Document ID: SEC-2005-0369-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: Pacific Exchange, Inc.
Posted Date: 2005-12-14T05:00Z

[Federal Register: December 14, 2005 (Volume 70, Number 239)]
[Notices]               
[Page 74078-74080]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr14de05-116]                         

-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-52911; File No. SR-PCX-2005-129]

 
Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by the Pacific Exchange, Inc. and 
Amendment No. 1 Thereto Relating to the Approval of Securities That 
Underlie Options Traded on the Exchange

December 7, 2005.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on November 23, 2005, the Pacific Exchange, Inc. (``PCX'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I and 
II below, which Items have been prepared by the self-regulatory 
organization. On December 7, 2005, PCX filed Amendment No. 1 to the 
proposed rule change.\3\ PCX filed the proposed rule change pursuant to 
Section 19(b)(3)(A) of the Act,\4\ and Rule 19b-4(f)(6) thereunder,\5\ 
which renders the proposal, as amended, effective upon filing with the 
Commission. The Commission is publishing this notice to solicit 
comments on the proposed rule change, as amended, from interested 
persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Form 19b-4 dated December 7, 2005 which replaced the 
original filing in its entirety (``Amendment No. 1''). Amendment No. 
1 made clarifying changes and corrected typographical errors in the 
original filing.
    \4\ 15 U.S.C. 78s(b)(3)(A).
    \5\ 17 CFR 240.19b-4(f)(6).
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes changes to PCX rules pertaining to the 
approval of securities that underlie options traded on the Exchange. 
Specifically, the Exchange proposes to eliminate Rule 5.6(b)(5) and 
amend Rule 5.6(b)(6) and Rule 5.3(b). A copy of the proposed rule 
change is available on the PCX Web site, (http://www.pacificex.com), at the 

PCX's Office of the Secretary and at the Commission's Public Reference 
Room.

 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

1. Purpose
    The purpose of this Amendment No. 1 is to make clarifying changes 
and correct typographical errors in the original filing. This Amendment 
No. 1 replaces the original rule filing in its entirety. The Exchange 
proposes changes to PCX rules pertaining to the approval of securities 
that underlie options traded on the Exchange. Specifically, the 
Exchange proposes to eliminate Rule 5.6(b)(5) and amend Rule 5.6(b)(6) 
and Rule 5.3(b).
    PCX Rule 5.6(b) sets forth various situations under which an 
underlying security previously approved for options trading will in 
usual circumstances be deemed to no longer meet Exchange requirements 
for the continuance of such approval. In such circumstances, Rule 
5.6(b)(5) provides that the Exchange will not open for trading any 
additional series of options in that class and may also limit any new 
opening transactions in those options series that have already been 
opened. The Exchange proposes to eliminate this provision because (1) 
it limits investors' ability to use options to hedge existing

[[Page 74079]]

equity positions in such securities, and (2) it is not necessary in the 
context of the rest of Rule 5.6(b).
    First, Rule PCX 5.6(b)(5) can and does impact investors' interests 
by preventing them from using new options series to hedge positions 
that may hold in the underlying security of companies that fail to make 
timely reports required by the Act. The Exchange states that such a 
restriction is inconsistent with the rules and regulations in the 
markets for the underlying securities because no similar trading 
restriction is placed upon the trading of the underlying security 
itself. Thus, Rule 5.6(b)(5) only serves to limit the abilities of 
shareholders in such companies who may wish to hedge their positions 
with new options series, at a time when the ability to hedge may be 
particularly important.
    The PCX believes that Rule 5.6(b)(5) has outlived any usefulness 
and now serves to unnecessarily burden and confuse the investing 
public. This provision was appropriate when it was first implemented 
when the listing and trading of standardized options was still in its 
infancy and information pertaining to public companies was not readily 
available to the general investing public. The Exchange believes that 
today's listed options market, however, is a mature one with investors 
who have access to a significant amount of real-time market information 
to assist them in making informed investment decisions, including 
information as to whether companies have timely filed reports as 
required by the Act, and if not, why not. Therefore, the Exchange 
states that there is no reason to continue limiting investors' ability 
to trade in options classes, including new series within those classes, 
simply because a company is not timely in filing its reports. The 
Exchange further believes that this restriction is further misplaced, 
considering that investors are not similarly restricted from buying or 
selling shares of the underlying security in the equity markets.
    Moreover, the Exchange believes that Rule 5.6(b)(5) limits an 
investor's ability to hedge his underlying stock positions at a time 
when he may be in most need to protect his investment. The failure of a 
public company to comply with its reporting requirements under the Act 
could cause a significant movement in the price of that company's 
stock. Restricting the Exchange from opening new options series may 
leave investors without means to hedge their positions with options 
contracts at strike prices that more accurately reflect the 
contemporaneous price trends of the underlying stock.
    Clearly, new options series on a security should not be permitted 
to be opened if the underlying security ceases to be an NMS stock. 
Typically, the Exchange becomes aware of issues that may impact the 
continued listing of a security well before that security is delisted 
from its primary market. Exchange staff routinely monitors daily press 
releases and informational releases disseminated by various entities, 
such as, the primary listing market of a security and private news 
services, in an effort to monitor the activities and news items 
pertaining to the issuers of securities that underlie options traded on 
the Exchange. In many cases, when an issuer fails to comply with its 
reporting requirements under the Act, the issuer is given a substantial 
amount of time to cure this deficiency before the primary listing 
market actually delists the issuer's security. Many times, the issuer 
is able to comply without its security ever being delisted. During this 
period, PCX staff continually monitors the status of the issuer's 
compliance with its reporting requirements to determine whether the 
security may be delisted. Finally, the primary listing market typically 
issues a press release well in advance of delisting an issuer's 
security to give investors and other market participants adequate 
notice.
    Given the availability of data and information relating to public 
issuers of securities in today's markets, and in light of the extensive 
amount of additional continued listing standards under Rule 5.6(b), 
waiting until a security is actually delisted by its primary listing 
market is the appropriate point at which to restrict the issuance of 
new options series in an options class. Accordingly, the Exchange 
hereby proposes to eliminate PCX Rule 5.6(b)(5).
    Additionally, as a matter of ``housekeeping,'' the Exchange also 
proposes to clarify Exchange Rule 5.3(b) and Rule 5.6(b)(6), which 
govern the criteria for the initial and continued listing of options on 
a particular security, respectively. Both of these provisions include 
as part of the criteria, a requirement that the underlying security 
must be a national market system security (``NMS security''). As part 
of the recently adopted Regulation NMS, among other things, the 
Commission revised the definition of an NMS security.\6\ Specifically, 
Rule 600(b)(46) under Regulation NMS defines an NMS security as ``any 
security or class of securities for which transaction reports are 
collected, processed, and made available pursuant to an effective 
transaction reporting plan, or an effective national market system plan 
for reporting transactions in listed options.'' Rule 600(b)(47) also 
defines an ``NMS stock'' as any NMS security other than an option. As 
such, PCX Rule 5.3(b) and Rule 5.6(b)(5) will be amended to reflect 
these new terms.
---------------------------------------------------------------------------

