Document ID: SEC-2006-1062-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations;proposed rule changes: National Association of Securities Dealers, Inc.
Posted Date: 2006-08-18T04:00Z

[Federal Register: August 18, 2006 (Volume 71, Number 160)]
[Notices]               
[Page 47850-47852]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr18au06-135]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-54313; File No. SR-NASD-2006-099]

 
Self-Regulatory Organizations; National Association of Securities 
Dealers, Inc.; Notice of Filing and Immediate Effectiveness of Proposed 
Rule Change Relating to Amendments to Procedures for the Exercise of 
Options

August 14, 2006.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that on August 10, 2006, the National Association of Securities 
Dealers, Inc. (``NASD'') 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 NASD. 
NASD filed the proposal as a ``non-controversial'' proposed rule change 
pursuant to Section 19(b)(3)(A) of the Act,\3\ and Rule 19b-4(f)(6) 
thereunder,\4\ which renders the proposal effective upon filing with 
the Commission.\5\ The Commission is publishing this notice to solicit 
comments on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 15 U.S.C. 78s(b)(3)(A).
    \4\ 17 CFR 240.19b-4(f)(6).
    \5\ NASD gave the Commission written notice of its intent to 
file the proposed rule change on June 16, 2006. See Rule 19b-
4(f)(6)(iii). 17 CFR 240.19b-4(f)(6)(iii).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    NASD proposes to amend Rule 2860(b)(23) (Tendering Procedures for 
Exercise of Options) to: (1) Simplify the manner in which a Contrary 
Exercise Advice (``CEA'') is submitted; (2) extend by one hour the cut-
off time by which members must submit CEA notices; (3) add procedures 
for exercising a standardized equity option when a modified close of 
trading is announced; and (4) consolidate all provisions pertaining to 
the exercise of standardized options contracts into Rule 2860(b)(23) 
instead of having additional and overlapping provisions in Rule 11850 
(Tendering Procedures for Exercise of Options) as it currently the 
case. The text of the proposed rule change is available at NASD, at the 
Commission, and at http://www.nasd.com.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, NASD 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. NASD 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
    NASD proposes to amend Rule 2860(b)(23) (Tendering Procedures for 
Exercise of Options) to conform to recent changes of the substantially 
similar rules of the Options Exchanges.\6\ The proposed rule change 
presents no novel issues.
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    \6\ See Rule 980 of the American Stock Exchange; Rule 1042 of 
the Philadelphia Stock Exchange; Rule 6.24 of the NYSE Arca 
(formerly the PCX); Rule 11.1 and related Regulatory Circulars RG03-
41 and RG 03-54 of the Chicago Board Options Exchange; Rule 1100 of 
the International Securities Exchange; and Chapter VII Section 1 of 
the Boston Options Exchange (collectively referred to as the 
``Options Exchanges'').
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    The proposed rule change simplifies the manner in which a Contrary 
Exercise Advice (``CEA'') is submitted, extends by one hour the cut-off 
time by which members must submit CEA notices, and adds procedures for 
exercising a standardized equity option when a modified close of 
trading is announced. The proposed rule change also consolidates all 
provisions pertaining to the exercise of standardized options contracts 
into Rule 2860(b)(23) instead of having additional and overlapping 
provisions in Rule 11850 (Tendering Procedures for Exercise of Options) 
as is currently the case.
    The provisions in Rule 2860(b)(23) apply only to members that are 
not also members of the exchange on which the option is listed and 
traded, so-called ``access firms.'' \7\ Inasmuch as access firms are 
not members of an options exchange, it is necessary that the NASD rule 
subject such firms and customers of such firms to the same requirements 
for CEAs as customers and firms that are members of an options 
exchange.
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    \7\ See Rule 2860(b)(1)(A)(ii).
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    Currently, Rule 2860(b)(23)(A) generally requires that members 
cannot accept instructions to exercise a

