10134 Federal Register / Vol. 60, No. 36 / Thursday, February 23, 1995 / Notices

1CBOE understands that when determining order

parameters for routing purposes, the member firms

look to (1) the size of the order, (2) whether the

series is on RAES, and (3) whether it is a market

order or an immediately executable limit order.

Telephone conservation between Edward Joyce,

CBOE, Michael Meyer, Attorney, Schiff, Hardin,

and Waite, Michael Walinskas, Branch Chief, Office

of Market Supervision (‘‘OMS’’), Division of Market

Regulation (‘‘Division’’), Commission, and John

offset by distribution expenses not

reimbursed by the Contingent Deferred

Sales Charge. In such circumstances, a

portion of the Mortality and Expense

Risk Charge might be viewed as

providing for a portion of the costs

relating to distribution of the Contracts.

NEVLICO represents that there is a

reasonable likelihood that the proposed

distribution financing arrangements will

benefit the Variable Account and

Contract Owners. The basis for such a

conclusion with be maintained in a

memorandum at NEVLICO’s principal

office and available to the Commission

upon request.

7. NEVLICO represents that the

Variable Account will invest only in

management investment companies that

undertake, in the event the company

adopts a plan to finance distribution

expenses under Rule 12b–1 under the

1940 Act, to have such plan formulated

and approved by the company’s board

of directors, a majority of whom are not

‘‘interested persons’’ of the company

within the meaning of section 2(a)(19) of

the 1940 Act.

Conclusion

Applicants assert that, for the reasons

and the facts set forth above, the

requested exemptions from Section

26(a)(2)(C) and 27(c)(2) of the 1940 Act

to deduct the mortality and expense risk

charge from the assets of the Variable

account under the Contracts meet the

standards in Section 6(c) of the 1940

Act. Applicants assert that the

exemptions requested are necessary and

appropriate in the public interest and

consistent with the protection of

investors and the policies and

provisions of the 1940 Act.

For the commission, by the Division of

Investment Management, pursuant to

delegated authority.

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 95–4399 Filed 2–22–95; 8:45 am]

BILLING CODE 8010–01–M

[Release No. 34–35388; File No. SR–CBOE–

95–06]

Self-Regulatory Organizations; Notice

of Filing of Proposed Rule Change by

the Chicago Board Options Exchange,

Incorporated, Related to Retail

Automatic Execution System

February 16, 1995.

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

Securities Exchange Act of 1934, 15

U.S.C. 78s(b)(1), notice is hereby given

that on January 18, 1995, the Chicago

Board Options Exchange, Incorporated

(‘‘CBOE’’ or ‘‘Exchange’’) filed with the

Securities and Exchange Commission

(‘‘Commission’’) the proposed rule

change as described in Items I, II and III

below, which Items have been prepared

by the CBOE. The Commission is

publishing this notice to solicit

comments on the proposed rule change

from interested persons.

I. Self-Regulatory Organization’s

Statement of the Terms of Substance of

the Proposed Rule Change

CBOE proposes to amend its rules to

allow the Exchange’s Control Room to

turn off the Retail Automatic Execution

System (‘‘RAES’’). The amendments

would add an Interpretation to

Exchange Rules 24.15 and 6.8. The text

of the proposed rule change is available

at the office of the Secretary, CBOE, and

at the Commission.

II. Self-Regulatory Organization’s

Statement of the Purpose of, and

Statutory Basis for, the Proposed Rule

Change

In its filing with the Commission,

CBOE included statements concerning

the purpose of and the 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 CBOE has

prepared summaries set forth in

Sections (A), (B) and (C) below, of the

most significant parts of such

statements.

A. Self-Regulatory Organization’s

Statement of the Purpose of, and

Statutory Basis for, the Proposed Rule

Change

The purpose of the proposed rule

change is to grant the Exchange’s

Control Room the authority to turn off

RAES if there is a system malfunction

that affects the Exchange’s ability to

disseminate or update market quotes.

