12998 Federal Register / Vol. 60, No. 46 / Thursday, March 9, 1995 / Notices

2Applicants represent that they will amend the

application during the Notice Period to reflect the

representations in this paragraph.

the future that are materially similar to

the Front Load Contracts and the Back

Load Contracts all charges and expenses

will be identical to, or lower than, the

corresponding charges and expenses for

the Front Load Contracts and the Back

Load Contracts, respectively, as

described in the application.2

13. The mortality risk borne by

Northwestern under both versions of the

Contracts arises from its obligation to

make annuity payments regardless of

how long an annuitant may live. The

mortality risk is the risk that annuitants

will live longer than Northwestern’s

actuarial projections indicate, resulting

in higher than expected annuity

payments.

14. The expense risk borne by

Northwestern under the Contracts is the

risk that the charges for administering

the Contracts, which are guaranteed for

the life of each Contract, may be

insufficient to cover the actual costs of

issuing and administering the Contracts.

15. The mortality and expense risk is

higher for the Back Load Contracts than

for the Front Load Contracts for several

reasons. Collection of a significant front

end load inherently reduces the risk that

charges will fall short of corresponding

expenses since receipt of deferred loads

is far less certain. The Front Load

Contracts require a minimum initial

purchase payment of $10,000, compared

with $25, $100 or $3,500 for Back Load

Contracts. The economies of scale

associated with larger units reduce the

expense risk. Northwestern asserts that

an additional mortality risk for the Back

Load Contract exists because the

withdrawal charge does not apply upon

the death of the annuitant.

Applicants’ Legal Analysis and

Conditions

1. Applicants request an exemption

from Sections 26(a)(2)(C) and 27(c)(2) of

the 1940 Act to the extent any relief is

necessary to permit the deduction from

Account B of the mortality and expense

risk charges under the Contracts.

Applicants request that the order also

permit the deduction of the mortality

and expense risk charges described

herein from the assets of Account B

pursuant to other contracts offered in

the future through Account B, to the

extent that such contracts are materially

similar to the Contracts.

2. Sections 26(a)(2)(C) and 27(c)(2) of

the 1940 Act prohibit a registered unit

investment trust and any depositor or

underwriter thereof from selling

periodic payment plan certificates

unless the proceeds of all payments are

deposited with a qualified trustee or

custodian and held under arrangements

which prohibit any payment to the

depositor or principal underwriter

except a fee, not exceeding such

reasonable amounts as the Commission

may prescribe, for performing

bookkeeping and other administrative

services.

3. Applicants submit that their

request for an order that applies to

materially similar contracts offered in

the future by Account B is appropriate

in the public interest. Such an order

would promote competitiveness in the

variable annuity contract market by

eliminating the need for Northwestern

to file redundant exemptive

applications, thereby reducing its

administrative expenses and

maximizing the efficient use of its

resources. Investors would not receive

any benefit or additional protection by

requiring Northwestern to seek

repeatedly exemptive relief regarding

the same issues addressed in the

application.

4. Applicants represent that they have

reviewed publicly available information

regarding the aggregate level of the

mortality and expense risk charges

under variable annuity contracts

comparable to the Front Load Contracts

and the Back Load Contracts currently

being offered in the insurance industry

taking into consideration such factors as

current charge levels, the manner in

which charges are imposed, the

presence of expense and annuity rate

guarantees and the markets in which the

Contracts will be offered. Based upon

this review, Applicants represent that

the mortality and expense risk charges

under the Contracts are within the range

of industry practice for comparable

contracts. Applicants will maintain and

make available to the Commission, upon

request, a memorandum outlining the

methodology underlying this

representation. Similarly, prior to

making available any materially similar

contracts through Account B,

Applicants will represent that the

mortality and expense risk charges

under any such contracts will be within

the range of industry practice for

comparable contracts. Applicants will

maintain and make available to the

Commission, upon request, a

memorandum outlining the

methodology underlying such

representation.

5. Applicants represent that Account

B will invest only in underlying funds

which undertake, in the event they

should adopt a plan under Rule 12b–1

under the 1940 Act to finance

distribution expenses, to have a board of

directors or trustees, a majority of whom

are not interested persons as defined

under Section 2(a)(19) of the 1940 Act,

formulate and approve any such plan.

6. Applicants do not expect the frontend sales load or contingent deferred

sales load imposed under the Contracts

will necessarily cover the expected costs

of distributing the Contracts. Any

shortfall will be made up from

Northwestern’s general assets which

will include amounts derived from the

mortality and expense risk charges.

