Self-Regulatory Organizations; Notice of Filing of Proposed Rule Change by the Philadelphia Stock Exchange, Inc. Relating to Listing Standards for Options on Equity Securities Issued in a Reorganization Transaction Pursuant to a Public Offering or a Rights Distribution

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-36625; File No. SR-Phlx-95-90]

Self-Regulatory Organizations; Notice of Filing of Proposed Rule

Change by the Philadelphia Stock Exchange, Inc. Relating to Listing

Standards for Options on Equity Securities Issued in a Reorganization

Transaction Pursuant to a Public Offering or a Rights Distribution

December 21, 1995.

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 December 19, 1995, the Philadelphia Stock Exchange, Inc. (``Phlx''

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 the Phlx. The

Commission is publishing this notice to solicit comments on the

proposed rule change from interested persons.

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

\2\ 17 CFR 240.19b-4.

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

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

of the Proposed Rule Change

The Phlx proposes to amend its listing standards in respect of

options on equity securities issues in a spin-off, reorganization,

recapitalization, restructuring or similar transaction where the

issuance is made pursuant to a public offering or a rights

distribution. The text of the proposed rule change is available at the

Office of the Secretary, Phlx, and at the Commission.

II. Self-Regulatory Organization's Statement of the Purpose of, and

Statutory Basis for, the Proposed Rule Change

In its filing with the Commission, Phlx 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 Phlx 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

The purpose of the proposed rule change is to amend the special

listing standards set forth in Phlx Rule 1009, Commentary .05 that

apply to options on equity securities issued in certain spin-offs,

reorganizations, recapitalizations, restructurings or similar

transactions (referred to herein as ``restructuring transactions'') so

as to also include securities issued pursuant to a public offering or a

rights distribution that is part of a restructuring transaction.

The proposed amendment to Rule 1009, Commentary .05 is intended to

facilitate the listing of options on equity securities issued in

restructuring transactions (referred to as ``Restructure Securities'')

by permitting the Exchange to base its determination as to the

satisfaction of certain of the listing standards set forth in Exchange

Rule 1009 and Commentary .01 thereunder by reference to (1) specified

characteristics of the ``Original Security'' in respect of which the

Restructure Security was issued or distributed; (2) the trading market

of the Original Security; (3) the number of shares of the Restructure

Security issued and outstanding; or (4) to the listing standards of the

exchange on which the Restructure Security is listed. Rule 1009,

Commentary .05 would permit the Exchange to certify a Restructure

Security as options eligible sooner than if it had to wait until it

could base its certification on characteristics of the Restructure

Security itself, but only in circumstances where the factors relied

upon make it reasonable to conclude that the Restructure Security will

in fact satisfy applicable listing criteria.

As recently approved by the Commission, Phlx Rule 1009, Commentary

.05 does not extend to restructuring transactions involving the

issuance of a Restructure Security in a public offering or a rights

distribution.\3\ The questions raised by the proposed extension of

Commentary .05 to Phlx Rule 1009 to reorganization transactions

involving public offering or rights distributions reflect that when a

Restructure Security is issued in a public offering or pursuant to a

rights distribution, it cannot automatically be assumed that the

shareholder population of the Restructure Security and the Original

Security will be the same. Instead, the holders of a Restructure

Security issued in a public offering will be those persons who

subscribed for and purchased the security in the offering, and the

holders of a Restructure Security issued in a rights distribution will

be those persons who elected to exercise their rights. Even in the case

of a distribution of nontransferable rights to shareholders of the

Original Security, not all such shareholders may choose to exercise

their rights. As a result, it cannot be assumed that the Restructure

Security will necessarily satisfy listing criteria pertaining to

minimum number of holders, minimum public float and trading volume

simply because the Original Security satisfied these criteria.

\3\ See Securities Exchange Act Release No. 36020 (July 24,

1995), 60 FR 39039 (July 31, 1995) (order approving Commentary .05

to Phlx Rule 1009).