    \6\ See Securities Exchange Act Release No. 51808 (June 9, 
2005); 70 FR 37496 (June 29, 2005).
---------------------------------------------------------------------------

2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b)\7\ of the Act, in general, and furthers the 
objectives of Section 6(b)(5),\8\ in particular, in that it is designed 
to facilitate transactions in securities, to promote just and equitable 
principles of trade, to enhance competition, and to protect investors 
and the public interest.
---------------------------------------------------------------------------

    \7\ 15 U.S.C. 78f(b).
    \8\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

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

    Written comments on the proposed rule change were neither solicited 
nor received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    The Exchange has designated the proposed rule change as one that: 
(i) Does not significantly affect the protection of investors or the 
public interest; (ii) does not impose any significant burden on 
competition; and (iii) does not become operative for 30 days from the 
date on which it was filed, or such shorter time as the Commission may 
designate. Therefore, the foregoing rule change has become effective 
pursuant to Section 19(b)(3)(A) of the Act \9\ and Rule 19b-4(f)(6) 
thereunder.\10\ At any time within 60 days after the filing of the 
proposed rule change, the Commission may summarily abrogate the rule 
change if it appears to the Commission such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act.
---------------------------------------------------------------------------

    \9\ 15 U.S.C. 78s(b)(3)(A).
    \10\ 17 CFR 240.19b-4(f)(6).

---------------------------------------------------------------------------

[[Page 74080]]

    Pursuant to Rule 19b-4(f)(6)(iii) under the Act,\11\ the proposal 
does not become operative for 30 days after the date of its filing, or 
such shorter time as the Commission may designate if consistent with 
the protection of investors and the public interest. The PCX has asked 
the Commission to waive the 30-day operative delay and the five day 
pre-filing notice requirement. Because the proposed rule change is 
based upon a recently approved rule change by the Chicago Board Options 
Exchange, Incorporated (``CBOE''),\12\ and the CBOE's proposed rule 
change was published for public notice and comment, the Commission 
believes that waiving the 30-day operative delay, as well as the five 
day pre-filing notice requirement, is consistent with the protection of 
investors and the public interest. Accordingly, the Commission 
designates the proposal to be effective and operative upon filing with 
the Commission.\13\
---------------------------------------------------------------------------

    \11\ 17 CFR 240.19b-4(f)(6)(iii).
    \12\ See Securities Exchange Act Release Nos. 52562 (October 4, 
2005), 70 FR 59382 (October 12, 2005) (notice for SR-CBOE-2004-37) 
and 52779 (November 16, 2005), 70 FR 70902 (November 23, 2005) 
(approval order for SR-CBOE-2004-37).
    \13\ For purposes only of waiving the 30-day operative delay, 
the Commission has considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
---------------------------------------------------------------------------

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 rule-comments@sec.gov. Please include 

File Number SR-PCX-2005-129 on the subject line.

Paper Comments

     Send paper comments in triplicate to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, Station Place, 100 F 
Street, NE., Washington, DC 20549-9303.

All submissions should refer to File Number SR-PCX-2005-129. 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. Copies of such 
filing also will be available for inspection and copying at the 
principal offices 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-PCX-2005-129 and should be submitted on or before 
January 4, 2006.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\14\
---------------------------------------------------------------------------

    \14\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Jonathan G. Katz,
Secretary.
[FR Doc. E5-7328 Filed 12-13-05; 8:45 am]

BILLING CODE 8010-01-P