[Federal Register: July 20, 2004 (Volume 69, Number 138)]
[Rules and Regulations]
[Page 43295-43299]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr20jy04-3]
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SECURITIES AND EXCHANGE COMMISSION
17 CFR Part 230
[Release No. 33-8442; File No. S7-17-04]
RIN 3235-AJ03
Covered Securities Pursuant to Section 18 of the Securities Act
of 1933
AGENCY: Securities and Exchange Commission.
ACTION: Final rule.
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SUMMARY: The Securities and Exchange Commission (``Commission'') is
adopting an amendment to a rule under section 18 of the Securities Act
of 1933 (``Securities Act''). The purpose of the amendment is to
designate options listed on the International Securities Exchange, Inc.
(``ISE'') as covered securities. Covered securities under section 18 of
the Securities Act are exempt from State law registration requirements.
DATES: Effective Date: August 19, 2004.
FOR FURTHER INFORMATION CONTACT: Kelly Riley, Assistant Director, (202)
942-0752, Gordon Fuller, Counsel to the Assistant Director, (202) 942-
0792 or Brian Trackman, Attorney, (202) 942-7951, Division of Market
Regulation, Securities and Exchange Commission, 450 Fifth Street, NW.,
Washington, DC 20549-1001.
SUPPLEMENTARY INFORMATION:
I. Introduction
In 1996, Congress amended section 18 of the Securities Act to
exempt from State registration requirements securities listed, or
authorized for listing, on the New York Stock Exchange (``NYSE''), the
American Stock Exchange (``Amex''), or the National Market System of
the Nasdaq Stock Market (``Nasdaq/NMS'') (collectively, the ``Named
Markets''), or any national securities exchange determined by the
Commission to have substantially similar listing standards to those
markets.\1\ More specifically, section 18(a) of the Securities Act
provides that ``no law, rule, regulation, or order, or other
administrative action of any State * * * requiring, or with respect to,
registration or qualification of securities * * * shall directly or
indirectly apply to a security that--(A) is a covered security.''\2\
Covered securities are defined in section 18(b)(1) of the Securities
Act to include those securities listed, or authorized for listing, on
the Named Markets, or securities listed, or authorized for listing on a
national securities exchange (or tier or segment thereof) that has
listing standards that the Commission determines by rule are
``substantially similar'' to the Named Markets.\3\
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\1\ See National Securities Markets Improvement Act of 1996,
Public Law No. 104-290, 110 Stat. 3416 (October 11, 1996).
\2\ 15 U.S.C. 77r(a).
\3\ 15 U.S.C. 77r(b)(1). In addition, securities of the same
issuer that are equal in seniority or senior to a security listed on
a Named Market or national securities exchange designated by the
Commission as having substantially similar listing standards to a
Named Market are covered securities for purposes of section 18 of
the Securities Act. 15 U.S.C. 77r(b)(1)(C).
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The Commission adopted Rule 146 pursuant to section 18(b)(1)(B) of
the Securities Act.\4\ Rule 146(b) lists those national securities
exchanges, or segments or tiers thereof that the Commission has
determined to have listing standards substantially similar to those of
the Named Markets, and thus securities listed on such exchanges are
covered securities.\5\ The ISE has petitioned the Commission to amend
Rule 146(b) to determine that its listing standards for securities
listed on the ISE are substantially similar to those of the Named
Markets and, accordingly, that securities listed pursuant to such
listing
[[Page 43296]]
standards are covered securities for purposes of section 18(b) of the
Securities Act.\6\
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\4\ Securities Act Release No. 7494, Securities Exchange Act
Release No. 39542 (January 13, 1998), 63 FR 3032 (January 21, 1998).
\5\ 17 CFR 230.146(b).
\6\ See letter from Michael Simon, Senior Vice President and
General Counsel, ISE, to Jonathan G. Katz, Secretary, Commission,
dated October 9, 2003.