Northwestern has concluded that there

is a reasonable likelihood that the

distribution financing arrangement

being used in connection with the

Contracts will benefit Account B and

the Contract owners. Northwestern will

keep and make available to the

Commission, upon request, a

memorandum setting forth the basis for

this representation.

Conclusion

Applicants assert that for the reasons

and upon the facts set forth above, the

requested exemption from Sections

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

to deduct the mortality and expense risk

charge under the Contracts, or under

materially similar contracts offered in

the future by Account B, meets the

standards in Section 6(c) of the 1940

Act. Applicants assert that the

exemptions requested are 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. 95–5814 Filed 3–8–95; 8:45 am]

BILLING CODE 8010–01–M

[Release No. 34–35436; File No. SR–PSE–

95–01]

Self-Regulatory Organizations; Notice

of Filing of Proposed Rule Change by

the Pacific Stock Exchange, Inc.,

Relating to Buy-Write Options Unitary

Derivatives (‘‘BOUNDs’’)

March 2, 1995.

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

Securities Exchange Act of 1934

(‘‘Act’’), 15 U.S.C. 78s(b)(1), notice is

hereby given that on February 6, 1995,

the Pacific Stock Exchange, Inc. (‘‘PSE’’

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 self-regulatory organization. The
Federal Register / Vol. 60, No. 46 / Thursday, March 9, 1995 / Notices 12999

1The PSE notes that BOUNDs is a service mark

of The American Stock Exchange, Inc.

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

The PSE, pursuant to Rule 19b–4

under the Act, proposes to amend its

rules to permit trading in Buy-Write

Options Unitary Derivatives

(‘‘BOUNDs’’).1 As described in more

detail below, BOUNDs are long term

options which the PSE believes have the

same economic characteristics as a

covered call writing strategy.

The text of the proposed rule change

is available at the Office of the

Secretary, PSE 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, the

self-regulatory organization included

statements concerning the purpose of,

and statutory 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 self-regulatory

organization has prepared summaries,

set forth in section (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

The Exchange is proposing to list for

trading BOUNDs. The Options Clearing

Corporation (‘‘OCC’’) will be the issuer

of all BOUNDs traded on the Exchange.

As with all OCC issued options,

BOUNDs will be created when an

opening buy and an opening sell order

are executed. The execution of such

orders will increase the open interest in

BOUNDs. Except as described herein,

BOUNDs will be subject to the rules

governing standardized options.

The Exchange anticipates listing

BOUNDs with respect to those

underlying securities that have listed

LEAPs. The criteria for stocks

underlying BOUNDs will be the same as

the criteria for stocks underlying LEAPs.

It is anticipated that the sum of the

market prices of a LEAP and a BOUND

on the same underlying stock with the

same expiration and exercise price will

closely approximate the market price for

the underlying stock. If the combined

price of the LEAP and BOUND diverge

from that of the underlying common

stock, there will be an arbitrage

opportunity which, when executed,

should bring the price relationships

back into line.

BOUNDs will have the same strike

prices and expiration dates as their

respective LEAPs except that the

Exchange will list only a strike price

that is at or very close to the price of the

underlying stock at the time of listing,

or that is below the price of the stock

at that time. For example, at the time of

initial listing, the strike prices for a

BOUND with the underlying stock

trading at $50 per share, would be set

at $40 and $50. The Exchange would

not list a BOUND with a strike price of

$60 in this example.

The Exchange anticipates that it will

list new complementary LEAPs and

BOUNDs on the same underlying

securities annually, or at more frequent

intervals, depending on market demand.

The Exchange has the current authority

to list LEAPs with up to 39 months until

expiration and, therefore, seeks to

introduce BOUNDs with up to the same

39 month duration.

BOUNDs will offer essentially the

same economic characteristics as

covered calls with the added benefits

that BOUNDs can be traded in a single

transaction and are not subject to early

exercise. BOUND holders will profit

from appreciation in the underlying

stock’s price up to the strike price and

will receive payments equivalent to any

cash dividends declared on the

underlying stock. On the ex-dividend

date for the underlying stock, OCC will

debit all accounts with short positions

in BOUNDs and credit all accounts with

long positions in BOUNDs with an

amount equal to the cash dividend on

the underlying stock.

