Notices. Notice and request for comments
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/register/2005/06/27/05-12670·A research copy — for the controlling text, always check the official state or federal source. Not legal advice.
BILLING CODE 7590-01-P SECURITIES AND EXCHANGE COMMISSION Proposed Collection; Comment Request *Upon Written Request, Copies Available From:* Securities and Exchange Commission, Office of Filings and Information Services, Washington, DC 20549 *Extension:* Rule 17f-5, SEC File No. 270-259, OMB Control No. 3235-0269 Rule 17f-7, SEC File No. 270-470 , OMB Control No. 3235-0529 Form N-17D-1, SEC File No. 270-231, OMB Control No. 3235-0229 Rule 19b-1, SEC File No. 270-312, OMB Control No. 3235-0354 Notice is hereby given that, pursuant to the Paperwork Reduction Act of 1995 (44 U.S.C. 3501-3520), the Securities and Exchange Commission (“Commission”) is soliciting comments on the collections of information summarized below.
The Commission plans to submit these existing collections of information to the Office of Management and Budget (“OMB”) for extension and approval. *Rule 17f-5.* Rule 17f-5 under the Investment Company Act of 1940 [15 U.S.C. 80a] (“Investment Company Act” or “Act”) governs the custody of the assets of registered management investment companies (“funds”) with custodians outside the United States. 1 Under Rule 17f-5, the fund's board of directors must find that it is reasonable to rely on each delegate it selects to act as the fund's foreign custody manager.
The delegate must agree to provide written reports that notify the board when the fund's assets are placed with a foreign custodian and when any material change occurs in the fund's custody arrangements. The delegate must agree to exercise reasonable care, prudence, and diligence, or to adhere to a higher standard of care. When the foreign custody manager selects an eligible foreign custodian, it must determine that the fund's assets will be subject to reasonable care if maintained with that custodian, and that the written contract that governs each custody arrangement will provide reasonable care for fund assets.
The contract must contain certain specified provisions or others that provide at least equivalent care. The foreign custody manager must establish a system to monitor the contract and the appropriateness of continuing to maintain assets with the eligible foreign custodian. 1 17 CFR 270.17f-5. All references to rules 17f-5, 17f-7, 17d-1, or 19b-1 in this notice are to 17 CFR 270.17f-5, 17 CFR 270.17f-7, 17 CFR 270.17d-1, and 17 CFR 270.19b-1, respectively. The collection of information requirements in rule 17f-5 are intended to provide protection for fund assets maintained with a foreign bank custodian whose use is not authorized by statutory provisions that govern fund custody arrangements, 2 and that is not subject to regulation and examination by U.S. regulators.
The requirement that the fund board determine that it is reasonable to rely on each delegate is intended to ensure that the board carefully considers each delegate's qualifications to perform its responsibilities. The requirement that the delegate provide written reports to the board is intended to ensure that the delegate notifies the board of important developments concerning custody arrangements so that the board may exercise effective oversight. The requirement that the delegate agree to exercise reasonable care is intended to provide assurances to the fund that the delegate will properly perform its duties. 2 See section 17(f) of the Investment Company Act [15 U.S.C. 80a-17(f)].
The requirements that the foreign custody manager determine that fund assets will be subject to reasonable care with the eligible foreign custodian and under the custody contract, and that each contract contain specified provisions or equivalent provisions, are intended to ensure that the delegate has evaluated the level of care provided by the custodian, that it weighs the adequacy of contractual provisions, and that fund assets are protected by minimal contractual safeguards.
The requirement that the foreign custody manager establish a monitoring system is intended to ensure that the manager periodically reviews each custody arrangement and takes appropriate action if developing custody risks may threaten fund assets. The Commission's staff estimates that each year, approximately 207 registrants 3 could be required to make an average of one response per registrant under rule 17f-5, requiring approximately 2 hours of director time per response, to make the necessary findings concerning foreign custody managers.
The total annual burden associated with these requirements of the rule would be up to approximately 414 hours (207 registrants × 2 hours per registrant). The staff further estimates that during each year, approximately 15 global custodians 4 would be required to make an average of 4 responses per custodian concerning the use of foreign custodians other than depositories. The staff estimates that each response would take approximately 275 hours, requiring approximately 1,100 total hours annually per custodian.
The total annual burden associated with these requirements of the rule would be approximately 16,500 hours (15 global custodians × 1,100 hours per custodian). Therefore, the total annual burden of all collection of information requirements of rule 17f-5 is estimated to be up to 16,914 hours (414 + 16,500). The total annual cost of burden hours is estimated to be $1,032,000 (414 hours × $500/hour for director time, plus 16,500 hours × $50/hour of professional time). Compliance with the collection of information requirements of the rule is necessary to obtain the benefit of relying on the rule's permission for funds to maintain their assets in foreign custodians. 3 This figure is an estimate of the number of new funds each year, based on data reported by funds in 2004 on Form N-1A and Form N-2 [17 CFR 274.101].
In practice, not all funds will use foreign custody managers, and the actual figure may be smaller. 4 This estimate is the same used in connection with the adoption of the amendments to rule 17f-5 and of rule 17f-7 in 1999, based on staff review of custody contracts and other research. The number of global custodians has not changed significantly since 1999. *Rule 17f-7.* Rule 17f-7 permits funds to maintain their assets in foreign securities depositories based on conditions that reflect the operations and role of these depositories. 5 Rule 17f-7 contains some “collection of information” requirements.
An eligible securities depository has to meet minimum standards for a depository. The fund or its investment adviser generally determines whether the depository complies with those requirements based on information provided by the fund's primary custodian (a bank that acts as global custodian). The depository custody arrangement has to meet certain risk limiting requirements. The fund can obtain indemnification or insurance arrangements that adequately protect the fund against custody risks.
The fund or its investment adviser generally determines whether indemnification or insurance provisions are adequate. If the fund does not rely on indemnification or insurance, the fund's contract with its primary custodian is required to state that the custodian will provide to the fund or its investment adviser a custody risk analysis of each depository, monitor risks on a continuous basis, and promptly notify the fund or its adviser of material changes in risks. The primary custodian and other custodians also are required to agree to exercise reasonable care. 5 Custody of Investment Company Assets Outside the United States, Investment Company Act Release No.
IC-23815 (April 29, 1999) [64 FR 24489 (May 6, 1999)]. The collection of information requirements in rule 17f-7 are intended to provide workable standards that protect funds from the risks of using securities depositories while assigning appropriate responsibilities to the fund's primary custodian and investment adviser based on their capabilities. The requirement that the depository meet specified minimum standards is intended to ensure that the depository is subject to basic safeguards deemed appropriate for all depositories.
The requirement that the custody contract state that the fund's primary custodian will provide an analysis of the custody risks of depository arrangements, monitor the risks, and report on material changes is intended to provide essential information about custody risks to the fund's investment adviser as necessary for it to approve the continued use of the depository. The requirement that the primary custodian agree to exercise reasonable care is intended to provide assurances that its services and the information it provides will meet an appropriate standard of care.