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On March 22, 2004, the Commission issued a release proposing to
amend Rule 146(b) to designate options listed on the ISE as covered
securities for purposes of section 18(a) of the Securities Act.\7\ The
Commission solicited comment on the proposal, and received one comment
letter in response to the proposal.\8\
After careful comparison, the Commission concludes that the current
listing standards of the ISE are substantially similar to the listing
standards of the Amex. Accordingly, the Commission today is amending
Rule 146(b) to designate options listed on the ISE as covered
securities under section 18(b)(1) of the Securities Act. Amending Rule
146(b) to include options listed on ISE as covered securities will
exempt those securities from State registration requirements as set
forth under section 18(a) of the Securities Act.
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\7\ Securities Act Release No. 8404, 69 FR 16154 (March 26,
2004) (``Proposing Release'').
\8\ See letter from William H. Navin, Executive Vice President
and General Counsel, Options Clearing Corporation, to Jonathan G.
Katz, Secretary, Commission, dated April 23, 2004 (``OCC Letter'').
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II. Background
In 1998, the Chicago Board Options Exchange, Inc. (``CBOE''),
Pacific Exchange, Inc. (``PCX''), the Philadelphia Stock Exchange, Inc.
(``Phlx''), and the Chicago Stock Exchange (``CHX'') petitioned the
Commission to adopt a rule determining that specified portions of the
exchanges' listing standards were substantially similar to the listing
standards of the Named Markets.\9\ In response to the petitions, and
after extensive review of the petitioners' listing standards, the
Commission adopted Rule 146(b), determining that the listing standards
of the CBOE, Tier 1 of the PCX, and Tier 1 of the Phlx were
substantially similar to those of the Named Markets and that securities
listed pursuant to those standards would be deemed covered securities
for purposes of section 18 of the Securities Act.\10\
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\9\ See letter from David P. Semak, Vice President, Regulation,
PCX, to Arthur Levitt, Jr., Chairman, Commission, dated November 15,
1996; letter from Alger B. Chapman, Chairman, CBOE, to Jonathan G.
Katz, Secretary, Commission, dated November 18, 1996; letter from J.
Craig Long, Esq., Foley & Lardner, Counsel to CHX, to Jonathan G.
Katz, Secretary, Commission, dated February 4, 1997; and letter from
Michele R. Weisbaum, Vice President and Associate General Counsel,
Phlx, to Jonathan G. Katz, Secretary, Commission, dated March 31,
1997.
\10\ Securities Act Release No. 7494, Securities Exchange Act
Release No. 39542 (January 13, 1998), 63 FR 3032 (January 21, 1998).
Review of CHX's listing program, including its listing standards and
operations, is ongoing. CHX has petitioned the Commission to amend
Rule 146(b) to include Tier 1 of CHX's listing standards. See letter
from Paul B. O'Kelly, Executive Vice President, Market Regulation
and Legal, CHX, to Jonathan G. Katz, Secretary, Commission, dated
May 17, 2000.
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In its petition, ISE has asked the Commission to amend Rule 146(b)
based on a determination that its listing standards are substantially
similar to those of the Named Markets so that securities listed on ISE
will be ``covered securities'' under section 18(b) of the Securities
Act.\11\ The ISE currently lists only standardized options issued and
guaranteed by the Options Clearing Corporation (``OCC'') that are
already listed on at least one of the other options exchanges named in
section 18(b)(1)(A) of the Securities Act or Rule 146--i.e., Amex,
CBOE, PCX and Phlx. These options are by definition ``covered
securities'' for purposes of section 18 of the Securities Act. ISE,
however, stated that it may in the future list standardized options
issued and guaranteed by OCC that are not listed on one of the other
options exchanges specified in section 18(b)(1)(A) of the Securities
Act or Rule 146. Accordingly, the ISE requested that the Commission
amend Rule 146(b) to designate securities listed on ISE as covered
securities for purposes of section 18 of the Securities Act.
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\11\ The Commission notes that, currently, the ISE lists only
standardized options and, accordingly, only has listing standards
for equity and index options.
