Document ID: SEC-2005-0103-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: American Stock Exchange LLC
Posted Date: 2005-10-12T04:00Z

[Federal Register: October 12, 2005 (Volume 70, Number 196)]
[Notices]               
[Page 59380-59382]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr12oc05-112]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-52563; File No. SR-Amex-2004-74]

 
Self-Regulatory Organizations; American Stock Exchange LLC; 
Notice of Filing of Proposed Rule Change and Amendment No. 1 Thereto 
Relating to the Elimination of Commentary .01(5) to Amex Rule 916

October 4, 2005.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'' or ``Exchange Act''),\1\ and Rule 19b-4 thereunder,\2\ notice 
is hereby given that on August 27, 2004, the American Stock Exchange 
LLC (``Amex'' or ``Exchange'') filed with the Securities and Exchange 
Commission (``Commission'') the proposed rule change as described in 
Items I, II, and III below, which Items have been prepared by Amex. On 
September 26, 2005, Amex filed Amendment No. 1 to the proposed rule 
change.\3\ The Commission is publishing

[[Page 59381]]

this notice to solicit comments on the proposed rule change, as 
amended, from interested persons.
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    \1\ 15 U.S.C 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ In Amendment No. 1, Amex proposed to amend the rule text of 
Amex Rule 915, in order to substitute the term ``NMS stock'' for the 
term ``national market system security,'' for consistency with 
Regulation NMS. See Securities Exchange Act Release No. 51808 (June 
9, 2005), 70 FR 37496 (June 29, 2005).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to eliminate Commentary .01(5) to Exchange 
Rule 916, which governs the withdrawal of approval for securities 
underlying options traded on the Exchange and amend Exchange Rule 
915(a), which governs the criteria of underlying securities with 
respect to which option contracts are approved for listing and trading 
on the Exchange. The text of the proposed rule change is available on 
Amex's Web site (http://www.amex.com), at the Office of the Secretary 

of Amex, 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, Amex 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. Amex 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 the 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The purpose of the proposed rule change is to eliminate Commentary 
.01(5) to Amex Rule 916. Commentary .01 sets forth the guidelines to be 
considered by the Exchange in determining whether an underlying 
security previously approved for options trading continues to be 
appropriate. Specifically, Rule 916 and related Commentary .01 provide 
that if an underlying security previously approved by the Exchange does 
not meet the then current requirements for continuance, the Exchange 
will not open for trading additional series of such options class and 
may also limit any new opening transactions in those options series 
that have previously been opened for trading.
    Commentary .01(5), in particular, provides that an underlying 
security will not be deemed to meet the Exchange's requirements for 
continued approval whenever:

    5. The issuer has failed to make timely reports as required by 
applicable requirements of the Securities Exchange Act of 1934, and 
such failure has not been corrected within 30 days after the date 
the report was due to be filed.