The alternative requirement that the fund obtain adequate indemnification or insurance against the custody risks of depository arrangements is intended to provide another, potentially less burdensome means to protect assets held in depository arrangements. The staff estimates that each of approximately 980 investment advisers 6 would make an average of 4 responses annually under the rule to address depository compliance with minimum requirements, any indemnification or insurance arrangements, and reviews of risk analyses or notifications.
The staff estimates each response would take 5 hours, requiring a total of approximately 20 hours for each adviser. The total annual burden associated with these requirements of the rule would be approximately 19,600 hours (980 advisers × 20 hours per adviser). The staff further estimates that during each year, each of approximately 15 global custodians would make an average of 4 responses to analyze custody risks and provide notice of any material changes to custody risk under the rule.
The staff estimates that each response would take 500 hours, requiring approximately 2,000 hours annually per custodian. 7 The total annual burden associated with these requirements of the new rule would be approximately 30,000 hours (15 custodians × 2,000 hours). Therefore, the staff estimates that the total annual burden associated with all collection of information requirements of the rule would be 49,600 hours (19,600 + 30,000). The total annual cost of burden hours is estimated to be $2,480,000 (49,600 hours × $50/hour of professional time).
The estimate of average burden hours is made solely for the purposes of the Paperwork Reduction Act. The estimate is not derived from a comprehensive or even a representative survey or study of the costs of Commission rules and forms. Compliance with the collection of information requirements of the rule is necessary to obtain the benefit of relying on the rule's permission for funds to maintain their assets in foreign custodians. 6 At the start of 2005, there were more than 36,800 investment company portfolios that were managed or sponsored by more than 980 mutual fund complexes.
A fund complex is a group of funds, all of which typically have the same adviser. 7 These estimates are based on conversations with representatives of the fund industry and global custodians. *Form N-17D-1.* Section 17(d) [15 U.S.C. 80a-17(d)] of the Investment Company Act authorizes the Commission to adopt rules that protect funds and their security holders from overreaching by affiliated persons when the fund and the affiliated person participate in any joint enterprise or other joint arrangement or profit-sharing plan.
Rule 17d-1 under the Act prohibits funds and their affiliated persons from participating in a joint enterprise, unless an application regarding the transaction has been filed with and approved by the Commission. Subparagraph (d)(3) of the rule provides an exemption from this requirement for any loan or advance of credit to, or acquisition of securities or other property of, a small business concern, or any agreement to do any of the foregoing (“investments”) made by a small business investment company (“SBIC”) and an affiliated bank, provided that reports about the investments are made on forms the Commission may prescribe.
Rule 17d-2 designates Form N-17D-1 (“form”) as the form for reports required by rule 17d-1(3). SBICs and their affiliated banks use form N-17D-1 to report any contemporaneous investments in a small business concern. The form provides shareholders and persons seeking to make an informed decision about investing in an SBIC an opportunity to learn about transactions of the SBIC that have the potential for self dealing and other forms of overreaching by affiliated persons at the expense of shareholders.
Form N-17D-1 requires SBICs and their affiliated banks to report identifying information about the small business concern and the affiliated bank. The report must include, among other things, the SBIC's and affiliated bank's outstanding investments in the small business concern, the use of the proceeds of the investments made during the reporting period, any changes in the nature and amount of the affiliated bank's investment, the name of any affiliated person of the SBIC or the affiliated bank (or any affiliated person of the affiliated person of the SBIC or the affiliated bank) who has any interest in the transactions, the basis of the affiliation, the nature of the interest, and the consideration the affiliated person has received or will receive.
Up to five SBICs may file the form in any year. 8 The Commission estimates the burden of filling out the form is approximately one hour per response and would likely be completed by an accountant or other professional. Based on past filings, the Commission estimates that no more than one SBIC is likely to use the form each year. The estimated total annual burden of filling out the form is one hour and the total annual cost is $53. 9 The Commission will not keep responses on Form N-17D-1 confidential. 8 As of April 22, 2005, five SBICs were registered with the Commission. 9 Commission staff estimates that the annual burden would be incurred by accounting professionals with an average hourly wage rate of $53.08 per hour.
See Securities Industry Association, *Report on Management and Professional Earnings in the Securities Industry—2003*
(2003)(reporting median salary paid to senior accountants outside New York). *Rule 19b-1.* Rule 19b-1 prohibits funds from distributing long-term capital gains more than once every twelve months unless certain conditions are met. Rule 19b-1(c) permits unit investment trusts (“UITs”) engaged exclusively in the business of investing in certain eligible fixed-income securities to distribute long-term capital gains more than once every twelve months, if:
(i)The capital gains distribution falls within one of several categories specified in the rule; and,
(ii)the distribution is accompanied by a report to the unit holder that clearly describes the distribution as a capital gains distribution. The purpose of this notice requirement is to ensure that unit holders understand that the source of the distribution is long-term capital gains. Rule 19b-1(e) permits a fund to apply for permission to distribute long-term capital gains more than once a year if the fund did not foresee the circumstances that created the need for the distribution. The application must set forth the pertinent facts and explain the circumstances that justify the distribution. An application that meets those requirements is deemed to be granted unless the Commission denies the request within 15 days after the Commission receives the application. The Commission uses the information required by rule 19b-1(e) to facilitate the processing of requests from funds for authorization to make a distribution that would not otherwise be permitted by the rule. The staff understands that funds that file an application generally use outside counsel to prepare the 19b-1(e) application. The staff estimates that, on average, the fund's investment adviser spends approximately four hours to review an application. The staff estimates that, on average, seven funds file an application per year under this rule for an estimated annual collection of information burden of 28 hours. There is a cost burden associated with rule 19b-1(e). As noted above, the staff understands that funds that file for exemption under rule 19b-1(e) generally use outside counsel to prepare the exemptive application. The staff estimates that, on average, 10 hours is required to prepare a rule 19b-1(e) exemptive application by outside counsel, including 8 hours by an associate and 2 hours by a partner. The staff estimates that the average cost of outside counsel preparation of the 19b-(e) exemptive application is $3,500. An average of 7 funds file under 19b-1(e) for an exemptive application each year, therefore the staff estimates that the annual cost burden imposed by rule 19b-1(e) is $24,500. The Commission staff estimates that there is no hour burden associated with paragraph