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III. Comment Letters
As noted above, the Commission received one comment letter in
response to the proposed rule amendment, which supported ISE's petition
to amend Rule 146(b).\12\ The OCC Letter noted that designating options
listed on the ISE as ``covered securities'' would place the ISE on an
equal competitive footing with other options exchanges whose listed
securities are presently exempt from State blue sky laws. The OCC
agreed with the Commission's preliminary view that ISE's selection and
maintenance requirements for underlying securities are substantially
similar to those of Amex. Finally, in response to the Commission's
request for comment on whether the absence of an express provision in
ISE's rules that it will monitor news sources for information
indicating that an underlying security no longer meets the requirements
for continued approval should impact the Commission's determination of
whether ISE's rules are ``substantially similar'' to Amex's rules, the
OCC Letter explained that the absence of such a provision in the ISE
maintenance requirements is a difference without substance. The OCC
expressed its view that, because the ISE is obligated under sections 6
and 19(g) of the Securities Exchange Act of 1934 (``Exchange Act'') to
enforce its rules, including its maintenance requirements, the ISE is
required to monitor for corporate events that render a security
ineligible to underlie ISE listed options.
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\12\ See supra note 8.
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IV. Discussion
The Commission has reviewed the ISE listing standards for options
traded on the ISE and determines that they are substantially similar to
those of Amex. The Commission notes that, under section 18(b)(1)(A) of
the Securities Act, the Commission has the authority to compare the
listing standards of a petitioner with those of either the NYSE, Amex,
or Nasdaq/NMS. Because Amex is the only Named Market that lists
standardized options, the Commission compared ISE's listing standards
to the listing standards applicable to options traded on the Amex.
In addition, the Commission has interpreted the ``substantially
similar'' standard to require listing standards at least as
comprehensive as those of the Named Markets.\13\ To the extent that the
ISE's listing standards are stricter than those of Amex, the Commission
may determine that they meet the substantially similar standard.
Finally, the Commission notes that differences in language or approach
do not necessarily lead to a determination that the listing standards
of the petitioner are not substantially similar to those of a Named
Market.
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\13\ Securities Act Release No. 7422, Securities Exchange Act
Release No. 38728 (June 9, 1997), 62 FR 32705 (June 17, 1997).
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The Commission reviewed ISE's listing standards for each class of
security it trades, specifically equity options and index options.
Using the approach outlined above, the Commission concludes that
currently the listing standards of the ISE are substantially similar to
the listing standards of the Amex.
With respect to equity options, the ISE listing and maintenance
requirements closely track the corresponding Amex provisions.\14\
Specifically, the ISE's original listing requirements pertaining to the
public
[[Page 43297]]
float, distribution of shares and trading volume of the underlying
security are identical to those of the Amex.\15\ The ISE and Amex also
impose the same initial listing and maintenance requirements for
options on American Depositary Receipts (``ADRs''), International
Funds, Restructured Companies, Exchange-Traded Fund shares
(``ETFs''),\16\ and Trust Issued Receipts.\17\ The only difference,
identified in the Proposing Release, between the ISE and Amex original
listing standards was a provision in the Amex rules that permits Amex
members to propose the listing of an option that otherwise meets
established listing requirements. ISE rules do not contain a similar
provision. The Commission has determined that because this difference
does not impact the quality of ISE's listing standards, it does not
render ISE's listing standards less comprehensive than Amex's listing
standards.\18\ Further, as noted above, differences in language or
approach of listing standards are not dispositive.
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\14\ Compare ISE Rules 502 and 503 with Amex Rules 915 and 916.
\15\ See id. The Commission notes that no exchange has standards
establishing qualifications for issuers of exchange-traded options
because all options are issued by the OCC. All options issued by the
OCC have the equal protection of OCC's backup system of clearing
members' obligations, margin deposits and clearing funds.
