30186 Federal Register / Vol. 74, No. 120 / Wednesday, June 24, 2009 / Notices 

10 17 CFR 200.30–3(a)(12). 

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

2 17 CFR 240.19b–4. 

3See Securities Exchange Act Release No. 59876 

(May 6, 2009), 74 FR 22613 (May 13, 2009) 

(‘‘Notice’’). 

4See letter from Kandy Rathinasamy, dated May 

15, 2009 (‘‘Rathinasamy Letter’’). 

5Section 220.12(f)(1) of Regulation T (12 CFR 

220), Supplement: Margin Requirements, grants 

authority to registered national securities exchanges 

to promulgate rules relating to call and put margin 

requirements. 

general, to protect investors and the 

public interest. 

B. Self-Regulatory Organization’s 

Statement on Burden on Competition 

The Exchange 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 

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 Exchange 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. 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. 

Comments may be submitted by any of 

the following methods: 

Electronic Comments 

• Use the Commission’s Internet 

comment form (http://www.sec.gov/ 

rules/sro.shtml); or 

• Send an e-mail to rulecomments@sec.gov. Please include File 

No. SR–NYSEAmex–2009–26 on the 

subject line. 

Paper Comments 

• Send paper comments in triplicate 

to Elizabeth M. Murphy, Secretary, 

Securities and Exchange Commission, 

Station Place, 100 F Street, NE., 

Washington, DC 20549–1090. 

All submissions should refer to File 

Number SR–NYSEAmex–2009–26. This 

file number should be included on the 

subject line if e-mail is used. To help the 

Commission process and review your 

comments more efficiently, please use 

only one method. The Commission will 

post all comments on the Commission’s 

Internet Web site (http://www.sec.gov/ 

rules/sro.shtml). 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 

Room, on official business days between 

the hours of 10 a.m. and 3 p.m. Copies 

of such filing also will be available for 

inspection and copying at the principal 

office of the Exchange. All comments 

received will be posted without change; 

the Commission does not edit personal 

identifying information from 

submissions. You should submit only 

information that you wish to make 

available publicly. All submissions 

should refer to File Number SR– 

NYSEAmex–2009–26 and should be 

submitted on or before July 15, 2009. 

For the Commission, by the Division of 

Trading and Markets, pursuant to delegated 

authority.10

Florence E. Harmon, 

Deputy Secretary. 

[FR Doc. E9–14796 Filed 6–23–09; 8:45 am] 

BILLING CODE 8010–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–60126; File No. SR–CBOE– 

2008–55] 

Self-Regulatory Organizations; 

Chicago Board Options Exchange, 

Incorporated; Order Granting Approval 

to a Proposed Rule Change, as 

Modified by Amendment No. 1, 

Relating to Margin Requirements 

June 17, 2009. 

I. Introduction 

On June 2, 2008, pursuant to Section 

19(b)(1) of the Securities Exchange Act 

of 1934 (the ‘‘Act’’),1 and Rule 19b–4 

thereunder,2 the Chicago Board Options 

Exchange, Incorporated (the ‘‘Exchange’’ 

or ‘‘CBOE’’) filed with the Securities 

and Exchange Commission (the 

‘‘Commission’’) a proposed rule change 

to modify its margin requirements to 

facilitate, under certain circumstances, 

the ability of account holders to use 

vested and currently exercisable 

compensatory employee stock options 

(‘‘Vested Employee Options’’) issued by 

publicly traded companies as collateral 

for writing call options that have the 

same underlying security as the Vested 

Employee Options. On May 3, 2009, 

CBOE filed Amendment No. 1. The 

proposed rule change was published for 

comment in the Federal Register on 

May 13, 2009.3 The Commission 

received one comment letter on the 

proposed rule change.4

II. Description 

The Exchange proposes to amend its 

margin requirements to facilitate, under 

certain circumstances, the ability of 

account holders to use Vested Employee 

Options issued by publicly traded 

companies (‘‘Issuers’’) as collateral for 

writing call options that have the same 

underlying security as the Vested 

Employee Options. Specifically, the 

proposal would allow account holders 

to sell, as a hedge, listed equity call 

options on the same underlying security 

as the account holder’s Vested 

Employee Options without the 

requirement of margin (the 

‘‘Transactions’’). The proposal would 

permit account holders to engage in the 

Transactions using their Vested 

Employee Options as collateral. 

Currently, such Transactions would be 

deemed ‘‘naked’’ for purposes of margin 

rules and subject to a deposit of cash 

margin, effectively making the strategies 

cost prohibitive and impractical. The 

Exchange believes that enabling 

employees who hold Vested Employee 

Options to generate income and 

liquidity on their otherwise illiquid 

asset through the listed options markets 

will benefit investors by providing 

greater transparency and liquidity. 