Specifically, the proposal would add a

rule interpretation to Exchange Rules

24.15 and 6.8 to grant the senior person

then in charge of the Exchange’s Control

Room the authority to turn off RAES if

there is a system malfunction that

affects the Exchange’s ability to

disseminate or update market quotes.

When RAES receives an order, the

system automatically will attach to the

order its execution price, determined by

the prevailing market quote at the time

of the order’s entry into the system. A

buy order will pay the prevailing market

quote for an offer and a sell order will

sell at the prevailing market quote for a

bid. A market maker who has signed on

as a participant in RAES will be

designated as a contra-broker on the

trade. Trades are assigned to these

participating market makers on a

rotating basis. Therefore, by agreeing to

participate in RAES, a market maker is

automatically assigned trades based on

the prevailing market quote that is then

being disseminated. Consequently, it is

important that the prevailing market

quote be accurate, because otherwise

market makers participating in RAES

may be assigned trades at prices other

than the actual prevailing market quote.

In addition, if there is a quote

dissemination problem such that

incorrect quotes are being displayed, it

could result in a customer’s order being

filled at a price other than the quote the

customer sees on display.

The proposed interpretations are

necessary to prevent market makers

from being assigned trades based on

inaccurate or ‘‘stale’’ market quotes and

to prevent customer orders from being

filled based on such inaccurate or

‘‘stale’’ market quotes. The proposed

Interpretations are also necessary to

prevent a situation where customers’

orders are filled at prices other than the

prices the customers see displayed.

Pursuant to the proposed

interpretations, the senior person then

in charge of the Exchange’s Control

Room will have the ability to act quickly

to turn off RAES if there is a system

malfunction that affects the Exchange’s

ability to disseminate or update market

quotes. Since RAES trades are based on

the current disseminated quote, RAES

trades would be based on inaccurate or

‘‘stale’’ quotes during a system

malfunction that interferes with

dissemination of current quote

information. The Exchange believes it is

important for the Control Room to have

this power to turn off RAES since the

Control Room will most likely learn of

the system malfunction before Floor

Officials or other Exchange Staff and

consequently the Control Room can act

in a timely manner to prevent trades

based on ‘‘stale’’ market quotes.

If RAES is turned off, the orders that

would have been routed to RAES will be

re-routed to the Floor Broker routing

printer in the trading crowd or to the

member firm booths. Where the order is

rerouted depends upon the parameters

member firms have set for their

customers’ orders prior to entering the

orders onto RAES.1
Federal Register / Vol. 60, No. 36 / Thursday, February 23, 1995 / Notices 10135

Ayanian, Attorney, OMS, Division, Commission, on

Monday, February 13, 1995.

2 17 CFR 200.30–3(a)(12) (1994).

1 15 U.S.C. 78s(b)(1) (1988).

2 17 CFR 240.19b–4 (1993).

3See Securities Exchange Act Release No. 35235

(January 18, 1995), 60 FR 4936 (January 25, 1995).

4 Generally, the rules of the options exchanges

provide that equity options may be traded up until

the close of business on the last business day before

expiration, which is generally the third Friday of

the expiration month (‘‘Expiration Friday’’). See,

e.g. CBOE Rule 11.1 and Phlx Rule 1042.

5For customers, an exercise instruction is a

notice delivered to a member to exercise an option.

For a clearing member of The Options Clearing

Corporation (‘‘OCC’’) or a market maker or floor

broker on a national options exchange, an exercise

instruction is a notice to OCC to exercise an option

that would not be automatically exercised pursuant

to OCC’s exercise-by-exception procedure (‘‘OCC

Rule 805’’), or not to exercise an option that would

otherwise be automatically exercised pursuant to

OCC Rule 805. See infra note 9. The OCC has

separate rules regarding the cut-off time by which

exercise notices must be delivered to OCC by OCC

clearing members. The proposed rule change does

not in any way affect OCC rules.

6 In most cases, exercise instructions are

electronically transmitted to OCC clearing members

through the Clearing Management and Control

System (‘‘C/MACS’’).

