[Federal Register Volume 61, Number 124 (Wednesday, June 26, 1996)]
[Notices]
[Pages 33160-33162]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-16228]



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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37322; File No. SR-PHLX-96-20]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Philadelphia Stock Exchange, Inc. Relating to Contrary 
Exercise Advices for Expiring Equity Options

June 18, 1996.
    Pursuant to Section 19(b)(1) of the Securities Commission Act of 
1934 ``(Act''), 15 U.S.C. Sec. 78s(b)(1), notice is hereby given that 
on May 30, 1996, the Philadelphia Stock Exchange, Inc. (``PHLX'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'' or ``SEC'') the proposed rule change as described in 
Items I, II, and III below, which Items have been prepared by the self-
regulatory organization. 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

    Pursuant to Rule 19b-4 of the Act, the PHLX proposes to adopt new 
Floor Procedure Advice (``Advice'') F-26, ``Equity Options Contrary 
Exercise Advices,'' to add certain provisions of paragraph (b), 
``Exercise Cut-Off for Expiring Options,'' of PHLX Rule 1042, 
``Exercise of Equity Option Contracts,'' to the PHLX's Floor Procedure 
Advice Handbook. The PHLX proposes to include Advice F-26 in the 
Exchange's minor rule violation enforcement and reporting plan (``minor 
rule plan'').\1\

[[Page 33161]]

Under the proposal, an initial violation of proposed Advice F-26 that 
is minor in nature will receive a warning and all subsequent violations 
within a one year period will be referred to the PHLX's Business 
Conduct Committee (``BCC''). In addition, an initial violation of 
proposed Advice F-26 that is deemed serious by the Exchange will be 
referred directly to the PHLX's BCC.\2\
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    \1\ The Exchange's minor rule plan is administered pursuant to 
PHLX Rule 970, ``Floor Procedure Advices: Violations, Penalties, and 
Procedures,'' which contains Advices with accompanying fine 
schedules. Pursuant to paragraph (c)(1) of Rule 19d-1 under the Act, 
a self-regulatory organization (``SRO'') is required to file 
promptly with the Commission notice of any ``final'' disciplinary 
action taken by the SRO. Pursuant to paragraph (c)(2) of Rule 19d-1, 
any disciplinary action taken by the SRO for violation of an SRO 
rule that has been designated a minor rule violation pursuant to the 
plan shall not be considered ``final'' for purposes of Section 
19(d)(1) of the Act if the sanction imposed consists of a fine not 
exceeding $2500 and the sanctioned person has not sought an 
adjudication, including a hearing, or otherwise exhausted his or her 
administrative remedies. By deeming unadjudicated minor violations 
as not final, the Commission permits the SRO to report violations on 
a periodic (quarterly), as opposed to immediate, basis.
    \2\ A violation of proposed Advice F-26 that is not easily 
verifiable or that requires a complicated factual or interpretative 
inquiry would also be referred directly to the Exchange's BCC. 
Conversation between Edith Hallahan, Special Counsel, Regulatory 
Services, PHLX, and Yvonne Fraticelli, Attorney, Office of Market 
Supervision (``OMS''), Division of Market Regulation (``Division''), 
Commission, on June 17, 1996.
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    The text of the proposed rule change is available at the Office of 
the Secretary, PHLX, 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 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 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

