proposed rule change at least five

business days prior to the filing date of

the proposed rule change, or such

shorter time as designated by the

Commission. The Exchange has

requested that the Commission

accelerate the operative date of the

proposed rule change so that the

Exchange may implement this proposal

as quickly as possible and allow FLEX

options to be used as they were

originally intended.

The Commission finds that it is

appropriate to designate the proposal to

become operative upon filing, because

the immediate implementation of the

proposed rule change is consistent with

the protection of investors and the

public interest. Specifically, the

Commission previously approved

virtually identical proposals by three

other exchanges.9 The Commission

notes that the proposed rule change

concerns issues that have previously

been the subject of a full comment

period pursuant to Section 19(b) of the

Act.10 The Commission does not believe

that the proposed rule change raises any

new regulatory issues.11

The Commission also believes that

immediate implementation of the

proposed rule change is beneficial to

investors. The Commission believes that

the proposal allows sophisticated high

net-worth investors to take full

advantage of FLEX options. In part,

FLEX options were created to allow

these investors to manage their risks by

having the ability to negotiate exercise

prices, contact terms for exercise style

(i.e., American, European, or capped),

and expiration dates. However, because

of the adverse tax effect on qualified

covered calls, the Exchange limited

FLEX equity call options exercise prices

to those prices available for

standardized equity call options. Now

that the tax issue has been clarified, the

Exchange is removing this restriction.

With the removal of this limitation, the

Commission believes that sophisticated,

high net-worth investors will better be

able to take advantage of the riskmanagement mechanisms provided by

FLEX equity call options.

At any time within 60 days of the

filing of such proposed rule change, the

Commission may summarily abrogate

such rule change if it appears to the

Commission that such action is

necessary or appropriate in the public

interests, for the protection of investors

or otherwise in furtherance of the

purposes of the Act.12

IV. Solicitation of Comments

Interested persons are invited to

submit written data, views, and

arguments concerning the foregoing,

including whether the proposed rule

change is consistent with the Act.

Persons making written submissions

Federal Register / Vol. 65, No. 74 / Monday, April 17, 2000 / Notices 20503

13 17 CFR 200.30–3 (a)(12).

1 15 U.S.C. 78s(b)(1).

2 17 CFR 240.19b–4.

3 In Amendment No. 1, the Exchange provided an

updated schedule of dues, fees and charges in

Appendix A to the proposed rule change. See Letter

from Murray L. Ross, Vice President and Secretary,

Phlx, to Nancy Sanow, Assistant Director, Division

of Market Regulation (‘‘Division’’), SEC, Dated

March 21, 2000.

4The Exchange will bill the controller space

charge at a rate of $250.00 per month instead of the

current rate of $750.00 per quarter. The Exchange

will bill the floor facilities fees and the shelf space

fee at a rate of $125.00 per month instead of the

current rate of $375.00 per quarter. The Exchange

will bill the direct wire charges at a rate of $20.00

per month instead of the current rate of $60.00 per

quarter.

5 15 U.S.C. 78f(b).

6 15 U.S.C. 78f(b)(4).

7 15 U.S.C. 78s(b)(3)(A).

8 17 CFR 240.19b–4(f)(2).

should file six copies thereof with the

Secretary, Securities and Exchange

Commission, 450 Fifth Street, NW.,

Washington, DC 20549–0609. 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

Room. Copies of such filing will also be

available for inspection and copying at

the principal office of the Exchange. All

submissions should refer to File No.

SR–Phlx–00–25 and should be

submitted by May 8, 2000.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.13

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 00–9488 Filed 4–14–00; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–42659; Filed No. SR–PHlx–

00–23]

Self-Regulatory Organizations; Notice

of Filing and Immediate Effectiveness

of a Proposed Rule Change by the

Philadelphia Stock Exchange, Inc. To

Modify the Frequency of Billing for the

Controller Space Charge, Floor

Facilities Fees, Shelf Space Fee on the

Equity Options Floor, and Direct Wire

Changes From a Quarterly to a

Monthly Basis

April 10, 2000.