[[Page 47851]]

standardized option from the account of any customer or any other 
member after 5:30 p.m. Eastern Time (``ET'') on the business day 
immediately prior to the expiration date of an option contract. Rule 
2860(b)(23)(A) also provides for an exception to this exercise cut-off 
time for specified reasons. Rule 2860(b)(23)(B) requires that members 
maintain records for each exercise instruction. Additional procedures 
with respect to the exercise of standardized options contracts that are 
not included in Rule 2860 are provided in Rule 11850 of the Uniform 
Practice Code and address The Options Clearing Corporation's (``OCC'') 
exercise-by-exception procedures (``Ex-by-Ex''). The Ex-by-Ex 
procedures set forth in OCC Rule 805 provide for the automatic exercise 
of certain options that are in-the-money by a specified amount. Under 
the Ex-by-Ex procedures, option holders holding an option contract that 
is in-the-money by a requisite amount and who wish to have their 
contracts automatically exercised need to take no further action.
    However, under OCC Rule 805, option holders who do not want their 
options automatically exercised or who want their options to be 
exercised under different parameters than that of the Ex-by-Ex 
procedure must file a CEA with a national options exchange of which 
they are a member or where the equity option is listed in accordance 
with Rule 11850 and instruct the OCC of their ``contrary intention.'' 
Rule 11850 is designed, in part, to deter individuals from taking 
improper advantage of late breaking news by requiring evidence of an 
options holder's intention to exercise or not exercise expiring equity 
options via the submission of a CEA. Members satisfy the filing 
requirement by manually submitting a CEA form or by electronically 
submitting the CEA through OCC's electronic communications system.
    If the OCC has waived the Ex-by-Ex procedures for an options class, 
a member is still required to submit a CEA if the member wants to 
exercise a standardized equity option that would not have been 
automatically exercised, or not to exercise a standardized equity 
option that would have been automatically exercised, had the Ex-by-Ex 
procedure been in effect.
    The Ex-by-Ex procedures contained in the rules of Options Exchanges 
have recently been amended.\8\ In addition, the Options Exchanges' 
rules contain provisions for exercising an equity option in the event 
of a modified close of trading. NASD proposes to (1) amend its rules to 
conform to the changes to the similar rules of the Options Exchanges, 
and (2) consolidate the provisions pertaining to the procedures for 
exercising standardized options set forth in Rule 11850 into Rule 
2860(b)(23).
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    \8\ See Securities Exchange Act Release Nos. 47885 (May 16, 
2003), 68 FR 28309 (May 23, 2003) (SR-AMEX-2001-92) (approval 
order); 48639 (October 16, 2003), 68 FR 60764 (October 23, 2003) 
(SR-PHLX-2003-65); 48640 (October 16, 2003), 68 FR 60757 (October 
23, 2003) (SR-PCX-2003-47); 49275 (February 18, 2004), 69 FR 8713 
(February 25, 2004) (SR-CBOE-2003-47); 48505 (September 17, 2003), 
68 FR 55680 (September 26, 2003) (SR-ISE-2003-20); and 49191 
(February 4, 2004), 69 FR 7055 (February 12, 2004) (SR-BSE-2004-04).
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    Specifically, Rule 2860(b)(23)(A)(i) would be amended to mirror the 
provisions of Rule 11850(a)(1) and provide that members may establish 
fixed procedures as to the latest time they will accept exercise 
instructions from customers for tender to the OCC.
    Rule 2860(b)(23)(A)(ii) would be amended to integrate the 
provisions of Rule 11850(b)(1)(A) regarding the cut-off time to submit 
final exercise decisions. In addition, to conform to the similar 
amendments to the rules of the Options Exchanges, NASD proposes to 
extend the cut-off time to 6:30 p.m. ET for members to submit CEAs for 
customer accounts. NASD further proposes to allow members to submit 
