16518 Federal Register / Vol. 60, No. 61 / Thursday, March 30, 1995 / Notices

6 17 CFR 200.30–3(a)(12) (1994).

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

2 17 CFR 240.19b–4 (1994).

3Amendment No. 1 Provides the following

information regarding the Index: (1) Industry groups

represented; (2) price and volume information

regarding the component stocks; and (3) component

stock seleciton criteria. See letter from Eileen

Smith, Director, Product Development, Research

Department, CBOE, to Steve Youhn, Attorney,

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

Commission, dated January 5, 1995 (‘‘Amendment

No. 1’’).

Amendment No. 2 provides that the CBOE will

monitor the Index semi-annually, and will notify

staff of the Commission in the event that certain

index component capitalization and volume levels

fall below designated thresholds. See letter from

Joseph Levin, Vice-President, Research & Product

Development, CBOE, to Michael Walinskas, Branch

Chief, Division, Commission, dated March 14, 1995

(‘‘Amendment No. 2’’).

4See Securities Exchange Act Release No. 35280

(January 25, 1995), 60 FR 6325.

5See Amendment No. 1, supra note 3.

6 Id. The CBOE has represented that should the

character of the Index change from the basic

description contained herein, it shall so notify the

Commission staff, and such change could require a

filing pursuant to Section 19(b)(1) of the Exchange

Act and Rule 19b–4 thereunder. Telephone

conversation between Eileen Smith, Director,

Product Development, Research Department, CBOE,

and Francois Mazur, Attorney, Division,

Commission, on March 1, 1995.

7See March 1, 1995 telephone conversation,

supra note 6.

communications relating to the

proposed rule change, as amended,

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

Amex.

All submissions should refer to File

No. SR–Amex–95–04 and should be

submitted by April 20, 1995.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.6

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 95–7842 Filed 3–29–95; 8:45 am]

BILLING CODE 8010–01–M

[Release No 34–35532; File No. SR–CBOE–

94–43]

Self-Regulatory Organizations;

Chicago Board Options Exchange,

Inc.; Order Approving a Proposed Rule

Change and Notice of Filing and Order

Granting Accelerated Approval of

Amendment No. 2 to a Proposed Rule

Change Relating to the Listing of

Regular and Long-Term Index Options

on the S&P SmallCap 600 Index

March 24, 1995.

I. Introduction

On November 8, 1994, the Chicago

Board Options Exchange, Inc. (‘‘CBOE’’

or ‘‘Exchange’’) filed with the Securities

and Exchange Commision

(‘‘Commission’’ or ‘‘SEC’’), pursuant to

Section 19(b)(1) of the Securities

Exchange Act of 1934 (‘‘Act’’) 1 and Rule

19b–4 thereunder,2 a proposal to list

and trade on the Exchange cash-settled,

European-style index options on the

Standard & Poor’s SmallCap 600 Index

(‘‘S&P SmallCap 600’’ or ‘‘Index’’), a

broad-based capitalization weighted

index designed to measure the

performance of small capitalization

stocks. The CBOE filed Amendment No.

1 to its proposal on January 9, 1995, and

Amendment No. 2 to its proposal on

March 14, 1995.3 The proposed rule

change was published for comment and

appeared in the Federal Register on

February 1, 1995.4 No comments were

received regarding the CBOE’s proposal.

II. Description of the Proposal

A. General

The CBOE proposes to list and trade

cash-settled, European-style stock index

options on the S&P SmallCap, a

capitalization-weighted index of 600

domestic stocks chosen for market size,

liquidity, and industry group

representation.

B. Composition of the Index

The S&P SmallCap 600 Index has

been designed to measure the

performance of small capitalization

stocks. The Index is a capailizationweighted index of U.S. stocks with each

stock affecting the Index in proportion

to its market capitalization.

As of October 19, 1994, the 600

component stocks ranged in

capitalization from $933 million to $46

million, and the market capitalization of

the Index totalled $181 billion. The

largest stock accounted for 0.51% of the

total weighting of the Index, while the

smallest accounted for 0.03%. The

median capitalization of the

components in the Index was $267

million. A breakdown of the component

stocks by trading markets shows that

Nasdaq is the primary market for 53%

of the weight of the Index (318 issues),

the New York Stock Exchange (‘‘NYSE’’)

represents 43% (257 issues), and the

American Stock Exchange (‘‘Amex’’)

represents 4% (25 issues). The Nasdaq

stocks in the Index are authorized as

Nasdaq National Market Securites, the

top tier of Nasdaq stocks.

