Self-Regulatory Organizations; Order Granting Partial Approval of Proposed Rule Changes and Notice of Filing and Order Granting Accelerated Approval of Amendments to Proposed Rule Changes by the American Stock Exchange, Inc., Chicago Board Options Exchange, Inc., New York Stock Exchange, Inc., Pacific Stock Exchange Inc., and Philadelphia Stock Exchange, Inc., Relating to the Listing and Trading of Options on Preferred Stock

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-34063; File Nos. SR-Amex-91-26, SR-COBE-91-34, SR-NYSE-

92-25, SR-PSE-91-33, and SR-Phlx-91-40]

Self-Regulatory Organizations; Order Granting Partial Approval of

Proposed Rule Changes and Notice of Filing and Order Granting

Accelerated Approval of Amendments to Proposed Rule Changes by the

American Stock Exchange, Inc., Chicago Board Options Exchange, Inc.,

New York Stock Exchange, Inc., Pacific Stock Exchange Inc., and

Philadelphia Stock Exchange, Inc., Relating to the Listing and Trading

of Options on Preferred Stock

May 13, 1994.

I. Introduction

Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934

(``Act''),\1\ and Rule 19b-4 thereunder,\2\ on October 8, 1991, October

4, 1991, September 23, 1992, November 20, 1991, and October 18, 1991,

the American Stock Exchange, Inc. (``Amex''), the Chicago Board Options

Exchange, Inc. (``CBOE''), the New York Stock Exchange, Inc.

(``NYSE''), the Pacific Stock Exchange, Inc. (``PSE''), and the

Philadelphia Stock Exchange, Inc. (``Phlx''), respectively (each

individually referred to herein as an ``Exchange'' and two or more

collectively referred to as ``Exchanges''), filed with the Securities

and Exchange Commission (``Commission'') proposed rule changes to

provide for the listing and trading of options on preferred stock.\3\

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\1\15 U.S.C. 78s(b)(1) (1988).

\2\17 CFR 240.19b-4 (1993).

\3\The original proposals of the NYSE and PSE, and the amended

proposals of the Amex, CBOE, and Phlx, also included requests to

list and trade options on American depositary receipts (``ADRs'').

Four of these filings also were subsequently amended several times

concerning options on ADRs (see, e.g., Amex Amendment Nos. 1, 2, 3,

and 4; CBOE Amendment Nos. 1 and 2; PSE Amendment Nos. 1 and 2; and

Phlx Amendment Nos. 1 and 2). The portions of the filings concerning

the listing and trading of options on ADRs previously were approved.

See infra note 8.

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The Exchanges filed amendments (``Exchange Amendments'') to their

proposals to indicate that the listing of options on preferred stock on

the respective Exchanges would be limited solely to preferred stock

that is non-convertible.\4\

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\4\The Amex filed Amendment No. 5 to its proposal on April 14,

1994. See Letter from Claire P. McGrath, Managing Director, and

Special Counsel, Amex, to Michael Walinskas, Branch Chief,

Derivatives Regulation, Division of Market Regulation, Commission,

dated April 14, 1994. The CBOE filed Amendment No. 3 to its proposed

rule change on May 10, 1993. See Letter from Michael L. Meyer,

Schiff Harding & Waite, to Sharon L. Lawson, Assistant Director,

Division of Market Regulation, Commission, dated May 5, 1993. The

NYSE filed Amendment No. 1 to its proposal on May 10, 1994. The PSE

filed Amendment No. 3 to its proposal on March 16, 1994. See Letter

from Michael D. Pierson, Senior Attorney, Market Regulation, PSE, to

Thomas No. McManus, Division of Market Regulation, Commission, dated

March 15,1994. The Phlx filed Amendment No. 3 to its proposed rule

change on March 17, 1994.

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The proposed rule changes were published for comment: (1) On

October 25, 1991, for the Amex, CBOE, and Phlx;\5\ (2) on December 17,

1991, for the PSE;\6\ and (3) December 3, 1992, for the NYSE.\7\ No

comments were received on these proposals. This order approves these

proposals as they relate to the listing of options on preferred

stock.\8\

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\5\See Securities Exchange Act Release No. 29829 (October 18,

1991), 56 FR 55356 (October 25, 1991). In addition, the Commission

in this release granted partial accelerated approval of proposals to

permit the listing of options on the preferred stock of R.J.R.

Nabisco Holdings Corporation (``RJR Preferred''). This partial

approval was granted in light of the extremely active trading in RJR

Preferred and the fact that RJR Preferred met the established

uniform options listing standards.

\6\See Securities Exchange Act Release No. 30048 (December 9,

1991), 56 FR 65527 (December 17, 1991).

\7\See Securities Exchange Act Release No. 31528 (November 27,

1992), 57 FR 57256 (December 3, 1992).