\16\ ETFs are defined under Amex Rule 915 to include ``shares or
other securities that are principally traded on a national
securities exchange or through the facilities of a national
securities association and reported as a national market security,
and that represent an interest in a registered investment company
organized as an open-end management investment company, a unit
investment trust or a similar entity which holds securities
constituting or otherwise based on or representing an investment in
an index or portfolio of securities. * * *'' See Amex Rule 915
Commentary .06. These securities are referred to as ``Fund Shares''
in the ISE rules. See ISE Rule 502(h).
\17\ Compare subsections (c), (f)-(h), and (j) of ISE Rule 502
with Subsections .03-.07 of Amex Rule 915, and Subsections (g)-(j)
of ISE Rule 503 with Subsections .06-.09 of Amex Rule 916.
\18\ The Proposing Release contains a more detailed description
of the Commission's analysis comparing ISE's listing and maintenance
standards for equity options to those of Amex. See Securities Act
Release No. 8404 (March 22, 2004), 69 FR 16154 (March 26, 2004).
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With regard to the maintenance standards for equity options, the
ISE's maintenance requirements for its equity options substantively
track those of the Amex.\19\ With respect to the underlying security of
an equity option, the ISE and Amex have identical maintenance
requirements regarding the number of publicly traded shares, their
distribution, trade volumes and market price. Failure to meet any one
of these criteria may result in delisting the option.\20\
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\19\ Compare ISE Rule 503 with Amex Rule 916.
\20\ See ISE Rule 503.
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Both Amex and ISE may withdraw approval for options trading if the
issuer of an underlying security that is principally traded on a
national securities exchange is delisted from trading on that exchange
and neither meets National Market System (``NMS'') criteria nor is
traded through the facilities of a national securities association.
Amex and ISE may also withdraw approval for options trading on a
security that is principally traded through facilities of a national
securities association, if such security is no longer designated as an
NMS security.\21\ Likewise, the ISE and Amex impose the same
maintenance requirements for continued listing of options on ADRs,
ETFs, Trust Issued Receipts, and Holding Company Depositary
Receipts.\22\
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\21\ See ISE Rule 503(b)(6); Amex Rule 916 Commentary .01(6).
\22\ Compare subsections (g)-(j) of ISE Rule 503 with
subsections .06-.09 of Amex Rule 916.
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The Commission noted in the Proposing Release that ISE did not have
an express provision requiring the ISE to monitor on a daily basis news
sources for information of corporate actions, which may indicate that
an underlying security no longer meets requirements for continued
approval, while Amex rules did have this express provision. Because ISE
is obligated under sections 6 and 19(g) of the Exchange Act to comply
with its own rules, which necessitates ISE monitoring corporate events
that have a bearing on whether an underlying security satisfies ISE's
listing standards, the Commission finds that the absence of such
express provision does not represent a significant enough difference
between the ISE and the Amex to change our conclusion that their
listing standards are substantially similar. The Commission notes that
the OCC supported this conclusion by stating that ``[t]he fact that
ISE's rules do not describe specifically how ISE will conduct such
monitoring does not mean that ISE's maintenance standards are less
comprehensive.'' \23\
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\23\ See supra note 8.
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With respect to index options, the Commission finds that the ISE
and the Amex have substantially similar requirements for stock indices
that may underlie index options. With regard to broad-based index
options, both the ISE and the Amex require that the listing of a class
of options on a new underlying index must be filed with the Commission
as a proposed rule change under section 19(b) of the Exchange Act.\24\
Furthermore, the Commission finds that the exchanges have substantially
similar provisions for the designation of narrow-based indices as
eligible to underlie index options, including rules that allow certain
options to be traded on certain narrow-based indices using an expedited
procedure, which involves submitting to the Commission a Form 19b-4(e)
under Rule 19b-4(e) of the Exchange Act.\25\ The listing and
maintenance requirements for component securities comprising narrow-
based index options listed on the ISE appear in all material respects
to be substantially similar to those of the Amex.\26\ Specifically, the
ISE and the Amex appear to have substantially similar criteria for
index components relating to market value, trading volume, calculation
of the index, and inclusion of non-U.S. component securities or
ADRs.\27\ In addition, the Commission believes that ISE and Amex
requirements for the index regarding weighting, index components,
rebalancing, information barriers maintained by broker-dealers, and the
dissemination of index values are substantially similar.\28\ Likewise,
the ISE rules setting forth position and exercise limits, margin
requirements, and settlement terms applicable to index options are
substantially similar to those of the Amex.\29\ Accordingly, the
Commission has determined that the listing standards of the ISE and the
Amex for index options are substantially similar.