(c)of rule 19b-1. There is also a cost burden associated with rule 19b-1(c). The staff estimates that there are approximately 6,485 UITs. For purposes of this Paperwork Reduction Act analysis, the staff has assumed that each of these UITs could rely on rule 19b-1(c) to make capital gains distributions. The staff estimates that, on average, UITs rely on rule 19b-1(c) once a year to make a capital gains distribution. 10 The staff estimates that a UIT incurs a cost of $50, which is encompassed within the fee the UIT pays its trustee, to prepare a notice for a capital gains distribution under rule 19b-1(c). These notices require limited preparation, the cost of which accounts for only a small, indiscrete portion of the comprehensive fee charged by the trustee for its services to the UIT. There is no separate cost to mail the notices because they are mailed with the capital gains distribution. Thus, the staff estimates that the notice requirement imposes an annual cost on UITs of approximately $324,250. 10 The number of times UITs may rely on the rule to make capital gains distributions depends on a wide range of factors and, thus, can vary greatly from one year to another. A number of UITs are organized as grantor trusts, and therefore do not generally make capital gains distributions under rule 19b-1(c), or may not rely on rule 19b-1(c) as they do not meet the rule's requirements. Other UITs may distribute capital gains biannually, annually, quarterly, or at other intervals. Based on these calculations, the total number of respondents for rule 19b-1 is estimated to be 6,492 (6,485 UIT portfolios + 7 funds filing an application under rule 19b-1(e)), the total annual hour burden is estimated to be 28 hours, and the total annual cost burden is estimated to be $348,750. These estimates of average annual burden hours and costs are made solely for purposes of the Paperwork Reduction Act. The collections of information required by 19b-1(c) and 19b-1(e) are necessary to obtain the benefits described above. Responses will not be kept confidential. The estimate of average burden hours is made solely for the purposes of the Paperwork Reduction Act, and is not derived from a comprehensive or even a representative survey or study of the costs of Commission rules. An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless it displays a currently valid OMB control number. Written comments are invited on:
(a)Whether the collection of information is necessary for the proper performance of the functions of the Commission, including whether the information has practical utility;
(b)the accuracy of the Commission's estimate of the burden of the collection of information;
(c)ways to enhance the quality, utility, and clarity of the information collected; and
(d)ways to minimize the burden of the collection of information on respondents, including through the use of automated collection techniques or other forms of information technology. Consideration will be given to comments and suggestions submitted in writing within 60 days of this publication. Please direct your written comments to R. Corey Booth, Director/Chief Information Officer, Office of Information Technology, Securities and Exchange Commission, 100 F Street, NE., Washington, DC 20549. Dated: June 17, 2005. Jill M. Peterson, Assistant Secretary. [FR Doc. E5-3325 Filed 6-24-05; 8:45 am] BILLING CODE 8010-01-P SECURITIES AND EXCHANGE COMMISSION Issuer Delisting; Notice of Application of IVAX Diagnostics, Inc. To Withdraw Its Common Stock, $.01 Par Value, From Listing and Registration on the Boston Stock Exchange, Inc. File No. 1-14798 June 17, 2005. On June 6, 2005, IVAX Diagnostics, Inc., a Delaware corporation (“Issuer”), filed an application with the Securities and Exchange Commission (“Commission”), pursuant to section 12(d) of the Securities Exchange Act of 1934 (“Act”) 1 ; and Rule 12d2-2(d) thereunder, 2 to withdraw its common stock, $.01 par value (“Security”), from listing and registration on the Boston Stock Exchange, Inc. (“BSE”). 1 15 U.S.C. 78 *l* (d). 2 17 CFR 240.12d2-2(d). On June 1, 2005, the Board of Directors (“Board”) of the Issuer approved a resolution to withdraw the Security from listing and registration on BSE. In making the decision to withdraw the Security from BSE, the Board stated that the following reasons, among others, factored into its decision. On January 13, 2000, b2bstores.com, Inc. (“b2bstores”), the predecessor to the Issuer, filed a Form 8-A/A with the Commission stating that b2bstores had registered the Security to list on BSE. On March 14, 2001, the Issuer, then a wholly-owned subsidiary of IVAX Corporation, merged with and into b2bstores, and on the same day, the Issuer filed a Form 8-A/A with the Commission stating that the Issuer had registered its Security to list on the American Stock Exhange, LLC (“Amex”). Since that time, the Security has been, and currently continues to be, principally listed and traded on Amex, while it is only listed (but not traded) on BSE. The Issuer stated in its application that it has complied with BSE rules by complying with all applicable laws in the State of Delaware, the state in which the Issuer is incorporated, and by filing with BSE the required documents governing the withdrawal of securities from listing and registration on BSE. The Issuer's application relates solely to withdrawal of the Security from listing on BSE and shall not affect its continued listing on Amex or its obligation to be registered under section 12(b) of the Act. 3 3 15 U.S.C. 78-(b). Any interested person may, on or before July 13, 2005, comment on the facts bearing upon whether the application has been made in accordance with the rules of BSE, and what terms, if any, should be imposed by the Commission for the protection of investors. All comment letters may be submitted by either of the following methods: Electronic Comments • Use the Commission's Internet comment form ( *http://www.sec.gov/rules/delist.shtml* ); or • Send an e-mail to *rule-comments@sec.gov.* Please include the File Number 1-14798 or; 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 1-14798. This file number should be included on the subject line if e-mail is used. To help us 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/delist.shtml* ). Comments are also available for public inspection and copying in the Commission's Public Reference Room. All comments received will be posted without change; we do not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly. The Commission, based on the information submitted to it, will issue an order granting the application after the date mentioned above, unless the Commission determines to order a hearing on the matter. For the Commission, by the Division of Market Regulation, pursuant to delegated authority. 4 4 17 CFR 200.30-3(a)(1). Jonathan G. Katz, Secretary. [FR Doc. E5-3333 Filed 6-24-05; 8:45 am] BILLING CODE 8010-01-P SECURITIES AND EXCHANGE COMMISSION [Release No. 34-51884; File No. SR-Amex-2005-038] Self-Regulatory Organizations; American Stock Exchange LLC; Notice of Filing and Order Granting Accelerated Approval of Proposed Rule Change Relating to the Listing and Trading of Options, Including LEAPS, on Full and Reduced Values of the Nasdaq 100 Index June 20, 2005. 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 April 7, 2005, the American Stock Exchange LLC (“Amex” or “Exchange”) filed with the Securities and Exchange Commission (“SEC” or “Commission”) the proposed rule change as described in Items I and II below, which Items have been prepared by the Exchange. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons and to approve the proposal on an accelerated basis. 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 Exchange states that it proposes to correct an omission in its rules to trade regular and long-term options on both the full and reduced values of the Nasdaq 100 Index (“Index”). Options on the Index are cash-settled and have European-style exercise provisions. The text of the proposed rule change is available on the Amex's Web site ( *http://www.amex.com* ), at the Amex's principal office, 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, the Exchange 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 III below. The Exchange 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 The Exchange states that it proposes to correct an omission in its rules to trade regular and long-term options on both the full and reduced values of the Nasdaq 100 Index. 