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

On the other hand, the Exchange believes that the same reasons for

wanting to make an options market available without delay to holders of

securities issued in reorganizations that do not involve public

offerings or rights distributions apply with equal force to securities

issued in reorganizations that do involve public offerings or rights

distributions, so long as there can be reasonable assurance that the

securities satisfy applicable options listing standards. That is,

holders of an Original Security who utilize options to manage the risks

of their stock positions may well find themselves to be holders of both

the Original Security and the Restructure Security following a

reorganization because they chose to purchase the Restructure Security

in a public offering or to exercise rights in order to maintain the

same investment position they had prior to the reorganization. Such

holders may want to continue to use options to manage the risks of

their combined stock position after the reorganization, but they can do

so only if options on the Restructure Security are available. The

Exchange believes that it is important to avoid any undue delay in the

introduction of options trading in such a Restructure Security in

circumstances where there is sound reason to believe that the

Restructure Security does in fact satisfy options listing standards.

Accordingly, the Phlx proposes to add new paragraph (d) to

Commentary .05 of Rule 1009, to address situations where a Restructure

Security is issued pursuant to a public offering or rights

distribution. Pursuant to the proposed rule change, the Exchange may

certify the Restructure Security as satisfying minimum shareholder and

minimum public float requirements on the basis provided for in approved

Commentary .05(c), only after at least five days of ``regular way''

trading. Moreover, after due diligence, the Exchange must have no

reason to believe that the Restructure

[[Page 67379]]

Security does not satisfy these requirements. Additionally, in order to

base certification on Commentary .05 of Rule 1009, the closing prices

of the Restructure Security on each of the five or more trading days

prior to the selection date must be at least $7.50. Finally, as is

required for all underlying securities selected for options trading,

trading volume in the Restructure Security must be at least 2,400,000

shares during a period of twelve months or less up to the time the

security is so selected.

The effect of the proposed rule change is that a Restructure

Security issued pursuant to a public offering or a rights distribution

that is part of a reorganization will be eligible for options trading

only if it satisfies all of the existing standards applicable to the

selection of underlying securities generally, except that (A) the

Exchange may assume the satisfaction of the minimum public ownership

requirement of 7,000,000 shares and the minimum 2,000 shareholders

requirement if (i) either the percentage of value tests of subparagraph

(a)(1) of Commentary .05 are met or the aggregate market value

represented by the Restructure Security is at least $500,000,000; and

if (ii) the Restructure Security is listed on an exchange or an

automatic quotation system having equivalent listing requirements or at

least 40,000,000 shares of the Restructure Security are issued and

outstanding, and if (iii) after the Restructure Security has traded

``regular way'' for at least five trading days and after having

conducted due diligence in the matter, the Exchange has no reason to

believe that these requirements are not met, and (B) subject to the

same percentage of value or aggregate market value requirements, the

Restructure Security may be deemed to satisfy the minimum market price

per share requirement if it has a closing market price per share of at

least $7.50 during each of the five or more trading days preceding the

date of selection, instead of having to satisfy this requirement over a

majority of days over a period of three months. (In the event the

Restructure Security has a closing price that is less than $7.50 on any

of the trading days preceding its selection, it will have to satisfy

this requirement on a majority of trading days over a period of three

months before it can be certified as eligible for options trading.) For

any Restructure Security issued in a public offering or a rights

distribution that does satisfy these requirements, the effect of the

proposed rule change will be to permit its certification of options

trading to take place as early as on the sixth day after trading in the

stock commences, instead of having to wait for three months of trading.

The Exchange believes that the proposed rule change is consistent

with Section 6(b) of the Securities Exchange Act of 1934 in general,

and furthers the objectives of Section 6(b)(5) in particular, by

removing impediment to a free and open market in options covering

securities issued in public offerings or pursuant to rights

distributions as part of restructuring transactions and other similar

corporate reorganizations.

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. Persons making written submissions

should file six copies thereof with the Secretary, Securities and

Exchange Commission, 450 Fifth Street, NW., Washington, D.C. 20549.

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 Section, 450 Fifth Street, NW.,

Washington, D.C. 20549. Copies of such filing will also be available

for inspection and copying at the principal office of the Phlx. All

submissions should refer to the File No. SR-Phlx-95-90 and should be

submitted by January 19, 1996.

For the Commission, by the Division of Market Regulation,

pursuant to delegated authority.\4\

\4\ 17 CFR 200.30-(a)(12).

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

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 95-31504 Filed 12-28-95; 8:45 am]

BILLING CODE 8010-01-M