A total of 98 industry groups are

represented in the Index. The top five

groups and their weights are: (1)

Computer Software and Services—

9.01%; (2) Insurance—5.13%; (3)

Savings and Loans—4.88%; (4) Health

Care Services—4.31%; and (5) Banks—

Regional—4.26%. During the period

April through September 1994, the

average monthly trading volume for the

Index component stocks ranged from

93,000 to 25.3 million shares. The

average monthly volume was 1.9

million shares. The top 100 stocks

account for 33.42% of the Index, while

the bottom 100 stocks account for 5.69%

of the Index. The prices for each of the

components ranged from $1.385 to

$64.50. The average price was $19.37.

The shares outstanding for each of the

Index component stocks ranged from 4.0

million to 189.0 million with an average

of 17.8 million. 5

S&P relies on several criteria to select

Index component stocks. Among other

things, stocks must trade on the NYSE

or Amex, or be Nasdaq National Market

securities; stocks must trade above $1.00

at the time of selection; companies with

50% or more of their shares outstanding

held by another corporation are not

included; companies with 60% or more

of their shares held by insiders are not

included; stocks must have at least a six

month trading history; stocks that do

not trade on any three days during a 12-

month period are not included; and

share turnover (annual trading volume

as a percent of shares outstanding) has

to exceed 20% on an annualized basis.

Index component stocks are then chosen

from the field of stocks that meets these

criteria so that they balance the

economic sector weighings, described

above. 6

C. Calculation of the Index

The methodology used to calculate

the value of the Index is similar to that

used to calculate the value of the S&P

500 Index. The value of the Index is

determined by adding the price of each

stock multiplied by the number of

shares outstanding. This sum is then

divided by an index divisor (‘‘Index

Divisor’’) which gives the Index a value

of 100 on its base date of December 31,

1993. The Index Divisor is adjusted for

pertinent changes as described below in

the section titled ‘‘Maintenance.’’ The

Index had a closing value of 96.82 on

September 30, 1994.

D. Maintenance

The S&P SmallCap 600 will be

maintained by S&P, and the CBOE has

represented that it will not influence

any S&P decisions concerning

maintenance of the Index. 7 To maintain
Federal Register / Vol. 60, No. 61 / Thursday, March 30, 1995 / Notices 16519

8See Amendment No. 2, supra note 3.

9When the last trading day is moved because of

Exchange holidays (such as when CBOE is closed

on the Friday before expiration), the last trading day

for expiring options will be Wednesday and the

exercise settlement value of Index options at

expiration will be determined at the opening of

regular Thursday trading.

10The CBOE is a member of the ISG, which was

formed on July 14, 1983 to, among other things,

coordinate more effectively surveillance and

investigative information sharing arrangements in

the stock and options markets. See Intermarket

Surveillance Group Agreement, July 14, 1983. The

most recent amendment to the ISG Agreement,

which incorporates the original agreement and all

amendments made thereafter, was signed by ISG

members on January 29, 1990. See Second

Amendment to the Intermarket Surveillance Group

Agreement, January 29, 1990. The members of the

ISG are: the Amex; the Boston Stock Exchange, Inc.;

the CBOE; the Chicago Stock Exchange, Inc.; the

National Association of Securities Dealers, Inc.; the

NYSE; the Pacific Stock Exchange, Inc.; and the

Philadelphia Stock Exchange, Inc. Because of the

potential opportunities for trading abuses involving

stock index futures, stock options, and the

underlying stock, and the need for greater sharing

of surveillance information for these potential

intermarket trading abuses, the major stock index

futures exchanges (e.g., the Chicago Mercantile

Exchange and the Chicago Board of Trade) joined

the ISG as affiliate members in 1990.

11See CBOE Rule 24.5.

12 15 U.S.C. 78f(b)(5) (1988).

13Pursuant to Section 6(b)(5) of the Act, the

Commission must predicate approval of any new

option or warrant proposal upon a finding that the

introduction of such new derivative instrument is

in the public interest. Such a finding would be

difficult for a derivative instrument that served no

hedging or other economic function, because any

benefits that might be derived by market

participants likely would be outweighed by the

potential for manipulation, diminished public

confidence in the integrity of the markets, and other

valid regulatory concerns. In this regard, the trading

of listed options or warrants on the S&P SmallCap

600 Index will provide investors with a hedging

vehicle that should reflect the overall movement of

the small-capitalization stock universe. The

Commission also believes that these options and

warrants will provide investors with a means by

which to make investment decisions in the smallcapitalization equity market, allowing them to

establish positions or increase existing positions in

small-capitalized stocks in a cost effective manner.

continuity of the Index, the Index

Divisor will be adjust to reflect certain

events relating to the component stocks.