3 The Exchange commenced trading of options based on the full and reduced values of the Nasdaq 100 Index in October 2001. However, the Exchange failed to submit a proposal to list and trade such options. 4 As a result, the Exchange proposes to amend its rules to provide for the listing and trading of these options on the Exchange. Specifically, the Exchange seeks to amend its rules to provide for the listing of options based upon the full value of the Nasdaq 100 Index (“Full-size Nasdaq 100 Index” or “NDX”) and one-tenth of the value of the Nasdaq 100 Index (“Mini Nasdaq 100 Index” or “MNX”), 5 including long-term options based upon the full value of the Nasdaq 100 Index (“NDX LEAPS”) and one-tenth of the value of the Nasdaq 100 Index (“MNX LEAPS”). 6 These index options are cash-settled, European-style options based on the full and reduced values of the Nasdaq 100 Index, a stock index calculated and maintained by The Nasdaq Stock Market, Inc. (“Nasdaq”). 7 3 Options on NDX and MNX are currently listed and trading on the Exchange, the Chicago Board Options Exchange, Inc. (“CBOE”) and the International Securities Exchange, Inc. (“ISE”). *See* Securities Exchange Act Release Nos. 33166 (November 8, 1993), 58 FR 60710 (November 17, 1993) (SR-CBOE-93-42) and 51121 (February 1, 2005), 70 FR 6476 (February 7, 2005) (SR-ISE-2005-01). 4 *See* Securities Exchange Act Release No. 45163 (December 18, 2001), 66 FR 66958 (December 27, 2001) (SR-Amex-2001-101) (notice of filing and immediate effectiveness disclosing license fees in connection with NDX and MNX). 5 Options on NDX and MNX are currently listed for trading on the CBOE. Options on NDX and MNX listed on the Exchange would be identical to the NDX and MNX options listed on CBOE. 6 Under Amex Rule 903, the Exchange may list long-term options that expire up to 60 months from the date of issuance. 7 A description of the Index is available on Nasdaq's Web site at *http://dynamic.nasdaq.com/dynamic/nasdaq100_activity.stm* . Index Design and Composition The Nasdaq 100 Index, launched in January 1985, represents the largest non-financial domestic and international issues listed on Nasdaq based on market capitalization. The Index reflects companies across major industry groups, including computer hardware and software, telecommunications, retail/wholesale trade, and biotechnology. The Index is calculated using a modified capitalization-weighted methodology. The value of the Index equals the aggregate value of the Index share weights, also known as the Depository Receipt Multiplier, of each of the component securities multiplied by each security's respective last sale price on Nasdaq or the Nasdaq Official Closing Price (“NOCP”), divided by Adjusted Base Period Market Value (“ABPMV”), and multiplied by the base value. The ABPMV serves the purpose of scaling such aggregate value (otherwise in the trillions) to a lower order of magnitude that is more desirable for Index reporting purposes. If trading in an Index security is halted while the market is open, the last Nasdaq traded price for that security is used for all index computations until trading resumes. If trading is halted before the market is open, the previous day's NOCP is used. Additionally, the Index is calculated without regard to any dividends on component securities. The methodology is expected to retain, in general, the economic attributes of capitalization weighting, while providing enhanced diversification. To accomplish this, Nasdaq reviews the composition of the Index on a quarterly basis and adjusts the weighting of Index components using a proprietary algorithm, if certain pre-established weight distribution requirements are not met. Nasdaq has certain eligibility requirements for inclusion in the Index. 8 For example, to be eligible for inclusion in the Index, a component security must be exclusively listed on the Nasdaq National Market, or dually listed on a national securities exchange prior to January 1, 2004. 9 Only one class of security per issuer is considered for inclusion in the Index. 8 The initial eligibility criteria and continued eligibility criteria are available on Nasdaq's Web site at *http://dynamic.nasdaq.com/dynamic/nasdaq100_activity.stm* . 9 In the case of spin-offs, the operating history of the spin-off would be considered. Additionally, if a component security would otherwise qualify to be in the top 25% of securities included in the Index by market capitalization for the six prior consecutive months, it would be eligible if it had been listed for one year. Additionally, the issuer of a component security cannot be a financial or investment company and cannot currently be involved in bankruptcy proceedings. Criteria for inclusion also require the average daily trading volume of a component security to be at least 200,000 shares on Nasdaq. If a component security is of a foreign issuer, based on its country of incorporation, it must have listed options or be eligible for listed-options trading. In addition, the issuer of a component security must not have entered into any definitive agreement or other arrangement that would result in the security no longer being eligible for inclusion in the Index within the next six months. An issuer of a component security also must not have annual financial statements with an audit opinion where the auditor or the issuer has indicated that the audit opinion cannot be currently relied upon. As of March 31, 2005, the following were characteristics of the Index: • The total capitalization of all components of the Index was approximately $1.75 trillion; • Regarding component capitalization,
(a)the highest capitalization of a component was $262.7 billion (Microsoft Corp.),
(b)the lowest capitalization of a component was $1.4 billion (Level 3 Communications, Inc.),
(c)the mean capitalization of the components was $17.64 billion, and
(d)the median capitalization of the components was $7.17 billion; • Regarding component price per share,
(a)the highest price per share of a component was $133.17 (Sears Holdings Corp.),
(b)the lowest price per share of a component was $1.67 (JDS Uniphase Corp.),
(c)the mean price per share of the components was $36.82, and
(d)the median price per share of the components was $33.30; • Regarding component weightings,
(a)the highest weighting of a component was 14.89% (Microsoft Corp.),
(b)the lowest weighting of a component was 0.08% (Level 3 Communications, Inc.),
(c)the mean weighting of the components was 1.00%,
(d)the median weighting of the components was 0.41%, and
(e)the total weighting of the top five highest weighted components was 39.08% (Microsoft Corp., Intel Corporation, Cisco Systems, Inc., Dell Inc. and Amgen Inc.); • Regarding component available shares,
(a)the most available shares of a component was 10.87 billion shares (Microsoft Corp.),
(b)the least available shares of a component was 51.67 million shares (Invitrogen Corporation),
(c)the mean available shares of the components was 699.9 million shares, and
(d)the median available shares of the components was 250.3 million shares; • Regarding the six-month average daily volumes of the components,
(a)the highest six-month average daily volume of a component was 92.1 million shares (Sirius Satellite Radio Inc.),
(b)the lowest six-month average daily volume of a component was 408,000 shares (Sigma-Aldrich Corporation),
(c)the mean six-month average daily volume of the components was 8.9 million shares,
(d)the median six-month average daily volume of the components was 3.3 million shares,
(e)the average of six month average daily volumes of the five most heavily traded components was 67.83 million shares (Sirius Satellite Radio Inc, Microsoft Corp., Intel Corp., Cisco Systems, Inc. and Oracle Corp.), and
(f)100% of the components had a six month average daily volume of at least 50,000; and • Regarding option eligibility,
(a)100% of the components were options eligible, as measured by weighting, and