Under Section 220.12(f)(1) of 

Regulation T,5 the Exchange, as a 

registered national securities exchange, 

is permitted to recognize the type of 

transactions described below as eligible 

for margin treatment subject to the 

approval of the Commission. 

The proposal would permit account 

holders to sell listed call options on the 

same security that underlies their 

Vested Employee Options without the 

requirement of margin. Given the 

uncertificated nature of employee stock 

options, in order to secure the account 

Federal Register / Vol. 74, No. 120 / Wednesday, June 24, 2009 / Notices 30187 

6The Exchange will proscribe a set delivery 

period, which is expected to be no later than three 

business days following assignment of the listed 

options. 

7 In this regard, the Exchange currently intends to 

recognize the Master Vested Stock Option 

Monetization Agreement, created by iOptions 

Group, LLC, as one acceptable agreement. 

8 In approving this proposal, the Commission has 

considered the proposed rule’s impact on 

efficiency, competition, and capital formation. See 

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

9 15 U.S.C. 78f(b)(5). 

10See Rathinasamy Letter, supra note 4. 

11 17 CFR 240.15c3–1. 

holder’s obligations under the 

Transactions, the proposal would 

require: 

1. The account holder to (A) pledge 

the Vested Employee Options to the 

broker-dealer and (B) provide the 

broker-dealer with an irrevocable 

power-of-attorney authorizing the 

broker-dealer to exercise the Vested 

Employee Options on the account 

holder’s behalf if the listed call options 

are assigned or if the broker-dealer 

determines it is necessary. The 

irrevocable power-of-attorney may also 

be used in the event the account holder 

wishes to close the listed option 

position prior to its expiration and 

instructs the broker-dealer to exercise 

that number of Vested Employee 

Options necessary to cover the cost of 

the closing purchase (the account holder 

will also have the option of depositing 

additional cash in the account holder’s 

account to cover the cost of the closing 

purchase). 

2. In the event the Vested Employee 

Options are exercised between the date 

of the Transaction in the listed call 

options (the ‘‘Commencement Date’’) 

and the date the Transaction is closed 

(the ‘‘Closing Date’’), the shares issued 

upon exercise will be pledged to the 

broker-dealer (thereby replacing the 

Vested Employee Options that had been 

pledged prior to exercise). For example, 

during the time a Transaction is 

pending, the account holder may resign 

from the account holder’s employment 

with the Issuer and may be required to 

exercise the Vested Employee Options 

within a certain timeframe following the 

account holder’s departure. In such a 

scenario, the account holder would ask 

the broker dealer to exercise the Vested 

Employee Options and the stock issued 

pursuant to the exercise would be 

pledged to the broker-dealer. 

3. The Issuer will promptly deliver 

the stock upon payment or receipt of the 

exercise notice from the broker-dealer.6

The Issuer will also agree prior to the 

Commencement Date to waive any 

forfeiture conditions that otherwise 

might apply to the Vested Employee 

Options (e.g., upon a termination of the 

account holder’s employment with the 

Issuer) as well as any transfer 

restrictions that would preclude pledge 

of the Vested Employee Options to the 

broker-dealer. In addition, the Issuer 

will represent that the Vested Employee 

Options are covered by an effective 

registration statement on Form S–8. If 

the registration statement becomes 

ineffective the Issuer will notify the 

broker-dealer immediately. 

4. Because it is essential that the 

account holder, broker-dealer and Issuer 

cooperate and are each fully informed, 

agree to and acknowledge their own and 

each other’s responsibilities, all 

Transactions will be governed by an 

agreement (the ‘‘Agreement’’) entered 

into by the account holder, brokerdealer and Issuer prior to the 

Commencement Date of the first 

transaction. The Agreement would 

generally set forth each party’s 

obligations, representations and 

acknowledgements and the terms and 

conditions governing the Transactions 

and must be in a form acceptable to the 

Exchange.7

5. Such other terms and conditions 

prescribed by the Exchange in 

accordance with such form, formats and 

procedures as may be established by the 

Exchange from time to time would also 

apply. In this regard, upon approval of 

the proposed rule change and for a 

period of one year, the Exchange will 

require that, prior to the 

Commencement Date, a legal opinion 

with respect to the account holder’s and 

Issuer’s legal right to enter into the 

Transactions under the terms of the 

Issuer’s employee stock option plan and 

related documents (the ‘‘Legal 

Opinion’’) be obtained in a form 

acceptable to the Exchange. During the 

one-year time period, the Exchange may 

determine that such Legal Opinion is no 

longer necessary and will revise its 

established forms, formats and 

procedures accordingly. 