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\24\ See ISE Rule 2002(a), Amex Rule 901C.01.
\25\ Compare ISE Rule 2002(b) with Amex Rule 901C.02.
\26\ Compare ISE Rules 502, 2002(c) with Amex Rules 915,
901C.02(d).
\27\ Compare ISE Rule 2002(b) with Amex Rule 901C.02.
\28\ Compare ISE Rules 2002 and 2003 with Amex Rule 901C.
\29\ Compare ISE Rules 413, 417, 418, 709, 1102, 2004-2010, 2012
with Amex Rules 462, 903C, 904C, 905C, 909C, 916C, 918C, 951C, and
980C. The ISE and Amex's disclaimer provisions relating to index
options are also substantially similar. Compare ISE Rule 2011 with
Amex Rule 902C.
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Therefore, the Commission has determined that the ISE's listing
standards are substantially similar to a Named Market and is amending
Rule 146(b) to reflect this determination, designating options listed
on the ISE as ``covered securities'' for purposes of section 18 of the
Securities Act.
The Commission notes that designating ISE options as covered
securities under Rule 146(b)(1) subjects ISE's listing standards to
Rule 146(b)(2). Rule 146(b)(2) under the Securities Act conditions the
designation of securities as ``covered securities'' under Rule
146(b)(1) on the identified exchange's listing standards continuing to
be substantially similar to those of the
[[Page 43298]]
Named Markets. In essence, Congress intended for the Commission to
monitor the listing and maintenance requirements of the exchanges,
consistent with our supervisory responsibility under the Exchange Act,
to evaluate the continued integrity of these markets and the protection
of investors. Thus, under Rule 146(b)(2), the designation of its
securities as covered securities is conditioned on the ISE maintaining
listing standards that are substantially similar to those of the Named
Markets.
V. Consideration of Promotion of Efficiency, Competition and Capital
Formation
As required under the Securities Act,\30\ the Commission has
considered the proposed rule's impact on efficiency, competition and
capital formation. Options exchanges are prohibited by Commission rule
from prohibiting, conditioning or limiting the listing of any stock
options class first listed on another options exchange.\31\
Nevertheless, options exchanges do compete for listings of non-equity
options such as index options. The Commission believes that designating
ISE-listed options as ``covered securities'' by amending Rule 146(b)
will permit ISE to better compete for new options and listings, which
will increase competition and, potentially, the overall liquidity of
the U.S. securities markets. The Commission does not, however, believe
that the amendment to Rule 146(b) will have any impact--positive or
negative--on capital formation because options are not used by issuers
to raise money. The Commission solicited comment on the proposed
amendment's effect on competition, efficiency and capital formation. No
comments were received. Thus, the Commission concludes that the
proposed amendment to Rule 146(b) would promote efficiency and
competition.
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\30\ 15 U.S.C. 77b(b).
\31\ See 17 CFR 240.19c-5.
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VI. Paperwork Reduction Act
The Paperwork Reduction Act of 1995 does not apply because the
proposed amendment to Rule 146(b) does not impose recordkeeping or
information collection requirements or other collection of information,
which require the approval of the Office of Management and Budget under
44 U.S.C. 3501 et seq.
VII. Cost and Benefits of Proposed Rulemaking
Congress amended section 18 of the Securities Act to exempt covered
securities from State registration requirements. Covered securities are
those listed on the Named Markets or any other national securities
exchange determined by the Commission to have substantially similar
listing standards to the Named Markets.\32\ Consistent with statutory
authority, the Commission has determined that the listing standards of
the ISE are substantially similar to those of the Amex, the only Named
Market that lists standardized options. Options listed on the ISE are
therefore covered securities subject only to Federal regulation.