(b)100% of the components were options eligible, as measured by number. Index Calculation and Index Maintenance In recent years, the value of the Full-size Nasdaq 100 Index has increased significantly, such that the value of the Index was 1482.53 on March 31, 2005. As a result, the premium for the Full-size Nasdaq 100 Index options also has increased. The Exchange believes that this has caused Full-size Nasdaq 100 Index options to trade at a level that may be uncomfortably high for retail investors. The Exchange believes that listing options on reduced values attracts a greater source of customer business than if the options were based only on the full value of the Index. The Exchange further believes that listing options on reduced values provides an opportunity for investors to hedge, or speculate on, the market risk associated with the stocks comprising the Index. Additionally, by reducing the values of the Index, investors are able to use this trading vehicle while extending a smaller outlay of capital. The Exchange believes that this attracts additional investors and, in turn, creates a more active and liquid trading environment. 10 10 The Exchange believes that options trading on MNX have generated considerable interest from investors. The Full-size Nasdaq 100 Index and the Mini Nasdaq 100 Index levels are calculated continuously, using the last sale price for each component stock in the Index, and are disseminated every 15 seconds throughout the trading day. 11 The Full-size Nasdaq-100 Index level equals the current market value of component stocks multiplied by 125 and then divided by the stocks' market value of the adjusted base period. The adjusted base period market value is determined by multiplying the current market value after adjustments times the previous base period market value and then dividing that result by the current market value before adjustments. To calculate the value of the Mini Nasdaq 100 Index, the full value of the Index is divided by ten. To maintain continuity for the Index's value, the divisor is adjusted periodically to reflect events such as changes in the number of common shares outstanding for component stocks, company additions or deletions, corporate restructurings, or other capitalization changes. 11 Full-size Nasdaq 100 Index and Mini Nasdaq 100 Index levels are disseminated through the Nasdaq Index Dissemination Services (“NIDS”) during normal Nasdaq trading hours (9:30 a.m. to 4 p.m. ET). The Index is calculated using Nasdaq prices (not consolidated) during the day and the NOCP for the close. The closing value of the Index may change until 5:15 p.m. ET due to corrections to the NOCP of the component securities. In addition, the Index is published daily on Nasdaq's Web site and through major quotation vendors such as Bloomberg, Reuters, and Thomson's ILX. The settlement values for purposes of settling both Full-size Nasdaq 100 Index (“Full-size Settlement Value”) and Mini Nasdaq 100 Index (“Mini Settlement Value”) are calculated based on a volume-weighted average of prices reported in the first five minutes of trading for each of the component securities on the last business day before the expiration date (“Settlement Day”). 12 The Settlement Day is normally the Friday preceding “Expiration Saturday.” 13 If a component security in the Index does not trade on Settlement Day, the closing price from the previous trading day would be used to calculate both the Full-size Settlement Value and Mini Settlement Value. 14 Accordingly, trading in options on the Index will normally cease on the Thursday preceding an Expiration Saturday. 12 The aggregate exercise value of the option contract is calculated by multiplying the Index value by the Index multiplier, which is 100. 13 For any given expiration month, options on the Nasdaq 100 Index will expire on the third Saturday of the month. 14 Full-size Settlement Values and Mini Settlement Values are disseminated by CBOE. Nasdaq monitors and maintains the Index. Nasdaq is responsible for making all necessary adjustments to the Index to reflect component deletions; share changes; stock splits; stock dividends; stock price adjustments due to restructuring, mergers, or spin-offs involving the underlying components; and other corporate actions. Some corporate actions, such as stock splits and stock dividends, require simple changes to the available shares outstanding and the stock prices of the underlying components. The component securities are evaluated on an annual basis, except under extraordinary circumstances that may result in an interim evaluation, as follows: Securities listed on Nasdaq that meet its eligibility criteria are ranked by market value using closing prices as of the end of October and publicly available total shares outstanding as of the end of November. Eligible component securities that are already in the Index and ranked in the top 100 (based on market value) are retained in the Index. Component securities that are ranked from 101 to 150 are also retained provided that each such component security was ranked in the top 100 during the previous ranking review. Components that do not meet the criteria are replaced. The replacement securities chosen are those Index-eligible securities that have the largest market capitalization and are not currently in the Index. The list of annual additions and deletions to the Index is publicly announced in early December. Changes to the Index are made effective after the close of trading on the third Friday in December. If at any time during the year a component security no longer trades on Nasdaq, or is otherwise determined by Nasdaq to become ineligible for inclusion in the Index, that component security would be replaced with the largest market capitalization component not currently in the Index that met the eligibility criteria described earlier. Although the Exchange is not involved in the maintenance of the Index, the Exchange represents that it will monitor the Index on a quarterly basis and file a proposed rule change with the Commission pursuant to Rule 19b-4 if:
(i)The number of securities in the Index drops by one-third or more;
(ii)10% or more of the weight of the Index is represented by component securities having a market value of less than $75 million;
(iii)less than 80% of the weight of the Index is represented by component securities that are eligible for options trading pursuant to Amex Rule 915;
(iv)10% or more of the weight of the Index is represented by component securities trading less than 20,000 shares per day; or
(v)the largest component security accounts for more than 25% of the weight of the Index or the largest five components in the aggregate account for more than 50% of the weight of the Index. The Exchange will further notify the Commission's Division of Market Regulation if Nasdaq determines to cease maintaining and calculating the Index, or if the Index values are not disseminated every 15 seconds by a widely available source. The Amex has represented that, if the Index ceases to be maintained or calculated, or if the Index values are not disseminated every 15 seconds by a widely available source, it would not list any additional series for trading and would limit all transactions in such options to closing transactions only for the purpose of maintaining a fair and orderly market and protecting investors. Contract Specifications The contract specifications for options on the Index are set forth as an Exhibit to the proposed rule change. The contract specifications are identical to the contract specifications of NDX and MNX options that also trade on CBOE and ISE. The Index is a broad-based index, as defined in Amex Rule 900C(b)(1). Options on the Nasdaq 100 Index are European-style and A.M. cash-settled. 15 The Exchange's standard trading hours for index options (9:30 a.m. to 4:15 p.m. ET), as set forth in Commentary .02 to Amex Rule 1, apply to options on the Nasdaq 100 Index. Exchange rules that are applicable to the trading of options on broad-based indexes also apply to both NDX and MNX. 16 Specifically, the trading of NDX and MNX options would be subject to, among others, Exchange rules governing margin requirements and trading halt procedures for index options. 15 Amex intends for the contract specifications, which the Exchange submitted as an exhibit, to include the phrase “A.M. cash settled” in the “Settlement Type” section. Phone conversation between Angela Muehr, Attorney, Division of Market Regulation, Commission, and Jeff Burns, Associate General Counsel, Amex, on May 4, 2005. 16 *See* Amex Rules 900C *et al.