CEAs for non-customer accounts by 6:30 p.m. ET, but only if such member 
employs an electronic procedure with time stamp recording for the 
submission of exercise instructions by options holders. Members would 
have to establish fixed procedures to ensure secure time stamps in 
connection with the utilization of the electronic stamp provision. If a 
member does not employ an electronic time stamp and appropriate 
procedures to ensure secure time stamps, the member would have to 
submit CEAs for non-customer accounts by 5:30 p.m. ET.
    NASD believes that granting members additional time to submit CEAs 
or Advice Cancels is necessary to address a concern that a 5:30 p.m. ET 
cut-off time is problematic for customer accounts due to logistical 
difficulties in the time required to receive customer exercise 
instructions, and, subsequently, to process them through retail branch 
systems and back offices before submitting them. NASD believes that 
extending the cut-off times for CEAs and Advice Cancels for non-
customer accounts, if electronically time stamped, is fair and provides 
for consistent regulation. NASD does not propose to extend the 
submission cut-off time for members that manually submit CEA and Advice 
Cancels due to difficulties involved in monitoring manual procedures.
    Rule 2860(b)(23)(A)(iii) would be amended to incorporate the 
provisions of Rule 11850(b)(1)(A) regarding the Ex-by-Ex procedures 
together with conforming language and definitional changes to harmonize 
the rule with the rules of the Options Exchanges.
    A new subparagraph (iv) would be added to Rule 2860(b)(23)(A) to 
parallel the provisions of Rule 11850(b)(1)(B) for cases in which the 
Ex-by-Ex procedure has been waived. New subparagraph (iv) also would 
track the amended rules of the Options Exchanges that provide that no 
CEA is required to be filed if the option holder does not wish to 
exercise the expiring standardized equity option.
    Rule 2860(b)(23)(A)(v) would provide (as currently provided in Rule 
11850(b)(1)(C)) that members that maintain proprietary or public 
customer positions in expiring standardized equity options must take 
necessary steps to ensure that final exercise decisions are properly 
indicated to the relevant national options exchange with respect to 
such positions. In addition, members that have accepted the 
responsibility to indicate final exercise decisions on behalf of 
another member also must take necessary steps to ensure that such 
decisions are properly indicated to the relevant national options 
exchange.
    Rule 2860(b)(23)(A)(vi) would retain the provision (as currently 
provided in Rule 2860(b)(23)(A)(ii) and Rule 11850(b)(2)) that would 
allow members to make final exercise decisions after the exercise cut-
off time, but before expiration of the standardized equity option 
subject to the same exceptions as Rule 11850 currently provides which 
are also consistent with the rules of the Options Exchanges.\9\ Rule 
2860(b)(23)(B) would also retain the requirements for reporting and 
record keeping obligations when a member relies on these exceptions as 
amended by incorporating provisions from Rule 11850(b)(3).
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    \9\ See Securities Exchange Act Release No. 35389 (February 16, 
1995) 60 FR 10135 (February 23, 1995) (SR-NASD-94-78) regarding the 
Commission's approval of NASD's deletion of the exemption in Rule 
11850 that applies ``in the case of options contracts carried in an 
account maintained for another member in which only positions of 
customers of such other member are carried'' in order to conform to 
the rules of the Options Exchanges.
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    NASD also proposes to add to Rule 2860 a similar provision as found 
in the rules of the Options Exchanges that address when an options 
exchange or the OCC establishes a different exercise cut-off time.\10\ 
Specifically, proposed Rule 2860(b)(23)(A)(vii) would apply when a 
different or modified close of trading is announced. In such cases, the