These events include, but are not

limited to, adjustments for company

additions and deletions, share changes,

stock splits, stock dividends, and stock

price adjustments due to company

restructurings or spinoffs. Some

corporate actions, such as stock splits

and stock dividends, require simple

changes in the common shares

outstanding and the stock prices of the

companies in the Index. Other corporate

actions, such as share issuances, change

the market value of the Index and

require an Index Divisor adjustment as

well.

Although the CBOE is not involved in

the maintenance of the Index, it has

represented that it will monitor the

Index on a semi-annual basis and will

notify staff of the Commission when: (1)

10% of the capitalization of the Index

comprises securities with a market

capitalization of less than $100 million;

or (2) when 10% of the capitalization of

the Index is made up of components

with an average daily trading volume of

less than 10,000 shares over the

previous six months. 8

E. Index Option Trading

In addition to regular Index options,

the Exchange may provide for the listing

of long-term (up to three years

expiration) index options series

(‘‘LEAPS’’) and reduced-value LEAPS

on the Index. For reduced-value LEAPS,

the underlying value would be

computed at one-tenth of the Index

level. The current and closing index

value of any such reduced-value LEAP

will, after such initial computation, be

rounded to the nearest one-hundredth.

The Exchange seeks to have the

discretion to list series in 21⁄2 point

intervals when the Index level is below

200. The minimum tick size for series

trading below $3 will be 1⁄16th and for

series trading above $3 the minimum

tick will be 1⁄8th. The trading hours for

options on the Index will be from 8:30

a.m. to 3:15 p.m. Chicago time.

F. Settlement of Index Options

The proposed options on the Index

will expire on the Saturday following

the third Friday of the expiration

month. Trading in the expiring contract

month will normally cease at 3:15 p.m.

(Chicago time) on the immediately

preceding Thursday. The exercise

settlement value of the Index at option

expiration will be calculations by S&P

based on the opening prices of the

component securities on the business

day prior to expiration, which will

normally be a Friday (‘‘A.M.

Settlement’’).9 If a stock fails to open for

trading, the last available price on the

stock will be used in the calculation of

the Index, as is done for currently listed

indexes.

G. Surveillance

The Exchange will use the same

surveillance procedures currently used

for each of the Exchange’s other index

options to monitor trading in Index

options and Index LEAPS on the S&P

SmallCap 600. These procedures

include complete access to trading

activity in the underlying securities. In

addition, the Intermarket Surveillance

Group Agreement (‘‘ISG Agreement’’),

dated July 14, 1983, as amended January

29, 1990, will be applicable to the

trading of options on the Index.10

H. Position Limits

The Exchange proposes to establish

position limits for options on the S&P

SmallCap 600 at 100,000 contracts on

either side of the market, and no more

than 60,000 of such contracts may be in

the series in the nearest expiration

month. Exercise limits will be set at the

same level as position limits.11 The

Exchange represents that these limits

are roughly equivalent, in dollar terms,

to the limits applicable to comparable

small-capitalization indexes, including

the Wilshire Small Cap Index and the

Russell 2000 Index.

III. Discussion

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, the

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

Act.12 The Commission finds that the

trading of options on the Index will

permit investors to participate in the

price movements of the 600 securities

on which the Index is based. The

Commission also believes that the

trading of options on the Index will

allow investors holding positions in

some or all of the securities underlying

the Index to hedge the risks associated

with their portfolios. Accordingly, the

Commission believes S&P SmallCap 600

options will provide investors with an

important trading and hedging

mechanism that should reflect

accurately the overall movement of

stocks in the small-capitalization range

of U.S. equity securities. By broadening

the hedging and investment

opportunities of investors, the

Commission believes that the trading of

S&P SmallCap 600 options will serve to

protect investors, promote the public

interest, and contribute to the

maintenance of fair and orderly

markets.13

The trading of S&P SmallCap 600

options, however, raises several issues,

including issues related to index design,

customer protection, surveillance, and

market impact. For the reasons

discussed below, the Commission

believes that the CBOE has adequately

addressed these issues.