* For NDX, the Exchange proposes to establish aggregate position and exercise limits at 75,000 contracts on the same side of the market. The Full-size Nasdaq Index contracts would be aggregated with Mini Nasdaq 100 Index contracts, where ten Mini Nasdaq 100 Index contracts equal one Full-size Nasdaq 100 Index contract. 17 Commentary .01(c) to Rule 904C provides that position limits for hedged index options may not exceed twice the established position limits for broad stock index groups. A hedge exemption of 150,000 contracts and 1,500,000 contracts is available for NDX and MNX, respectively. 18 17 The position limits proposed by the Exchange for Nasdaq 100 Index options are identical to those established by CBOE and ISE. 18 The same limits that apply to position limits would apply to exercise limits for these products. Furthermore, Amex intends for the contract specifications, which the Exchange submitted as an exhibit, to include the hedge exemption in the “Position and Exercise Limits” section. Phone conversation between Angela Muehr, Attorney, Division of Market Regulation, Commission, and Jeff Burns, Associate General Counsel, Amex, on May 4, 2005. The Exchange proposes to apply broad-based index margin requirements for the purchase and sale of options on the Index. Accordingly, purchases of put or call options with nine months or less until expiration must be paid for in full. Writers of uncovered put or call options would be required to deposit or maintain 100% of the option proceeds, plus 15% of the aggregate contract value (current index level × $100), less any out-of-the-money amount, subject to a minimum of the option proceeds plus 10% of the aggregate contract value for call options and a minimum of the option proceeds plus 10% of the aggregate exercise price amount for put options. The Exchange proposes to set strike price intervals at 2 1/2 points for certain near-the-money series in near-term expiration months when the Full-size Nasdaq 100 Index or Mini Nasdaq 100 Index is at a level below 200, and 5 point strike price intervals for other options series with expirations up to one year, and at least 10 point strike price intervals for longer-term options. 19 The minimum tick size for series trading below $3 is $0.05, and for series trading at or above $3 is $0.10. Based on the current index levels, the Exchange plans to set strike price intervals of 5 points and 2 1/2 points for NDX and MNX, respectively. The Exchange proposes to list options on both the Full-size Nasdaq 100 Index and the Mini Nasdaq 100 Index in the three consecutive near-term expiration months plus up to three successive expiration months in the March cycle. 20 For example, consecutive expirations of January, February, March, plus June, September, and December expirations would be listed. 21 In addition, long-term option series having up to 60 months to expiration may be traded. 22 The trading of any long-term Nasdaq 100 Index options would be subject to the same rules that govern the trading of all the Exchange's index options, including sales practice rules, margin requirements, and trading rules. 19 *See e.g.* Securities Exchange Act Release No. 34129 (May 27, 1994), 59 FR 28905 (June 3, 1994) (SR-Amex-91-31). 20 Amex intends for the contract specifications, which the Exchange submitted as an exhibit, to include the phrase, “LEAPS may also be available,” in the “Expiration Cycle” section. Phone conversation between Angela Muehr, Attorney, Division of Market Regulation, Commission, and Jeff Burns, Associate General Counsel, Amex, on May 4, 2005. 21 *See* Amex Rule 903C. 22 *See* Amex Rule 903C(a). Surveillance and Capacity The Exchange represents that it has an adequate surveillance program in place for options traded on the Index and applies the same program procedures that it applies to the Exchange's other index options. Additionally, the Exchange is a member of the Intermarket Surveillance Group (“ISG”) under the Intermarket Surveillance Group Agreement, dated June 20, 1994. The members of the ISG include all of the U.S. registered stock and options markets: Amex, the Boston Stock Exchange, CBOE, the Chicago Stock Exchange, ISE, the National Stock Exchange, NASD, the New York Stock Exchange, the Pacific Stock Exchange, and the Philadelphia Stock Exchange. The ISG members work together to coordinate surveillance and investigative information sharing in the stock and options markets. In addition, the major futures exchanges are affiliated members of the ISG, which allows for the sharing of surveillance information for potential intermarket trading abuses. The Exchange has represented that it has the necessary systems capacity to support options series resulting from options on the NDX and MNX, including NDX LEAPS, and MNX LEAPS. 2. Statutory Basis The Exchange believes that the proposed rule change is consistent with Section 6 of the Act 23 in general, and with Section 6(b)(5) in particular, 24 in that it is designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, 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. 23 15 U.S.C. 78f. 24 15 U.S.C. 78f(b)(5). B. Self-Regulatory Organization's Statement on Burden on Competition The Exchange does not believe that the proposed rule change would impose any inappropriate 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. 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 Comment • 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-2005-038 on the subject line. Paper Comments: • Send paper comments in triplicate to Jonathan G. Katz, Secretary, Securities and Exchange Commission, Station Place, 100 F Street, NE., Washington, DC 20549-9303. All submissions should refer to File Number SR-Amex-2005-038. 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 Section, Station Place, 100 F Street, NE, Washington, DC 20549. Copies of this filing also will be available for inspection and copying at the principal office of the Amex. 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-2005-038 and should be submitted on or before July 18, 2005. IV. Commission's Findings and Order Granting Accelerated Approval of Proposed Rule Change The Commission finds that the proposed rule change is consistent with the requirements of the Act and the rules and regulations thereunder applicable to a national securities exchange. 25 In particular, the Commission believes that the proposal is consistent with Section 6(b)(5) of the Act, 26 which requires that the rules of an exchange be designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, to remove impediments to and perfect the mechanism of a free and open market and a national market system, and in general to protect investors and the public interest. The Commission notes that it previously approved the listing and trading of options on the Nasdaq 100 Index on both the CBOE and the ISE. 27 The Commission presently is not aware of any regulatory issue that should cause it to revisit that earlier finding or preclude the trading of such options on the Amex. 25 In approving this proposal, the Commission has considered its impact on efficiency, competition, and capital formation. *See* 15 U.S.C. 78c(f). 26 15 U.S.C. 78f(b)(5). 27 *See supra* note 3. In approving this proposal, the Commission has specifically relied on the following representations made by the Exchange: 1. The Exchange will notify the Commission's Division of Market Regulation immediately if Nasdaq determines to cease maintaining and calculating the Nasdaq 100 Index, or if the Nasdaq 100 Index values are not disseminated every 15 seconds by a widely available source. If the Index ceases to be maintained or calculated, or if the Index values are not disseminated every 15 seconds by a widely available source, the Exchange will not list any additional series for trading and limit all transactions in such options to closing transactions only for the purpose of maintaining a fair and orderly market and protecting investors. 2. The Exchange has an adequate surveillance program in place for options traded on the Nasdaq 100 Index. 