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\32\ 15 U.S.C. 77r(b)(1)(B).
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By exempting options listed on ISE from State law registration
requirements, the Commission expects that the listing process will
become easier by avoiding duplicative regulation. Moreover, we also
expect adoption of the rule to minimize the administrative burden ISE
and the OCC face inasmuch as compliance with State registration
requirements is preempted.
The Commission also believes that the amendment to Rule 146(b) will
permit ISE to compete with other markets whose options are exempt from
State registration requirements for new options products and listings.
This result has the potential to enhance competition and liquidity,
thus benefiting market participants and the public.
The Commission does not believe that there are any significant
costs to investors associated with the preemption of State registration
requirements for options listed with the ISE. The Commission notes that
there may be some cost to investors through the loss of the benefits of
State registration and oversight, although the cost is difficult to
quantify and, in any event, is unlikely to be significant. Furthermore,
we believe that Congress contemplated this potential cost in relation
to the economic benefits of exempting covered securities from State
regulation. The Commission solicited comment as to the costs and
benefits associated with the proposed amendment. No comments were
received.
VIII. Regulatory Flexibility Act Certification
In the Proposing Release,\33\ the Commission certified, pursuant to
section 605(b) of the Regulatory Flexibility Act,\34\ that amending
Rule 146(b) would not have a significant economic impact on a
substantial number of small entities. The Commission solicited comment
as to the nature of any impact on small entities, including empirical
data to support the extent of such impact costs and benefits associated
with the proposed amendment. No comments were received.
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\33\ See supra note 7.
\34\ 5 U.S.C. 605(b).
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IX. Statutory Authority
The Commission is amending Rule 146(b) pursuant to the Securities
Act of 1933 (15 U.S.C. 77a et seq.), particularly sections 18(b)(1)(B)
and 19(a) (15 U.S.C. 77r(b)(1)(B) and 77s(a)).
List of Subjects in 17 CFR Part 230
Securities.
Text of the Rule
0
For the reasons set forth in the preamble, title 17, chapter II of the
Code of Federal Regulations is amended as follows:
PART 230--GENERAL RULES AND REGULATIONS, SECURITIES ACT OF 1933
0
1. The authority citation for part 230 continues to read, in part, as
follows:
Authority: 15 U.S.C. 77b, 77c, 77d, 77f, 77g, 77h, 77j, 77r,
77s, 77z-3, 77sss, 78c, 78d, 78j, 78l, 78m, 78n, 78o, 78t, 78w,
78ll(d), 78mm, 79t, 80a-8, 80a-24, 80a-28, 80a-29, 80a-30, and 80a-
37, unless otherwise noted.
* * * * *
0
2. Section 230.146 is amended by revising paragraphs (b)(1)(ii),
(b)(1)(iii), and (b)(2) and by adding paragraph (b)(1)(iv) as follows:
Sec. 230.146 Rules under section 18 of the Act.
* * * * *
(b) * * *
(1) * * *
(i) * * *
(ii) Tier I of the Philadelphia Stock Exchange, Incorporated;
(iii) The Chicago Board Options Exchange, Incorporated; and
(iv) Options listed on the International Securities Exchange,
Incorporated.
(2) The designation of securities in paragraphs (b)(1)(i) through
(iv) of this section as covered securities is conditioned on such
exchanges' listing standards (or segments or tiers thereof) continuing
to be substantially similar to those of the NYSE, Amex, or Nasdaq/NMS.
Dated: July 14, 2004.
[[Page 43299]]
By the Commission.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 04-16441 Filed 7-19-04; 8:45 am]
BILLING CODE 8010-01-P