Like regular options, BOUNDs will

trade in standardized contract units of

100 shares of underlying stock per

BOUND so that at expiration, BOUND

holders will receive 100 shares of the

underlying stock for each BOUND

contract held if, on the last day of

trading, the underlying stock closes at or

below the strike price. However, if at

expiration the underlying stock closes

above the strike price, the BOUND

contract holder will receive a payment

equal to 100 times the BOUND’s strike

price for each BOUND contract held.

BOUND writers will be required to

deliver either 100 shares of the

underlying stock for each BOUND

contract or the strike price multiplied by

100 at expiration, depending on the

price of the underlying stock at that

time. This settlement design is similar

to the economic result that accrues to an

investor who has purchased a covered

call (i.e., long stock, short call) and held

that position to the expiration of the call

option.

For example, if the XYZ BOUND has

a strike price of $50 and XYZ stock

closes at $50 or less at expiration, the

holder of the XYZ BOUND contract will

receive 100 shares of XYZ stock. This is

the same result as if the call option in

a buy-write position had expired out of

the money; i.e., the option would expire

worthless and the writer would retain

the underlying stock. If XYZ closes

above $50 per share, then the holder of

an XYZ BOUND will receive $5,000 in

cash (100 times the $50 strike price).

This mimics the economic result to the

covered call writer when the call

expires in the money, i.e., the writer

would receive an amount equal to 100

shares times the strike price and would

forfeit any appreciation above that price.

The settlement mechanism for the

BOUNDs will operate in conjunction

with that of LEAP calls. For example, if

at expiration the underlying stock closes

at or below the strike price, the LEAP

call will expire worthless, and the

holder of a BOUND contract will receive

100 shares of stock from the short

BOUND. If, on the other hand, the LEAP

call is in the money at expiration, the

holder of the LEAP call is entitled to

100 shares of stock from a short LEAP

upon payment of the strike price, and

the holder of a BOUND contract is

entitled to the cash equivalent of the

strike price times 100 from the short

BOUND. An investor long both a LEAP

and a BOUND, where XYZ closes above

the $50 strike price at expiration, would

be entitled to receive $5,000 in cash

from the short BOUND and, upon

exercise of the LEAP, would be

obligated to pay $5,000 to receive 100

shares of XYZ stock.

The Exchange believes the settlement

of the LEAP and BOUND at expiration

are equally well harmonized from the

perspective of the writer. For example,

an investor long the underlying stock,

and who writes both a LEAP and a

BOUND, will be obligated to deliver the

stock to the long LEAP call if the

underlying stock closes above the strike

price, and will receive in return

payment of the strike price times 100,

which amount will then be delivered to

the long BOUND. Accordingly, the

Exchange believes a covered writer’s

position is effectively closed upon the

delivery of the underlying stock. If a

writer of both instruments has deposited

cash or securities other than the

underlying stock as margin for a short

LEAP call and BOUND, then the writer

delivers 100 shares of stock (purchased

on the open market) to the long LEAP
13000 Federal Register / Vol. 60, No. 46 / Thursday, March 9, 1995 / Notices

2A European-style option may only be exercised

during a limited period of time before the option

expires. An American-style option may be exercised

at any time prior to its expiration.

call upon payment of the strike price

times 100. The writer of the BOUND

then delivers the cash value of 100

times the strike price to the holder of

the long BOUND.

It should be noted that LEAPs are

American-style options whereas

BOUNDs are European-style.2 The

Exchange believes that it would be

inappropriate for the BOUND holder to

have an American-style exercise right

since the BOUND will tend to trade at

a discount to the stock and strike price.

Sales Practices

BOUNDs will be subject to the

Exchange’s sales practice and suitability

rules applicable to standardized options

set forth in Rule 9.

Adjustments

BOUNDs will be subject to

adjustments for corporate and other

actions in accordance with the rules of

OCC.

Position Limits

BOUNDs will be subject to the

position limits for equity options set

forth in Exchange Rule 6.8. In addition,

BOUNDs will be aggregated with other

equity options on the same underlying

stock for purposes of calculating

position limits. According to the

Exchange, since a BOUND to holder is

a bullish position (i.e., the equivalent of

a short put position where the strike

price has been prepaid), the Exchange

proposes that long BOUNDs be

aggregated with long call and short put

positions in the related equity options.

Similarly, since the Exchange believes

the BOUND, from the perspective of the

seller, is a ‘‘bearish’’ position (i.e., it is

the equivalent of a long put position

where the strike price has been

prepaid), it proposes to aggregate short

BOUNDs with short call and long put

positions in the related equity options.