Pursuant to Section 19(b)(1) of the

Securities Exchange Act of 1934

(‘‘Act’’),1 and Rule 19b–4 thereunder,2

notice is hereby given that on March 9,

2000, the Philadelphia Stock Exchange,

Inc. (‘‘Phlx’’ or ‘‘Exchange’’) filed with

the Securities and Exchange

Commission (‘‘SEC’’ or ‘‘Commission’’)

the proposed rule change as described

in Items, I, II, and III below, which Items

have been prepared by the Exchange.

On March 22, 2000, the Exchange

submitted Amendment No. 1 to the

proposed rule change.3

I. Self-Regulatory Organization’s

Statement of the Terms of Substance of

the Proposed Rule Change

The Phlx proposes to amend its

schedule of dues, fees and charges so

that it will bill the controller space

charge, floor facilities fees, shelf space

fee on the equity options floor and

direct wire charges on a monthly basis

rather than the quarterly basis the

Exchange currently uses. The amounts

of the charges of fees will remain

unchanged; only the frequency of billing

for such fees or charges will change to

a monthly basis. The Phlx proposes that

the change in the frequency of billing

for the fees or charges mentioned above

become effective at the opening of

business on April 1, 2000.

II. Self-Regulatory Organization’s

Statements of, and Statutory Basis for,

the Proposed Rule Change

In its filing with the Commission, the

Exchange included statements

concerning the purpose of and basis for

the proposed rule change. The text of

these statements may be examined at

the places specified in Item IV below.

The Exchange has prepared summaries,

set forth in Sections A, B, and C below,

of the most significant aspects of such

statements.

A. Self-Regulatory Organization’s

Statement of the Purpose of, and

Statutory Basis for, the Proposed Rule

Change

1. Purpose

The Exchange proposes to amend the

Phlx’s fee schedule to change the

frequency that Exchange members,

foreign currency option (‘‘FCO’’)

participants and member organizations

and participant organizations are billed

for the controller space charge, floor

facilities fees, shelf space fee for the

equity options floor and the direct wire

charges. The Exchange proposes to bill

these fees or charges on a monthly basis,

instead of on a quarterly basis.4

The Exchange’s Finance Committee is

recommending that the fees or charges

mentioned above be billed monthly

instead of quarterly to enhance

operational efficiency for the Exchange

and its members and participants. The

Exchange represents that the proposed

rule change would permit the

Exchange’s Accounting Department to

operate more effectively. The Exchange

further represents that the proposed rule

change would allow Exchange members

and participants to more accurately

gauge their monthly operating expenses,

and to permit them to reduce their

operational cash flow burdens that may

result from the current quarterly

payment schedule.

2. Statutory Basis

The Exchange believes that the

proposed rule change is consistent with

Section 6 of the Act 5 in general, and

further the objectives of Section 6(b)(4) 6

in particular, in that it provides for the

equitable allocation of reasonable dues,

fees, and other charges amount its

members and other persons using its

facilities. Specifically, the Exchange

believes that the proposed rule change

is reasonable and equitable because only

the frequency of billing for the fees or

charges mentioned above will be

changed, and not the amount billed.

B. Self-Regulatory Organization’s

Statement on Burden on Competition

The Phlx does not believe that the

proposed rule change will impose any

inappropriate burden on competition.

C. Self-Regulatory Organization’s

Statement on Comments on the

Proposed Rule Change Received From

Members, Participants or Others

No written comments were either

solicited or received.

III. Date of Effectiveness of the

Proposed Rule Change and Timing for

Commission Action

The foregoing rule change establishes

or changes a fee, due or charge imposed

by the Exchange and, therefore, has

become effective upon filing pursuant to

Section 19(b)(3)(A) of the Act 7 and Rule

19b–4(f)(2) thereunder.8 The Exchange

intends to implement the change to the

frequency of billing for the fees or

charges mentioned above at the opening

of business on April 1, 2000. At any

time within 60 days of filing of such

proposed rule change, the Commission

may summarily abrogate such rule