A. Index Design and Structure

The Commission finds that it is

appropriate and consistent with the Act

to classify the Index as broad-based, and

therefore to permit Exchange rules

applicable to the trading of broad-based

index options to apply to the Index

options. Specifically, the Commission

believes the Index is broad-based
16520 Federal Register / Vol. 60, No. 61 / Thursday, March 30, 1995 / Notices

14A significant majority of the stocks are

relatively actively traded, as indicated by an Index

component median average daily trading volume of

53,179 shares. Telephone conversation between

Eileen Smith, Director, Product Development,

Research Department, CBOE, and Francois Mazur,

Attorney, Division, Commission, on February 23,

1995.

The Commission notes that an index purportedly

representing high capitalization stocks might not be

deemed to have actively traded stocks if the

components stocks’ median average daily volume

was only 53,179 shares. With regard to a small

capitalization index, where almost by their nature

the most active stocks will likely not be included,

a median average daily trading volume less than

that for existing broad based indexes could be

acceptable, depending upon the index’s other

features. For the S&P SmallCap 600, the median

average daily trading volume is acceptable given the

large number of component stocks and the

inclusion of criteria designed to exclude inactively

traded stocks from being selected.

15See Section II.B, supra.

16See supra note 14.

17Currently, 65% of the Index is accounted for by

stocks meetings the CBOE’s options listing

standards. Telephone conversation between Eileen

Smith, Director, Product Development, Research

Department, CBOE, and Francois Mazur, Attorney,

Division, Commission, on February 28, 1995. These

standards, which are uniform among the options

exchanges, provide that a security underlying an

option must, among other things, meet the

following requirements: (1) the public float must be

at least 7,000,000; (2) there must be a minimum of

2,000 stockholders; (3) trading volume must have

been at least 2.4 million over the preceding twelve

months; and (4) the market price must have been

at least $7.50 for a majority of the business days

during the preceding three calendar months. See

CBOE Rule 5.3, Interpretation .01.

As a general matter, for broad-based index

options, the Commission prefers that at least 50%

of an index’s components continue to be optionseligible. Given the broad diversity of the SmallCap

600 Index and the selection and maintenance

criteria, together with the fact that 65% of the

Index’s components are options eligible, the

Commission believes that the Index will not be

readily susceptible to manipulation. See supra

Section II.B.

18See Amendment No. 2, Supra note 3.

19The Commission would not be inclined to

approve such a high position limit if the position

limit dollar equivalent amount were substantially

higher than as currently proposed.

20See Securities Exchange Act Release No. 31243

(October 5, 1992), 57 FR 45849.

21See supra note 10.

22The CBOE has stated that it has the necessary

systems capacity to support new series that would

result from the introduction of the S&P SmallCap

600 options. In addition, the Options Price

Reporting Authority (‘‘OPRA’’) has represented that

additional traffic generated by options and LEAPs

on the S&P SmallCap 600 Index is within OPRA’s

capacity. See letter from Joseph P. Corrigan,

Executive Director, OPRA, to Eileen Smith,

Director, Product Development, Research

Department, CBOE, dated October 26, 1994.

because it reflects a substantial segment

of the U.S. equities market, in general,

and small-capitalization securities in

particular. First, the Index consists of

600 relatively actively traded,14 smallcapitalization domestic securities.

Second, the total capitalization of the

Index, as of October 19, 1994, was $181

billion, with the market capitalizations

of the individual stocks in the Index

ranging from a high of $933 million to

a low of $46 million, with a median

value of $267 million. Third, the Index

includes stocks of companies from a

broad range of industries, and no

industry segment comprises more than

9.01% of the Index’s total value.15

Fourth, as of October 19, 1994, no single

stock comprises more than 0.51% of the

Index’s total value, and the percentage

weighting of the 100 largest issues in the

Index accounted for only 33.42% of the

Index. Fifth, the Index selection and

maintenance criteria will serve to

ensure that the Index maintains its

broad representative sample of stocks in

the small-capitalization range of U.S.

equity securities. Accordingly, the

Commission believes it is appropriate to

classify the Index as broad-based.