\8\On November 27, 1992, the Commission issued orders granting

partial accelerated approval of the Exchanges' proposals (including

amendments thereto) to permit the Exchanges to provide for the

listing and trading of options on ADRs, provided that there is a

comprehensive surveillance sharing agreement in place between the

particular Exchange and the primary exchange on which the foreign

security underlying the ADR is listed or the governmental regulatory

authority overseeing such primary exchange, or provided that the

Commission otherwise approves the listing without such an agreement.

See Securities Exchange Act Release Nos. 31529 (November 27, 1992),

57 FR 57248 (December 3, 1992) (Amex); 31531 (November 27, 1992), 57

FR 57250 )December 3, 1992) (CBOE); 31529 (November 27, 1992), 57 FR

57256 (December 3, 1992) (NYSE); 31530 (November 27, 1992), 57 FR

57262 (December 3, 1992) (PSE); and 31532 (November 27, 1992), 57 FR

57264 (December 3, 1992) (Phlx) (collectively, ``ADR Approval

Orders''). In addition, to the extent that there is no surveillance

sharing agreement between the relevant U.S. options exchange and the

primary exchange on which the foreign security underlying the ADR

trades, the Commission has approved other Exchange proposals to list

options on such ADRs provided that 50 percent or more of the world-

wide trading volume of the underlying foreign security occurs in the

U.S. ADR market. See Securities Exchange Act Release Nos. 33555

(January 31, 1994), 59 FR 5619 (February 7, 1994) (Amex); 33554

(January 31, 1994), 59 FR 5622 (February 7, 1994) (CBOE); 33552

(January 31, 1994), 59 FR 5626 (February 7, 1994) (NYSE); 33551

(January 31, 1994), 59 FR 5631 (February 7, 1994) (PSE); and 33553

(January 31, 1994), 59 FR 5634 (February 7, 1994) (Phls).

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II. Description of the Proposal

In 1991, the Commission issued an order approving proposed rules

changes by the Exchanges easing the standards relating to the

selection, and continuing eligibility, of securities underlying

exchange-traded options (in effect, increasing the number of securities

eligible for options trading).\9\ In this order, the Commission stated

that the Exchanges would be required to file separate rule proposals

pursuant to Section 19(b) of the Act in order to list for trading

options on securities other than common stock.\10\ In response thereto,

the Exchanges filed with the Commission the above referenced rule

proposals in order to enunciate generally their policies that

securities other than common stock may be appropriate for options

trading, and specifically to provide for the listing of options on ADRs

and preferred stock.\11\

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\9\Securities Exchange Act Release No. 29628 (August 29, 1991),

56 FR 43949 (September 5, 1991).

\10\Id.

\11\As stated earlier, the portions of the proposals relating to

the listing of options on ADRs have been previously approved. See

supra note 8.

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The proposals under consideration would authorize the Exchanges to

amend their rules to provide for the listing and trading of options on

preferred stock which is non-convertible, and which otherwise satisfies

the Exchanges' uniform options listing and maintenance listing

standards.

The initial options listing standards for each of the Exchanges

would require the following: (1) the preferred stock must have a

``float'' of a minimum of 7,000,000 shares outstanding; (2) there must

be at least 2,000 holders of the underlying preferred stock; (3) the

trading volume in all markets in which the underlying preferred stock

is traded must have been at least 2,400,000 shares over the prior

twelve months; (4) the market price per share of the preferred stock

must have been at least $7.50 for the majority of business days during

the prior three calendar months; (5) the preferred stock underlying the

option must be registered under the Act and listed on a national

securities exchange or traded through the facilities of a national

securities association and reported as a national market system

security; and (6) the issuer of the preferred stock must be in

compliance with all applicable requirements of the Act and rules

thereunder relating to the making of timely reports.\12\

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\12\See Amex Rule 915; CBOE Rule 5.3; NYSE Rule 715; PSE Rule

3.6; and Phlx Rule 1009.

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The maintenance listing criteria for all Exchanges would require:

(1) the preferred stock must maintain a ``float'' of 6,300,000 shares

outstanding; (2) there must continue to be at least 1,600 holders of

the preferred stock; (3) the trading volume in all markets in which the

underlying preferred stock is traded must have been at least 1,800,000

shares over the prior twelve month period; (4) the market price per

share must have been at least $5 for the majority of business days

during the three preceding calendar months; (5) the preferred stock

continues to be registered under the Act and listed on a national

securities exchange or traded through the facilities of a national

securities association and reported as a national market system

security; and (6) the issuer of the preferred stock continues to be in

compliance with all applicable requirements of the Act and rules

thereunder relating to the making of timely reports.\13\

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\13\See Amex Rule 916; CBOE Rule 5.4; NYSE Rule 716; PSE Rule

3.7; and Phlx Rule 1010.

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III. Commission Findings and Conclusions

The Commission finds that the portions of the proposed rule changes

relating to the listing of options on non-convertible preferred stock

is consistent with the requirements of Section 6(b)(5) of the Act and

the rules and regulations thereunder applicable to a national

securities exchange. Specifically, the Commission finds that allowing

options to trade on preferred stock, among other things, gives

investors a better means to hedge their positions in the preferred

stock, as well as enhanced market timing opportunities. Further, the

pricing of the preferred stock underlying an option may become more

efficient, and market makers in such preferred stock, by virtue of

enhanced hedging opportunities, may be able to provide deeper and more

liquid markets. In sum, the Commission believes that options on

preferred stock will engender the same benefits to investors and the

marketplace that exist with respect to options on common stock.