The Exchange proposes to eliminate this provision based on its 
experience in recent years applying this requirement. The Exchange 
believes that this provision limits the ability of investors to use 
options to hedge existing equity positions and is not necessary given 
the entire application of Commentary .01. In addition, the Exchange 
notes that the underlying security will continue to trade on national 
securities exchanges, regardless of the late filings or reports 
required by the Exchange Act.
    The Exchange submits that Commentary .01(5) potentially harms 
investors and the marketplace by preventing the use of new options 
series to hedge positions in the underlying security of companies that 
fail to make timely reports required by the Exchange Act. The Exchange 
states that this restriction is inconsistent with the underlying equity 
markets, whereby failure to properly file Exchange Act reports does not 
result in a similar trading restriction. Accordingly, the Exchange 
maintains that Commentary .01(5) limits the ability of investors who 
may wish to hedge their underlying stock positions with new options 
series, at a time when the ability to hedge may be particularly 
important.
    The Exchange believes that Commentary .01(5) has substantially 
outlived any usefulness and now serves to unnecessarily burden and 
confuse the investing public. Commentary .01(5) to Rule 916 has been a 
part of the Exchange's continued listing criteria since late 1976, 
shortly after the listing and trading of standardized options commenced 
on the Exchange. In contrast to 1976, the Exchange states that the 
standardized options market today is a mature market largely consisting 
of sophisticated investors with significant access to information, such 
as information on the failure of a company to make timely Exchange Act 
reports. Therefore, the Exchange contends that there is no reason to 
limit the opportunity for investors to execute transactions in options 
classes (including new series within those classes) simply because a 
company is not timely in filing its Exchange Act reports, when 
investors are not similarly restricted from purchasing or selling 
shares in the underlying company.
    Moreover, the limitation on new options series imposed pursuant to 
Commentary .01(5) causes considerable confusion and frustration in the 
options marketplace because it only restricts the trading of new series 
in a given option class. The Exchange has found that Commentary .01(5) 
tends to confuse both public customers and market professionals, who 
find themselves restricted from trading any new options series in a 
given class at the same time that trading occurs in pre-existing 
options series or the underlying stock itself. Still further confusion 
can arise in this process because the Exchange maintains that Amex, as 
well as the other options exchanges, have no independent means to 
verify whether any of the listed securities underlying options traded 
at the Exchange have failed to meet their Exchange Act reporting 
requirements. Accordingly, the options exchanges, including Amex, must 
rely on other SROs or third parties for such notification, which is 
always difficult to monitor, particularly since such third-party 
reports are sometimes delayed or inaccurate.\4\
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    \4\ The Exchange notes that it has a procedure in place to 
monitor when an underlying security previously approved for option 
transaction ceases to trade on or is delisted from its primary 
listed market. The Exchange's Listing Qualification Department 
(``Department'') monitors: (1) The daily list services issued by the 
primary listing markets (such as the New York Stock Exchange, Inc., 
Amex, and The Nasdaq Stock Market); (2) press releases issued by the 
primary listing markets and the news wires; and (3) information 
circulars issued by the primary listing markets. If the Department 
is aware that an underlying security may be halted for trading on or 
delisted from its primary listed market, the Department would 
monitor such security closely on a daily basis. In the event of a 
delisting of the underlying security from its primary listed market, 
Amex will cease opening new series of options in such security and 
allow the existing series of options to expire. Additionally, if the 
underlying security has been halted or suspended in the primary 
market, the Exchange may halt trading in the option class pursuant 
to Amex Rule 918(b) and shall halt trading pursuant to Amex Rule 
117. Telephone conversation between Jeffrey Burns, Associate General 
Counsel, Amex, and Steve L. Kuan, Special Counsel, Division of 
Market Regulation, Commission, September 29, 2005.
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    The Exchange further submits that Commentary .01(5) is unnecessary 
for the protection of investors and the marketplace. For example, 
underlying securities that are delisted or fail to be NMS securities 
are no longer approved for options trading under existing rules. 
Specifically, existing Commentary .01(6) to Rule 916 provides that an 
underlying security will no longer be approved for options transactions 
when:

    ``(6) The issue, in the case of an underlying security that is 
principally traded on a national securities exchange, is delisted 
from trading on that exchange and neither meets NMS criteria nor 
traded through the facilities

[[Page 59382]]

of a national securities association, or the issue, in the case of 
an underlying security that is principally traded through the 
facilities or a national securities association, is no longer 
designated as an NMS security.'' \5\

    \5\ In Amendment No. 1, the Exchange proposed to amend Amex Rule 
916, Commentary .01(6) to update the rule text with respect to the 
definition of ``NMS stock'' in Regulation NMS under the Act. 
Telephone conversation between Jeffrey Burns, Associate General 
Counsel, Amex, and Steve L. Kuan, Special Counsel, Division of 
Market Regulation Commission, September 29, 2005.
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    Amex believes a better approach is to limit or suspend options 
trading when the underlying security itself has been delisted and not 
subject the process to the inherent uncertainty of a failure of the 
underlying company to timely file its Exchange Act reports. The 
Exchange accordingly submits that Commentary .01(5) should be 
eliminated.
    Moreover, the Exchange is amending Amex Rule 915(a) to substitute 
``NMS stock'' as defined in Regulation NMS for the previous description 
of a national market system security. In addition, the Exchange is 
updating Commentary .01(6) of Rule 916 in light of Regulation NMS.
    Both of these provisions include 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, Exchange Rule 915(a) and Commentary .01(6) of 
Exchange Rule 916 will be amended to reflect these new terms.
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    \6\ See supra note 3.
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2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b) of the Act,\7\ in general, and furthers the 
objectives of Section 6(b)(5) of the Act,\8\ in particular, in that it 
is designed to prevent fraudulent and manipulative acts and practices, 
to promote just and equitable principles of change, 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 a national market system.
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    \7\ 15 U.S.C. 78f.
    \8\ 15 U.S.C. 78f(b)(5).
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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.

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 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, 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-Amex-2004-74 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-Amex-2004-74. 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 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-Amex-2004-74 and should be submitted on or before 
November 2, 2005.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\9\
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    \9\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
 [FR Doc. E5-5574 Filed 10-11-05; 8:45 am]

BILLING CODE 8010-01-P