III. Discussion and Commission’s 

Findings 

After careful review of the proposed 

rule change, the comment letter and 

CBOE’s response, 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 association.8

In particular, the Commission finds 

that the proposed rule change is 

consistent with Section 6(b)(5),9 in that 

the proposed rule change is designed to 

prevent fraudulent and manipulative 

acts and practices, promote just and 

equitable principles of trade, remove 

impediments to and perfect the 

mechanisms of a free and open market 

and a national market system, and, in 

general, to protect investors and the 

public interest. The proposed rule 

change will offer market participants 

new trading opportunities and will 

enhance the Exchange’s competitive 

position. 

The Commission received one 

comment letter, in support of the 

proposal, stating that the proposed rule 

change is ‘‘a great idea, allowing 

employees to monetize the time value of 

their options.’’10

The Commission believes that the 

proposed rule change to amend the 

Exchange’s margin rule should be 

allowed. However, the Commission 

does have significant concerns with the 

amount of control each broker-dealer 

has over the Vested Employee Options. 

One purpose of the margin rules is to 

protect broker-dealers in the event of 

market turmoil. The broker-dealer must 

have enough control over the cash or 

securities it is holding as margin on 

behalf of investors to be able to act 

unilaterally to protect itself. With 

Vested Employee Options, the brokerdealer cannot act unilaterally to use the 

margin deposited by the customer (i.e., 

the Vested Employee Options); instead, 

the broker-dealer must rely on another 

person (i.e., the issuer) to promptly 

deliver the required shares. For 

example, if an issuer notifies the brokerdealer that there is an ineffective 

registration statement, it could prevent 

the broker-dealer from exercising the 

options and receiving publicly tradable 

shares, a prospect that could cause 

financial harm to the broker-dealer. 

The Commission raised these 

concerns in the Notice by noting in a 

footnote that absent relief from the 

Commission, broker-dealers would need 

to take a capital charge for any 

unsecured margin debt and by asking 

questions about how the broker-dealer’s 

legal authority to exercise the Vested 

Employee Options could be enhanced 

and how to limit the liquidity and 

operational risks arising from the 

Transactions. The Commission received 

no comments on this footnote or these 

questions. Thus, for purposes of 

determining whether an account is 

unsecured or partly secured pursuant to 

the net capital rule,11 including an 

account containing a Transaction, a 

broker-dealer may not include the value 

of a Vested Employee Option. 

30188 Federal Register / Vol. 74, No. 120 / Wednesday, June 24, 2009 / Notices 

12 15 U.S.C. 78s(b)(2). 

13 17 CFR 200.30–3(a)(12). 

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

2 17 CFR 240.19b–4. 

3See Securities Exchange Act Release No. 59877 

(May 6, 2009), 74 FR 22611 (May 13, 2009) 

(‘‘Notice’’). 

4Section 220.12(f)(1) of Regulation T (12 CFR 

220), Supplement: Margin Requirements, grants 

authority to registered national securities exchanges 

to promulgate rules relating to call and put margin 

requirements. 

5The Exchange will proscribe a set delivery 

period, which is expected to be no later than three 

business days following assignment of the listed 

options. 

6 In this regard, the Exchange currently intends to 

recognize the Master Vested Stock Option 

Monetization Agreement, created by iOptions 

Group, LLC, as one acceptable agreement. 

IV. Conclusion 

It is therefore ordered, pursuant to 

Section 19(b)(2) of the Act,12 that the 

proposed rule change (SR–CBOE–2008– 

55), as modified by Amendment No. 1, 

be, and hereby is, approved. 

For the Commission, by the Division of 

Trading and Markets, pursuant to delegated 

authority.13

Florence E. Harmon, 

Deputy Secretary. 

[FR Doc. E9–14797 Filed 6–23–09; 8:45 am] 

BILLING CODE 8010–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–60127; File No. SR–ISE– 

2007–121] 

Self-Regulatory Organizations; 

International Securities Exchange, 

LLC; Order Granting Approval to a 

Proposed Rule Change, as Modified by 

Amendment No. 1, Relating to Margin 

Requirements 

June 17, 2009. 

I. Introduction 

On December 24, 2007, pursuant to 

Section 19(b)(1) of the Securities 

Exchange Act of 1934 (the ‘‘Act’’),1 and 

Rule 19b–4 thereunder,2 the 

International Securities Exchange, LLC 

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

Securities and Exchange Commission 

(the ‘‘Commission’’) a proposed rule 

change to modify its margin 

requirements to facilitate, under certain 

circumstances, the ability of account 

holders to use vested and currently 

exercisable compensatory employee 

stock options (‘‘Vested Employee 

Options’’) issued by publicly traded 

companies as collateral for writing call 

options that have the same underlying 

security as the Vested Employee 

Options. On April 29, 2009, ISE filed 

Amendment No. 1. The proposed rule 

change was published for comment in 

the Federal Register on May 13, 2009.3

The Commission received no comments 

on the proposed rule change. 