Pursuant to the proposed

interpretations, once the system

malfunction has been corrected and the

market quotes have been updated, either

the senior person then in charge of the

Exchange’s Control Room, or the Order

Book Official, or the RAES Supervisor

may re-start RAES.

Conclusion

CBOE believes that the proposed rule

change is consistent with and further

the objectives of Section 6(b)(5) of the

Act, in that the rules change is designed

to perfect the mechanisms of a free and

open market and to protect investors

and the public interest by enabling the

Control Room to turn off RAES to

prevent trades based on inaccurate

market quotes.

B. Self-Regulatory Organization’s

Statement on Burden on Competition

CBOE 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

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

Within 35 days of the date of

publication of this notice in the Federal

Register or within such longer period (i)

as the Commission may designate up to

90 days of such date if it finds such

longer period to be appropriate and

publishes its reasons for so finding or

(ii) as to which the self-regulatory

organization consents, the Commission

will:

(A) by order approve such proposed

rule change, or

(B) institute proceedings to determine

whether the proposed rule change

should be disapproved.

IV. 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, NW.,

Washington, DC 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 in

the Commission’s Public Reference

Section, 450 Fifth Street, NW.,

Washington, DC 20549. Copies of such

filing will also be available for

inspection and copying at the principal

office of CBOE. All submissions should

refer to file number SR–CBOE–95–06

and should be submitted by March 16,

1995.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.2

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 95–4401 Filed 2–22–95; 8:45 am]

BILLING CODE 8010–01–M

[Release No. 34–35389; File No. SR–NASD–

94–78]

Self-Regulatory Organizations; Order

Granting Accelerated Approval of a

Proposed Rule Change by the National

Association of Securities Dealers, Inc.,

Relating to Exercise Cut-Off

Procedures for Expiring Equity

Options Contracts

February 16, 1995.

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

Securities Exchange Act of 1934

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

on December 23, 1994, the National

Association of Securities Dealers, Inc.

(‘‘NASD’’) submitted to the securities

and Exchange Commission

(‘‘Commission’’) a proposed rule change

relating to the exercise procedures for

expiring equity options contracts. The

proposal was published for comment in

the Federal Register on January 25,

1995.3 No comments were received on

the proposed rule change. This order

approves the proposed rule change.

Currently, with regard to expiring

standardized equity options, Section 63

of the NASD’s Uniform Practice Code

(‘‘Practice Code’’) provides that NASD

members and their customers are

required to indicate their exercise

decisions to clearing members no later

than 5:30 p.m. (E.S.T.) on the business

day immediately prior to the expiration

date of the options (‘‘Exercise Cut-Off

Time’’).4 This is the latest time by which

an exercise instruction 5 may be: (1)

Prepared by a clearing member for

positions in its proprietary trading

account; (2) accepted by a clearing

member from a non-clearing member; or

(3) accepted by a member from any

customer.6

The only exceptions to the Exercise

Cut-Off Times contained in Section 63

of the Practice Code are: (1) To remedy

mistakes or errors made in good faith;

(2) to take appropriate action as the

result of a failure to reconcile an

unmatched option transaction; (3)

where exceptional circumstances

relating to a customer’s or member’s

ability to communicate exercise

instructions to a member (or a member’s

ability to receive such exercise

instructions) prior to the Exercise CutOff Time warrant such action; and (4)

with respect to options contracts in an

account maintained for another member

in which only positions of customers of

such other member are carried.

Members are required to prepare a

memorandum of every exercise

instruction received from a customer

stating the time when such instruction

was received. In addition, in the event

a member receives and acts on an

exercise instruction pursuant to one of

the exceptions noted above, the member

must prepare a memorandum setting

forth the circumstances giving rise to

the exception. If the member is relying

on either the first or the third exception

described above, the member must

promptly file a copy of the

memorandum with the NASD.

Thus, it is presently a violation of

Section 63 of the Practice Code for

clearing members to accept exercise

instructions after the Exercise Cut-Off

Time, except in reliance on one of the

exceptions noted above. Because