The Commission believes that the

general broad diversification,

capitalizations, and relatively liquid

markets of the Index’s component stocks

significantly minimize the potential for

manipulation of the Index. First, as

discussed above, the Index represents a

broad cross-section of domestic small

capitalization stocks, with no single

industry group or stock dominating the

Index. Second, the majority of the stocks

that comprise the Index are relatively

actively traded.16 Third, the

Commission believes that the Index

selection and maintenance criteria will

serve to ensure that the Index will not

be dominated by low-priced stocks with

small capitalizations, floats, and trading

volumes.17 Fourth, the CBOE has

represented that it will monitor the

Index semi-annually and will notify the

staff of the Commission when: (1) ten

percent of the capitalization of the Index

is comprised of securities with a market

capitalization of less than $100 million;

or (2) ten percent of the capitalization of

the Index is made up of components

with an average daily trading volume of

less than 10,000 shares over the

previous six months.18 Fifth, the

Exchange has proposed reasonable

position and exercise limits for the

Index options that will serve to

minimize potential manipulation and

other market impact concerns. Although

a position and exercise limit of 100,000

contracts is high by traditional

standards, in dollar value it represents

$968,200,000 (based on the September

30, 1994 Index closing value of 96.82),

an amount equivalent to that allowed

for other small-capitalization index

options currently trading.19

Accordingly, the Commission believes it

is unlikely that attempted

manipulations of the prices of the Index

components would affect significantly

the Index’s value.

B. Customer Protection

The Commission believes that a

regulatory system designed to protect

public customers must be in place

before the trading of sophisticated

financial instruments, such as Index

options, can commence on a national

securities exchange. The Commission

notes that the trading of standardized

exchange-traded options occurs in an

environment that is designed to ensure,

among other things, that: (1) The special

risks of options are disclosed to public

customers; (2) only investors capable of

evaluating and bearing the risk of

options trading are engaged in such

trading; and (3) special compliance

procedures are applicable to options

accounts. Accordingly, because the

Index options will be subject to the

same regulatory regime as the other

standardized options traded on the

CBOE, the Commission believes that

adequate safeguards are in place to

ensure the protection of investors in

Index options.

C. Surveillance

The Commission generally believes

that a surveillance sharing agreement

between an exchange proposing to list a

stock index derivative product and the

exchange(s) trading the stocks

underlying the derivative product is an

important measure for surveillance of

the derivative and underlying securities

markets. Such agreements ensure the

availability of information necessary to

detect and deter potential

manipulations and other trading abuses,

thereby making the stock index product

less readily susceptible to

manipulation.20 In this regard, the

NYSE, Amex, and the NASD are all

members of ISG.21 In addition, the

CBOE will apply the same surveillance

procedures as those used for existing

broad based index options trading on

the CBOE.

D. Market Impact

The Commission believes that the

listing and trading of S&P SmallCap 600

Index Options on the CBOE will not

adversely affect the underlying

securities markets.22 First, as described

above, the Index is broad-based and

comprised of 600 stocks with no one

stock or industry group dominating the

Index. Second, as noted above, the

stocks contained in the Index have

relatively large capitalizations and are

relatively actively traded. Third,

existing CBOE stock index options rules

and surveillance procedures will apply

to S&P SmallCap 600 options. Fourth,
Federal Register / Vol. 60, No. 61 / Thursday, March 30, 1995 / Notices 16521

23Securities Exchange Act Release No. 30944

(July 28, 1992), 57 FR 33376.

24 15 U.S.C. 78s(b)(2) (1988).

25 17 CFR 200.30–3(a)(12) (1994).

1The NASD initially submitted the proposed rule

change on February 5, 1995. Amendment No. 1,

submitted on March 22, 1995, replaces the

proposed rule change in its entirety.

2NASD Manual, Rules of Fair Practice, Art. III,

Sec. 1 (CCH) ¶ 2151.05.

the position limits of 100,000 contracts

on either side of the market, with no

more than 60,000 of such contracts in a

series in the nearest month expiration

month, will serve to minimize potential

manipulation and market impact

concerns. Fifth, the risk to investors of

contra-party non-performance will be

minimized because the Index options

will be issued and guaranteed by the

Options Clearing Corportation just like

any other standardized option traded in

the United States.