    The PHLX proposes to adopt Advice F-26 in order to add certain 
pertinent provisions of PHLX Rule 1042 regarding expiring equity 
options into the Exchange's Floor Procedure Advice Handbook. The PHLX 
believes that including these provisions in the Floor Procedure Advice 
Handbook should facilitate compliance with PHLX Rule 1042 due to ease 
of reference on the trading floor. Proposed Advice F-26 will be 
incorporated into the PHLX's minor rule plan; accordingly, the PHLX 
proposes to amend the minor rule plan to include proposed Advice F-26. 
Under the proposal, the first violation of proposed Advice F-26 that is 
minor in nature will be subject to a warning, and all subsequent 
violations within a one year calendar period will be referred to the 
Exchange's BCC for disciplinary action. In addition, an initial 
violation of proposed Advice F-26 that is deemed serious by the 
Exchange will be referred directly to the PHLX's BCC.\3\
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    \3\ See note 2, supra.
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    PHLX Rule 1042 establishes the PHLX's cut-off procedure for 
expiring equity options. Specifically, PHLX Rule 1042(b) requires that 
final exercise decisions be communicated to the Exchange by 5:30 p.m. 
Eastern Time on the business day immediately prior to the expiration 
date by (1) taking no action and allowing exercise determinations to be 
made in accordance with Options Clearing Corporation's (``OCC'') Rule 
805(d)(2), where applicable; \4\ or (2) submitting a Contrary Exercise 
Advice (``CEA''), a form which commits an option holder either to not 
exercise an option that would otherwise be exercised automatically 
pursuant to OCC Rule 805, or to exercise an option that otherwise would 
not be exercised automatically pursuant to OCC Rule 805. The Exchange 
states that PHLX Rule 1042 is substantially similar to the exercise 
rules of the other options exchanges.
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    \4\ Under OCC Rule 805(d)(2), a clearing member is deemed to 
have tendered to OCC an exercise notice for options with an exercise 
price below (in the case of a call) or above (in the case of a put) 
the closing price of the underlying security by (i) \3/4\ of a point 
or more, if the option contract is carried in a customer's account, 
or (ii) \1/4\ of a point or more, if the option contract is carried 
in any other account, unless the clearing member has instructed OCC 
to exercise none, or fewer than all, of such contracts. If a 
clearing member desires that any such contract not be exercised, the 
clearing member must give appropriate instructions to OCC in 
accordance with OCC Rule 805(b).
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    According to the PHLX, the current proposal was developed in 
conjunction with the other options exchanges. As part of this joint 
review of exercise procedures through the Intermarket Surveillance 
Group (``ISG''), the exchanges focused on the disciplinary result of 
violating the exercise rules, noting that a more streamlined process 
was needed. Thus, the PHLX states that the exchanges intend to permit 
the prompt issuance of a warning for minor violations of the exercise 
rules before triggering the full disciplinary process.\5\
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    \5\ One example of a minor violation of PHLX Rule 1042(b) would 
be submitting a CEA to the wrong place. Telephone conversation 
between Edith Hallahan, Special Counsel, Regulatory Services, PHLX, 
and Yvonne Fraticelli, Attorney, OMS, Division, Commission, on June 
5, 1996.
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    The Exchange believes that PHLX Rule 1042 and proposed Advice F-26 
contain important substantive requirements, including an exercise cut-
off time, and specific submission requirements. The purpose of the 
proposal is to codify minor infractions into the PHLX's minor rule 
plan. In administering the minor rule plan, the PHLX understands that 
infractions cited pursuant to the minor rule plan are minor in nature 
and more serious violations are referred directly to the BCC. Thus, 
proposed Advice F-26 is intended only to cover minor infractions and 
specifically states this.\6\ The Exchange does not believe that, by 
virtue of including the provisions as an Advice, all violations of 
Advice F-26 are thereby minor. PHLX Rule 1042 was intended to govern 
exercise procedures in order to prevent the occurrence of abuses and 
fraudulent activity. Incorporating part of PHLX Rule 1042 into an 
Advice does not diminish this critical purpose. The PHLX states that 
many other important, substantive provisions in the Exchange's rules 
are codified into Advices so that minor violations can be handled 
efficiently.\7\
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    \6\ The fine schedule for proposed Advice F-26 provides a 
warning for a first offense for infractions of the CEA procedure 
which are minor in nature; any violation of the procedure which has 
been deemed serious by the Exchange will be referred directly to the 
Exchange's BCC where stronger sanctions may result. However, the 
Exchange notes that this does not affect the other Advices 
administered pursuant to the minor rule plan which do not 
specifically contain this statement; infractions cited pursuant to 
the minor rule plan are minor in nature regardless of whether this 
specific language was added to the Advice.
    \7\ See e.g., Advice F-15, ``Minor Infractions of Position/
Exercise Limits and Hedge Exemptions.''
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    The PHLX believes that the proposal is consistent with Section 6 of 
the Act, in general, and in particular, with Section 6(b)(5), in that 
it is designed to promote just and equitable principles of trade, to 
prevent fraudulent and manipulative acts and practices, to foster 
cooperation and coordination with persons engaged in regulating, 
clearing, settling, processing information with respect to, and 
facilitating transactions in securities, as well as to protect 
investors and the public interest, by codifying the provisions of PHLX 
Rule 1042(b) into proposed Advice F-26.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange 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

    Within 35 days of the publication of this notice in the Federal 
Register or within such longer period (i) as the Commission may 
designate up to 90

[[Page 33162]]

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 the proposed rule change, or
    (B) Institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicition of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing. Persons making written submissions 
should file six copies thereof with the Secretary, Securities and 
Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549. 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for inspection and copying at the 
Commission's Public Reference Section, 450 Fifth Street, N.W., 
Washington, D.C. 20549. Copies of such filing will also be available 
for inspection and copying at the principal office of the PHLX. All 
submissions should refer to File No. SR-PHLX-96-20 and should be 
submitted by July 17, 1996.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\8\
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    \8\ 17 CFR Sec. 200.30-3(a)(12) (1995).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-16228 Filed 6-25-96; 8:45 am]
BILLING CODE 8010-01-M