The Commission also believes that it is appropriate to permit the

Exchanges to list and trade options on preferred stock given that the

proposal includes specific provisions related to the protection of

investors. First, the proposals require that the preferred stock must

meet the particular Exchange's uniform options listing standards in all

respects. As described above, this would include both initial listing

and maintenance of listing criteria. These criteria ensure, among other

things, that the underlying preferred stock must initially and

thereafter maintain sufficient price and share float levels in order to

help prevent the options on the preferred stock from being readily

susceptible to manipulation.

Second, the proposals would permit the Exchanges to list only

options on preferred stock that is non-convertible. The Commission

currently believes that it is inappropriate to trade options on

preferred stock which is convertible into another security, such as

common stock. Specifically, where the preferred shares underlying a

listed option could be converted into another security, the Commission

is concerned that the public float of that particular preferred stock

could decrease, perhaps suddenly, to a level approaching or falling

below the maintenance standard of 6,300,000 shares, due to a large

number of conversions. Such a decrease in the public float of the

preferred stock underlying the option, in turn, may have an adverse

impact on the liquidity of the preferred stock, and consequently make

the markets for the preferred stock and the options thereon more

readily susceptible to manipulation. Although the Commission recognizes

that all options trading contains the risk that the underlying security

may fall below the maintenance criteria, because the convertibility

feature is attached to the preferred stock at all times, the ability of

this to occur is more likely than with other non-convertible

securities. Therefore, the Commission believes that permitting the

Exchanges to list options only on non-convertible preferred stock

addresses the foregoing concerns, and generally serves to prevent

fraudulent and manipulative acts and practices, promotes just and

equitable principles of trade, and protects investors and the public

interest.

The Commission notes that the listing on the Exchanges of options

on ADRs where the foreign securities underlying the ADRs are preferred

shares must be done in a manner consistent with this order and the ADR

Approval Orders.\14\ Specifically, the underlying preferred shares must

be non-convertible, and there must be a comprehensive surveillance

sharing agreement in place between the particular Exchange and the

primary exchange on which the underlying security is listed or the

governmental regulatory authority overseeing such primary exchange (or

the Commission must otherwise approve the listing without such an

agreement).\15\

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\14\See supra note 8.

\15\Id. Such a comprehensive surveillance sharing agreement

would not be necessary if 50 percent or more of the world-wide

trading volume of the underlying foreign security occurs in the U.S.

ADR market. Id.

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The Commission finds good cause for approving the Exchange

Amendments prior to the thirtieth day after the date of publication of

notice of filing thereof in the Federal Register. As originally

proposed, the Exchanges' rule changes would have provided for the

listing of options on any type of preferred stock, including

convertible preferred stock. The Exchange Amendments significantly

narrow the scope of the original proposals by providing for the listing

only of options on non-convertible preferred stock. This refinement

will serve to protect investors and the public interest, and minimize

the potential for manipulation. Further, the original, broader

proposals were published for the full 21-day comment period, and no

comments were received. The Commission finds, therefore, that no new

issues are raised by the Exchange Amendments. Accordingly, the

Commission believes it is consistent with Sections 19(b)(2) and 6(b)(5)

of the Act to approve the Exchange Amendments on an accelerated basis.

IV. Solicitation of Comments

Interested persons are invited to submit written data, views, and

arguments concerning the Exchange Amendments. Persons making written

submissions should file six copies thereof with the Secretary,

Securities and Exchange Commission, 450 Fifth Street NW., Washington,

DC 20549. Copies of the submission, all subsequent amendments, all

written statements with respect to the proposed rule changes that are

filed with the Commission, and all written communications relating to

the proposed rule changes 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. Sec. 552, will be available for inspection and

copying in the Commission's Public Reference Section, 450 Fifth Street

NW., Washington, DC. Copies of such filings also will be available for

inspection and copying at the principal office of the above-mentioned

self-regulatory organizations. All submissions should refer to the

appropriate file number in the caption above and should be submitted by

June 10, 1994.

It is therefore ordered, Pursuant to section 19(b)(2) of the

Act\16\ that the portions of the proposed rule changes (File Nos. SR-

Amex-91-26, SR-CBOE-91-34, SR-NYSE-92-25, SR-PSE-91-33, and SR-Phlx-91-

40), as amended, relating to the listing of options on preferred stock,

are approved.

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\16\15 U.S.C. 78s(b)(2) (1988).

For the Commission, by the Division of Market Regulation,

pursuant to delegated authority.\17\

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\17\17 CFR 200.30-3(a)(12) (1993).

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Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 94-12299 Filed 5-19-94; 8:45 am]

BILLING CODE 8010-01-M