Lastly, the Commission believes that

settling expiring S&P SmallCap 600

options (including full-value and

reduced-value Index LEAPS) based on

the opening prices of component

securities is reasonable and consistent

with the Act. As noted in other contexts,

valuing expiring index options for

exercise settlement purposes based on

opening prices rather than closing

prices may help reduce adverse effects

on the securities underlying options on

the Index.23

The Commission finds good cause for

approving Amendment No. 2 prior to

the thirtieth day after the date of

publication of notice of filing thereof in

the Federal Register. Specifically,

Amendment No. 2 provides that the

CBOE will monitor, semi-annually, the

Index and will notify staff of the

Commission in the event that certain

index component capitalization and

volume levels fall below designated

thresholds. The Commission believes

that this monitoring provision is not a

material change that raises regulatory

concerns not already addressed by the

proposal. Accordingly, the Commission

believes it is consistent with Sections

6(b)(5) and 19(b)(2) of the Act to

approve Amendment No. 2 to the

proposal on an accelerated basis.

IV. Solicitation of Comments

Interested persons are invited to

submit written data, views, and

arguments concerning Amendment No.

2. 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 the 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, N.W.,

Washington, D.C. 20549. Copies of such

filing will also be available for

inspection and copying at the principal

office of the CBOE. All submissions

should refer to File No. SR–CBOE–94–

43 and should be submitted by April 20,

1995.

V. Conclusion

For the reasons discussed above, the

Commission finds that the proposal is

consistent with the Act, and, in

particular, Section 6 of the Act.

It is therefore ordered, pursuant to

Section 19(b)(2) of the Act,24 that the

proposed rule change (File No SR–

CBOE–94–43), as amended, is approved.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.25

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 95–7841 Filed 3–29–95; 8:45 am]

BILLING CODE 8010–01–M

[Release No. 34–35533; File No. SR–NASD–

95–06]

Self-Regulatory Organizations; Notice

of Filing of Proposed rule Change by

National Association of Securities

Dealers, Inc. Relating to Interpretation

of the Board of Governors—

Forwarding of Proxy and Other

Material Under Article III, Section 1 of

the NASD Rules of Fair Practice

March 24, 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 March 22, 1995,1

the National Association of Securities

Dealers, Inc. (‘‘NASD’’ or ‘‘Association’’)

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 NASD.

I. Self-Regulatory Organization’s

Statement of the Terms of Substance of

the Proposed Rule Change

The NASD is proposing to amend its

Interpretation of the board of

Governors—Forwarding of Proxy and

Other Material under Article III, Section

1 to the NASD Rules of Fair Practice.2

Below is the text of the proposed rule

change. Proposed new language is in

italics; proposed deletions are in

brackets.

NASD Rules of Fair Practice

Business Conduct of Members

* * * * *

Article III, Section 1

Interpretation of the Board of Governors

Forwarding of Proxy and Other Materials

Introduction

A member has an inherent duty in carrying

out high standards of commercial honor and

just and equitable principles of trade to

forward (i) all proxy material which is

properly furnished to it by the issuer of the

securities or a stockholder of such issuer, to

each beneficial owner of shares of that issue

(or the beneficial owner’s designated

investment adviser) which are held by the

member for the beneficial owner thereof and

(ii) all annual reports, information statements

and other material sent to stockholders,

which are properly furnished to it by the

issuer of the securities to each beneficial

owner of shares of that issue (or the

beneficial owner’s designated investment

adviser) which are held by the member for

the beneficial owner thereof. For the

assistance and guidance of members in

meeting their responsibilities, the Board of

Governors has promulgated this

interpretation. The provisions hereof shall be

followed by all members and failure to do so

shall constitute conduct inconsistent with

high standards of commercial honor and just

and equitable principles of trade in violation

of Article III, Section 1 of the Rules of Fair

Practice of the Association.

Interpretation

Section 1. No member shall give a proxy

to vote stock which is registered in its name,

except as required or permitted under the

provisions of Section 2 or 3 hereof, unless

such member is the beneficial owner of such

stock.

Section 2. Whenever an issuer or

stockholder of such issuer soliciting proxies

shall timely furnish to a member:

(a)[1] sufficient copies of all soliciting

material which such person is sending to

registered holders, and

(b)[2] satisfactory assurance that he will

reimburse such member for all out-of-pocket

expenses, including reasonable clerical

expenses incurred by such member in

connection with such solicitation, such

member shall transmit promptly to each

beneficial owner of stock of such issuer (or

the beneficial owner’s designated investment

adviser) which is in its possession or control

and registered in a name other than the name

of the beneficial owner all such material

furnished. Such material shall include a

signed proxy indicating the number of shares

held for such beneficial owner and bearing a

symbol identifying the proxy with proxy