3. The additional quote and message traffic that will be generated by listing and trading NDX, MNX, NDX LEAPS, and MNX LEAPS will not exceed the Exchange's current message capacity allocated by the Independent System Capacity Advisor. The Commission further notes that in approving this proposal, it relied on the Exchange's discussion of how Nasdaq currently calculates the Index. If the manner in which Nasdaq calculates the Index were to change substantially, this approval order might no longer be effective. In addition, the Commission believes that the position limits for these new options, and the hedge exemption from such position limits, are reasonable and consistent with the Act. The Commission previously has found identical provisions for NDX and MNX options to be consistent with the Act. 28 28 *See* Securities Exchange Act Release No. 44156 (April 6, 2001), 66 FR 19261 (April 13, 2001) (SR-CBOE-00-14) (order approving a proposed rule change by CBOE to increase position and exercise limits for Nasdaq 100 Index options, expand the Index hedge exemption, and eliminate the near-term position limit restriction). The Commission finds good cause for approving this proposal before the thirtieth day after the publication of notice thereof in the **Federal Register.** Because options on the Nasdaq 100 Index already trade already trade on the Amex, accelerating approval of the Amex's proposal should benefit investors by updating the Exchange's rules to reflect the updates that should have been made when the Amex began trading the options in October 2001. 29 29 The Commission notes that, for purposes of inspection and compliance, this approval is not retroactive. V. Conclusion *It is therefore ordered* , pursuant to Section 19(b)(2) of the Act, 30 that the proposed rule change (SR-Amex-2005-38), is hereby approved. 30 15 U.S.C. 78s(b)(2). For the Commission, by the Division of Market Regulation, pursuant to delegated authority. 31 31 17 CFR 200.30-3(a)(12). Jill M. Peterson, Assistant Secretary. [FR Doc. E5-3331 Filed 6-24-05; 8:45 am] BILLING CODE 8010-01-P SECURITIES AND EXCHANGE COMMISSION [Release No. 34-51888; File No. SR-CBOE-2005-47] Self-Regulatory Organizations; Chicago Board Options Exchange, Incorporated; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change Relating to the Exchange's Hybrid Trading System and Hybrid 2.0 Platform June 20, 2005. 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 June 14, 2005, the Chicago Board Options Exchange, Incorporated (“CBOE” 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 Exchange. The Exchange has designated this proposal as one constituting a stated policy, practice, or interpretation with respect to the meaning, administration, or enforcement of an existing rule under Section 19(b)(3)(A)(i) of the Act, 3 and Rule 19b-4(f)(1) thereunder, 4 which renders the proposal effective upon filing with the Commission. 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. 3 15 U.S.C. 78s(b)(3)(A)(i). 4 17 CFR 240.19b-4(f)(1). I. Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change The Exchange proposes to clarify its rules that relate to the designation of index options and options on ETFs on CBOE's Hybrid Trading System and Hybrid 2.0 Platform. Below is the text of the proposed rule change. Proposed new language is *italicized;* proposed deletions are in [brackets]. Chicago Board Options Exchange, Incorporated Rules Rule 6.45B—Priority and Allocation of Trades in Index Options and Options on ETFs on the CBOE Hybrid System Generally: The rules of priority and order allocation procedures set forth in this rule shall apply only to index options and options on ETFs that have been designated [by the appropriate Exchange procedures committee] for trading on the CBOE Hybrid System. The term “market participant” as used throughout this rule refers to a Market-Maker, a Remote Market-Maker, an in-crowd DPM or LMM, an e-DPM with an appointment in the subject class, and a floor broker representing orders in the trading crowd. The term “in-crowd market participant” only includes an in-crowd Market-Maker, in-crowd DPM or LMM, and floor broker representing orders in the trading crowd. (a)—(d) No change. * * * Interpretations and Policies: No change. Rule 8.14 Index Hybrid Trading System Classes: Market-Maker Participants
(a)Generally: The *appropriate* Exchange procedures committee *(i)* may authorize for trading on the CBOE Hybrid Trading System or Hybrid 2.0 [Program] *Platform* index options and options on ETFs [currently] trading on the Exchange *prior to June 10, 2005 and (ii)* [. The appropriate Exchange procedures committee] *if that authorization is granted,* shall determine the eligible categories of market maker participants for *those* option *s* [classes currently trading on the Exchange]. *For index options and options on ETFs trading for the first time on the Exchange on or subsequent to June 10, 2005, the Exchange shall determine the appropriate trading platform (e.g., CBOE Hybrid Trading System, Hybrid 2.0 Platform) and the eligible categories of market maker participants on that platform. The Exchange shall also have the authority to determine whether to change the trading platform on which those options trade and to change the eligible categories of market maker participants for those options. The eligible categories of market maker participants* [, which] may include:
(b)Each class designated [by the appropriate Exchange committee] for trading on Hybrid or the Hybrid 2.0 Platform shall have an assigned DPM or LMM. *The Exchange or the appropriate Exchange committee, as applicable pursuant to the authority granted under CBOE Rule 8.14(a) to determine eligible categories of market maker participants,* [The appropriate Exchange committee] may determine to designate classes for trading on Hybrid or the Hybrid 2.0 Platform without a DPM or LMM provided the following conditions are satisfied: II. Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, the Exchange 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 Exchange 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 The Exchange proposes to make a technical revision in CBOE Rule 8.14(a) to change “Hybrid 2.0 Program” to “Hybrid 2.0 Platform” since this is a defined term under CBOE Rule 1.1. CBOE Rule 8.14(a) currently sets forth the general rules that determine which index options and options on ETFs the Exchange procedures committee may designate for trading on CBOE's Hybrid Trading System and Hybrid 2.0 Program. CBOE Rule 8.14(a) currently provides that “[t]he Exchange procedures committee may authorize for trading on the CBOE Hybrid Trading System or Hybrid 2.0 Program index options and options on ETFs currently trading on the Exchange. The appropriate Exchange procedures committee shall determine the eligible categories of market maker participants for option classes currently trading on the Exchange * * * .” The Exchange proposes to
(i)establish the cut-off date that determines which index options and options on ETFs the appropriate Exchange procedures committee may authorize for trading on the Hybrid Trading System or the Hybrid 2.0 Platform; and
(ii)set forth in CBOE Rule 8.14 that the Exchange shall determine the trading platform and eligible categories of market maker participants in classes trading for the first time on the Exchange after the cut-off date. Specifically, the Exchange proposes to delete the word “currently” in CBOE Rule 8.14(a) and insert the specific date of June 10, 2005 to clarify that the appropriate Exchange procedures committee may authorize for trading on the Hybrid Trading System or the Hybrid 2.0 Platform those index options and options on ETFs that are trading on the Exchange prior to June 10, 2005. June 10, 2005, is the date of Commission approval of SR-CBOE-2004-87 5 , which rule filing created rules, including CBOE Rule 8.14, that permit the trading of index options and options on ETFs on CBOE's Hybrid Trading System and Hybrid 2.0 Platform either with a Designated Primary Market-Maker (“DPM”), a Lead Market-Maker (“LMM”), or without a DPM or LMM where a requisite number of assigned market-makers exist. Although the word “currently” was originally used to delineate the date of Commission approval of SR-CBOE-2004-87, the Exchange believes the proposed language that sets forth the specific date of Commission approval is clearer in this regard. 