II. Description 

The Exchange proposes to amend its 

margin requirements to facilitate, under 

certain circumstances, the ability of 

account holders to use Vested Employee 

Options issued by publicly traded 

companies (‘‘Issuers’’) as collateral for 

writing call options that have the same 

underlying security as the Vested 

Employee Options. Specifically, the 

proposal would allow account holders 

to sell, as a hedge, listed equity call 

options on the same underlying security 

as the account holder’s Vested 

Employee Options without the 

requirement of margin (the 

‘‘Transactions’’). The proposal would 

permit account holders to engage in the 

Transactions using their Vested 

Employee Options as collateral. 

Currently, such Transactions would be 

deemed ‘‘naked’’ for purposes of margin 

rules and subject to a deposit of cash 

margin, effectively making the strategies 

cost prohibitive and impractical. The 

Exchange believes that enabling 

employees who hold Vested Employee 

Options to generate income and 

liquidity on their otherwise illiquid 

asset through the listed options markets 

will benefit investors by providing 

greater transparency and liquidity. 

Under Section 220.12(f)(1) of 

Regulation T,4 the Exchange, as a 

registered national securities exchange, 

is permitted to recognize the type of 

transactions described below as eligible 

for margin treatment subject to the 

approval of the Commission. 

The proposal would permit account 

holders to sell listed call options on the 

same security that underlies their 

Vested Employee Options without the 

requirement of margin. Given the 

uncertificated nature of employee stock 

options, in order to secure the account 

holder’s obligations under the 

Transactions, the proposal would 

require: 

1. The account holder to (A) pledge 

the Vested Employee Options to the 

broker-dealer and (B) provide the 

broker-dealer with an irrevocable 

power-of-attorney authorizing the 

broker-dealer to exercise the Vested 

Employee Options on the account 

holder’s behalf if the listed call options 

are assigned or if the broker-dealer 

determines it is necessary. The 

irrevocable power-of-attorney may also 

be used in the event the account holder 

wishes to close the listed option 

position prior to its expiration and 

instructs the broker-dealer to exercise 

that number of Vested Employee 

Options necessary to cover the cost of 

the closing purchase (the account holder 

will also have the option of depositing 

additional cash in the account holder’s 

account to cover the cost of the closing 

purchase). 

2. In the event the Vested Employee 

Options are exercised between the date 

of the Transaction in the listed call 

options (the ‘‘Commencement Date’’) 

and the date the Transaction is closed 

(the ‘‘Closing Date’’), the shares issued 

upon exercise will be pledged to the 

broker-dealer (thereby replacing the 

Vested Employee Options that had been 

pledged prior to exercise). For example, 

during the time a Transaction is 

pending, the account holder may resign 

from the account holder’s employment 

with the Issuer and may be required to 

exercise the Vested Employee Options 

within a certain timeframe following the 

account holder’s departure. In such a 

scenario, the account holder would ask 

the broker dealer to exercise the Vested 

Employee Options, and the stock issued 

pursuant to the exercise would be 

pledged to the broker-dealer. 

3. The Issuer will promptly deliver 

the stock upon payment or receipt of the 

exercise notice from the broker-dealer.5

The Issuer will also agree prior to the 

Commencement Date to waive any 

forfeiture conditions that otherwise 

might apply to the Vested Employee 

Options (e.g., upon a termination of the 

account holder’s employment with the 

Issuer) as well as any transfer 

restrictions that would preclude pledge 

of the Vested Employee Options to the 

broker-dealer. In addition, the Issuer 

will represent that the Vested Employee 

Options are covered by an effective 

registration statement on Form S–8. If 

the registration statement becomes 

ineffective, the Issuer will notify the 

broker-dealer immediately. 

4. Because it is essential that the 

account holder, broker-dealer and Issuer 

cooperate and are each fully informed, 

agree to and acknowledge their own and 

each other’s responsibilities, all 

Transactions will be governed by an 

agreement (the ‘‘Agreement’’) entered 

into by the account holder, brokerdealer and Issuer prior to the 

Commencement Date of the first 

transaction. The Agreement would 

generally set forth each party’s 

obligations, representations and 

acknowledgements and the terms and 

conditions governing the Transactions 

and must be in a form acceptable to the 

Exchange.6