Customer Margin

The Exchange proposes to apply

options margin treatment to BOUNDs as

follows:

1. Long BOUND Positions: Full

payment required at the time of

purchase. As described more fully

below, however, there will be a credit

for long BOUNDs in BOUND spread

positions.

2. Short BOUND Positions: The

BOUND seller receives full value of the

BOUND at the time of the initial sale

and receives no further payment when

the contract is settled either by payment

of the strike price or delivery of the

underlying stock. Short BOUND

positions, therefore, will be margined in

an amount equal to the current market

price of the BOUND plus an amount

equal to an ‘‘add-on’’ used to margin

short call options times the market

value of the BOUND. Since the

maximum obligation of the seller of a

BOUND cannot exceed the strike price,

however, the amount of margin will

never exceed the strike value. For

example:

A. Assume a stock price of $50, an exercise

price of $50, a margin add-on percent of 20%

and the BOUND trading at $40. In this case,

the short seller would have to pay $48 to

margin the position, i.e., $40 BOUND price

plus 20% of $40.

B. Assume a stock price of $40, an exercise

price of $50, a margin add-on percent of 20%

and the BOUND trading at $35. In this case,

the margin would be $42, i.e., $35 BOUND

price plus 20% of $35.

3. Covered Positions: Short BOUND

positions offset by the equivalent

number of shares of the underlying

stock will not require any additional

margin since the seller’s obligation to

the buyer will, in all cases, be covered

by the position in the underlying stock.

Further, since the sum of the prices of

a LEAP and a BOUND will be

approximately equal to the price of the

underlying stock, a long stock position

is cover for both a short BOUND and a

short LEAP position.

4. Spread Positions

i. Same Expiration—Different Strike

Prices: There will be no margin

requirement for BOUND positions

which are long the higher strike price

and short the lower strike price since

the long BOUND more than covers the

obligation of the short side of the

position. For positions short the higher

strike price and long the lower strike, a

customer will be required to post the

difference between the strike prices.

ii. Different Expiration-Same Strike

Price: No margin will be required for

positions long the nearest expiration

and short the longer expiration since the

value of the long BOUND will cover the

obligation on the short leg of the

position. Positions that are short the

near expiration and long the distant

expiration will require full margin on

the short position less 80% of the

market value of the long position.

iii. Different Expiration-Different

Strike Prices: There will be no margin

required for positions that are long the

near expiration and short the distant

expiration when the strike price on the

near expiration is higher than the strike

on the distant expiration. For positions

which are long the near expiration and

short the distant expiration where the

strike price on the near expiration is

lower than the strike on the distant

contract, the margin will be the

difference in the strike between the near

term and distant strikes. For positions

which are short the near expiration and

long the distant expiration, full margin

will be required on the short position

less 80% of the market value of the long

position.

The Exchange believes that the

proposed rule change is consistent with

Section 6(b) of the Act, in general, and

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

in particular, in that it is designed to

prevent fraudulent and manipulative

acts and practices, to promote just and

equitable principles of trade, to foster

cooperation and coordination with

persons engaged in facilitating

transactions in securities, and to remove

impediments to and perfect the

mechanism of a free and open market

and the national market system.

B. Self-Regulatory Organization’s

Statement on Burden on Competition

The PSE does not believe that the

proposed rule change will impose any

burden on competition that is not

necessary or appropriate in furtherance

of the purposes of the Act.

C. Self-Regulatory Organization’s

Statement on Comments on the

Proposed Rule Change Received From

Members, Participants, or Others

Written comments were neither

solicited nor 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.,
Federal Register / Vol. 60, No. 46 / Thursday, March 9, 1995 / Notices 13001

3 17 CFR 200.30–3(a)(12) (1994).

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. Copies of such filing

will also be available for inspection and

copying at the principal office of the

above-mentioned self-regulatory

organization. All submissions should

refer to the file number in the caption

above and should be submitted by

March 30, 1995.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.3

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 95–5704 Filed 3–8–95; 8:45 am]

BILLING CODE 8010–01–M

SMALL BUSINESS ADMINISTRATION

Privacy Act System of Records

AGENCY: Small Business Administration.

ACTION: Notice of Amendment to the

Ageny’s Privacy Act System of Records.

SUMMARY: The Small Business

Administration (SBA) is amending the

Agency’s Privacy Act System of Records

SBA 145, Temporary Disaster

Employees. This System is being

amended to expand the categories of

individuals covered.