[[Page 47852]]

option exchange or the OCC would have forewarning of the event and 
would be required to provide notice of the change in the exercise cut-
off time by 5:30 p.m. ET on the business day prior to the last trading 
day before expiration. Under such circumstances, the deadline for 
making a final decision to exercise or not exercise would be 1 hour and 
28 minutes following the time announced for the close of trading on 
that day. With respect to the submission of a CEA by members, the cut-
off time would be 2 hours and 28 minutes after the close of trading for 
customer accounts and non-customer accounts where the member firm 
employs an electronic procedure with time stamp for the submission of 
exercise instructions. Members that do not employ an electronic 
submission procedure for exercise instructions would be required to 
submit a CEA within 1 hour and 28 minutes after the close of trading 
for its non-customer accounts.
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    \10\ See supra note 6.
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    Proposed subparagraphs (viii), (ix) and (x) of Rule 2860(b)(23)(A), 
wholly incorporate the provisions of Rule 11850(b)(4) through (6), 
respectively. As noted above, Rule 2860(b)(23)(B) requiring 
recordkeeping of instructions would be retained and amended by 
incorporating provisions from Rule 11850(b)(3).
    Finally, paragraphs (C) and (D) of Rule 2860(b)(23) govern the 
allocation of exercise assignment notices and delivery and payment, 
respectively. Rule 11850(c) and (d) of the Uniform Practice Code have 
the same provisions as Rule 2860(b)(23) with regard to these 
provisions. Accordingly, these provisions are deleted from Rule 11850 
as they are covered in Rule 2860(b)(23)(C) and (D).
    NASD believes that the proposed rule change is necessary to provide 
its members that are not members of an options exchange with the same 
treatment as members of the Options Exchanges. Furthermore, as noted 
above, the proposed rule change will streamline and simplify the NASD 
rules as well as harmonize NASD's rule with those of the Options 
Exchanges.
    NASD has filed the proposed rule change for immediate 
effectiveness. NASD will announce the implementation date of the 
proposed rule change in a Notice to Members to be published no later 
than 60 days following the filing of the rule change with the 
Commission for immediate effectiveness. The implementation date will be 
30 days after the date of the Notice to Members.
2. Statutory Basis
    NASD believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act,\11\ which requires, among 
other things, that NASD rules be designed to prevent fraudulent and 
manipulative acts and practices, to promote just and equitable 
principles of trade, and, in general, to protect investors and the 
public interest. NASD believes the proposed rule change will streamline 
and simplify NASD rules by consolidating overlapping provisions. In 
addition, NASD believes the proposed rule change will promote 
consistent regulation by harmonizing NASD's rule with those of the 
Options Exchanges.
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    \11\ 15 U.S.C. 78o-3(b)(6).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    NASD does not believe that the proposed rule change will result in 
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 were neither solicited nor received.

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

    Because the foregoing proposed rule change does not: (i) 
Significantly affect the protection of investors or the public 
interest; (ii) impose any significant burden on competition; and (iii) 
become operative for 30 days from the date on which it was filed, or 
such shorter time as the Commission may designate if consistent with 
the protection of investors and the public interest, the proposed rule 
change has become effective pursuant to Section 19(b)(3)(A) of the Act 
\12\ and Rule 10b-4(f)(6) thereunder.\13\
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    \12\ 15 U.S.C. 78s(b)(3)(A).
    \13\ 17 CFR 240.19b-4(f)(6).
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    At any time within 60 days of the filing of such proposed rule 
change, the Commission may summarily abrogate such rule change if it 
appears to the Commission that 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.

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-NASD-2006-099 on the subject line.

Paper Comments

     Send paper comments in triplicate to Nancy M. Morris, 
Secretary, Securities and Exchange Commission, Station Place, 100 F 
Street, NE., Washington, DC 20549-1090.

All submissions should refer to File Number SR-NASD-2006-099. 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 NASD. 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-NASD-2006-099 and should be submitted on or before 
September 8, 2006.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\14\
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    \14\ 17 CFR 200.30-3(a)(12).
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Nancy M. Morris,
Secretary.
[FR Doc. E6-13639 Filed 8-17-06; 8:45 am]

BILLING CODE 8010-01-P