DATES: This amendment is effective on

March 9, 1995.

FOR FURTHER INFORMATION CONTACT:

Bernard Kulik, Associate Administrator

for Disaster Assistance, U.S. Small

Business Administration, 8th floor, 409

3rd Street, SW, Washington, DC 20416;

202–205–6734.

SBA 145

SYSTEM NAME:

Former and Current Disaster

Employees—SBA 145.

SYSTEM LOCATION:

Office of Disaster Assistance, Central

Office, See Appendix A for location.

CATEGORIES OF INDIVIDUALS COVERED BY THE

SYSTEM:

Employees who have been previously

employed within the Office of Disaster

Assistance and some current employees.

CATEGORIES OF RECORDS IN THE SYSTEM:

Former employees within the Office

of Disaster Assistance and some current

employees. These records contain name,

address, telephone number where

person can be reached, SSN, Disaster

Area where employed, series and grade,

job title, dates of employment and

reason for termination, name and job

title of supervisor, and summary of

supervisor’s evaluation. Also included

is information, if any, concerning

violations of the Agency’s Standards of

Conduct (13 CFR Part 105) and

information, if any, concerning official

investigations and disciplinary actions

taken with regard to the employee.

Special skills and bilingual capabilities

are also included.

AUTHORITY FOR MAINTENANCE OF THE SYSTEM:

5 U.S.C. 301, 15 U.S.C. 834(b)(6), 44

U.S.C. 101.

ROUTINE USES OF RECORDS MAINTAINED IN THE

SYSTEM, INCLUDING CATEGORIES OF USERS AND

THE PURPOSE OF SUCH USES:

The records will be used by Disaster

Area Directors and personnel officers

assigned to each Disaster Area to verify

previous SBA disaster assistance

employment history when a former

employee is considered for

reemployment and to locate current or

former employees with special skills or

language capabilities needed in special

situations.

Disclosures may be made to a

congressional office from the record of

an individual in response to an inquiry

from the congressional office made at

the request of that individual.

Disclosures may be made to the

Department of Justice when:

(a) The agency, or any component

thereof; or

(b) Any employee of the agency in his

or her official capacity; or

(c) Any employee of the agency in his

or her individual capacity where the

Department of Justice has agreed to

represent the employee; or

(d) The United States, where the

agency determines that litigation is

likely to affect the agency or any of its

components

is a party to litigation or has an interest

in such litigation, and the use of such

records by the Department of Justice is

deemed by the agency to be relevant and

necessary to the litigation, provided,

however, that in each case, the agency

determines that disclosure of the

records to the Department of Justice is

a use of the information contained in

the records that is compatible with the

purpose for which the records were

collected.

To disclose them in a proceeding

before a court adjudicative body before

which the agency is authorized to

appear, when:

(a) The agency, or any component

thereof; or

(b) Any employee of the agency in his

or her official capacity; or

(c) Any employee of the agency in his

or her individual capacity where the

agency has agreed to represent the

employee; or

(d) The United States, where the

agency determines that litigation is

likely to affect the agency or any of its

components

is a party to litigation or has an interest

in such litigation, and the use of such

records by the agency determines that

use of such records is relevant and

necessary to the litigation, provided,

however, that in each case, the agency

determines that disclosure of the

records to a court or other adjudicative

body is a use of the information

contained in the records that is

compatible with the purpose for which

the records were collected.

POLICIES AND PRACTICES FOR STORING,

RETRIEVING, ACCESSING, RETAINING AND

DISPOSING OR RECORDS IN THE SYSTEM:

These records will be maintained in

card files and in a computer database.

RETRIEVABILITY:

These records will be filed

alphabetically by the individual’s last

name.

SAFEGUARDS:

Access to and use of these records are

limited to those persons whose official

duties require such access. Personnel

screening is employed to prevent

unauthorized disclosures.

RETENTION AND DISPOSAL:

Destroy when no longer necessary.

SYSTEMS MANAGER(S) AND ADDRESS:

Privacy Act Officer and Associate

Administrator for Disaster Assistance,

Central Office. See Appendix A for

address.

NOTIFICATION PROCEDURES:

An individual may inquire as to

whether the system contains a record

pertaining to him or her by addressing

a request in person or in writing to the

manager(s) listed above.

RECORDS ACCESS PROCEDURE:

In response to a request by an

individual to determine whether the