5 *See* Securities Exchange Act Release No. 51822 (June 10, 2005), 70 FR 35321 (June 17, 2005) (SR-CBOE-2004-87). Second, the Exchange is proposing to add two sentences to CBOE Rule 8.14(a) to clarify that for index options and options on ETFs that are trading for the first time on the Exchange on or subsequent to June 10, 2005, the Exchange generally, as opposed to the appropriate Exchange procedures committee, would determine the appropriate platform on which such options would trade, and the Exchange would also determine the eligible categories of market maker participants trading on such platform. Although the Exchange believes that the current construction of CBOE Rule 8.14(a) fairly implies that the Exchange retains the authority to determine the trading platform and eligible categories of market maker participants over products not currently trading 6 on the Exchange, the proposed rule change, as set forth in CBOE Rule 8.14(a), would clarify the Exchange's authority in this regard. 6 As explained in the immediately preceding paragraph, the Exchange is deleting “currently” and inserting June 10, 2005 to provide an exact date of reference in Rule 8.14(a). Third, corollary changes are being proposed in CBOE Rule 8.14(b) to further clarify that the authority retained by the Exchange under Rule 8.14(a), with respect to determining eligible categories of market maker participants, would extend to determining whether to designate index options or options on ETFs for trading on the Hybrid Trading System or Hybrid 2.0 Platform without a DPM or LMM. Lastly, the Exchange proposes to remove language from the introduction section of CBOE Rule 6.45B to clarify that CBOE Rule 8.14(a), and not CBOE Rule 6.45B, governs how index options and options on ETFs are to be authorized for trading on CBOE's Hybrid Trading System and Hybrid 2.0 Platform. 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) 8 in particular, in that it should promote just and equitable principles of trade, to remove impediments to and perfect the mechanism of a free and open market and a national market system, and protect investors and the public interest. Specifically, the Exchange believes that the proposed rule change clarifies the meaning of current Exchange rules that are already fairly implied by the language therein. 7 15 U.S.C. 78f(b). 8 15 U.S.C. 78f(b)(5). B. Self-Regulatory Organization's Statement on Burden on Competition CBOE does not believe that the proposed rule change will impose any burden on competition 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 The Exchange neither solicited nor received written comments on the proposed rule change. III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action The foregoing proposed rule change will take effect upon filing with the Commission pursuant to Section 19(b)(3)(A)(i) of the Act 9 and Rule 19b-4(f)(1) thereunder, 10 because it constitutes a stated policy, practice, or interpretation with respect to the meaning, administration, or enforcement of an existing rule. 9 15 U.S.C. 78s(b)(3)(A)(i). 10 17 CFR 240.19b-4(f)(1). At any time within 60 days of the filing of the 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-CBOE-2005-47 on the subject line. Paper Comments • Send paper comments in triplicate to Jonathan G. Katz, Secretary, Securities and Exchange Commission, Station Place, 100 F Street, NE, Washington, DC 20549-9303. All submissions should refer to File Number SR-CBOE-2005-47. 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 CBOE. 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-CBOE-2005-47 and should be submitted on or before July 18, 2005. For the Commission, by the Division of Market Regulation, pursuant to delegated authority. 11 11 17 CFR 200.30-3(a)(12). Jill M. Peterson, Assistant Secretary. [FR Doc. E5-3327 Filed 6-24-05; 8:45 am] BILLING CODE 8010-01-P SECURITIES AND EXCHANGE COMMISSION [Release No. 34-51889; File No. SR-CHX-2005-18] Self-Regulatory Organizations; Chicago Stock Exchange, Inc.; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Permit the Submission of Immediate or Cancel CHXpress Orders June 20, 2005. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”) 1 , and Rule 19b-4 2 thereunder, notice is hereby given that on June 3, 2005, the Chicago Stock Exchange, Inc. (“CHX” or “Exchange”) filed with the Securities and Exchange Commission (“Commission”) the proposed rule change as described in Items I and II, below, which Items have been prepared by the Exchange. The Exchange filed the proposal 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. 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. 3 15 U.S.C. 78s(b)(3)(A). 4 17 CFR 240.19b-4(f)(6). I. Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change The Exchange proposes to amend its rules to permit the submission of immediate or cancel CHXpress orders. The text of the proposed rule change is included below. *Italics* indicate new text. Article XX Regular Trading Sessions Guaranteed Execution System and Midwest Automated Execution System RULE 37.
(a)No change to text.
(b)No change to text.
(11)CHXpress Orders. This section applies to the execution and display of orders through CHXpress, an automated functionality offered by the Exchange. All other rules of the Exchange are applicable, unless expressly superseded by this section.
(A)Only an unconditional round lot limit order *, or a round lot limit order with an “immediate or cancel” condition,* is eligible for entry as a CHXpress order. A CHXpress order may not be entered until an order has been executed on the primary market in the subject issue. A CHXpress order is good only for the day on which it is submitted and will be automatically cancelled at the end of each day's trading session. CHXpress orders shall be identified with the designator “XPR.”
(B)No change to text.
(C)No change to text.
(D)If a CHXpress order cannot be immediately executed, it will be placed in the specialist's book for display or later execution, in accordance with CHX rules *, unless the CHXpress order is an “immediate or cancel” order, in which case it will be automatically cancelled.* A CHXpress order will be instantaneously displayed, when it constitutes the best bid or offer in the CHX book. A CHXpress order, however, will not be displayed, if its display would improperly lock or cross another ITS market. If the display of a CHXpress order would improperly lock or cross another ITS market, the CHXpress order will be automatically cancelled. II. Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, the Exchange 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 Exchange 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 The Exchange is rolling out a new, automated functionality for the handling of particular orders, called CHXpress TM . According to the Exchange, the CHXpress functionality is designed to provide additional opportunities for the Exchange's participants to seek and receive liquidity through automated executions of orders at the Exchange. 5 With a few exceptions, CHXpress orders will be executed immediately and automatically against same or better-priced orders in the specialist's book, or against the specialist's quote (when that functionality is available). 6 If a CHXpress order cannot be immediately executed, it will be placed in the specialist's book for instantaneous display or later execution. 7 5 *See* Securities Exchange Act Release No. 50481 (September 30, 2004); 69 FR 60197 (October 7, 2004). 6 CHXpress orders will not be executed if those executions would improperly trade-through another ITS market or if trading in the issue had been halted. CHXpress orders that would improperly trade through an ITS market or that are received during a trading halt will be cancelled. If trading in an issue has been halted, CHXpress orders in the book will be cancelled. 7 A CHXpress order will be instantaneously and automatically displayed when it constitutes the best bid or offer in the CHX book. *See* CHX Article XX, Rule 37(b)11(D). CHXpress orders, like all other orders at the Exchange, will not be eligible for automated display if that display would improperly lock or cross the National Best Bid or Offer (“NBBO”). A CHXpress order that would improperly lock or cross the NBBO will be cancelled. CHXpress orders cannot be excluded from the CHX's quote. The current rules relating to CHXpress orders require that the orders be unconditional round-lot limit orders. 8 The Exchange now believes that it would be appropriate to also allow CHX participants to submit CHXpress orders with an “immediate or cancel” condition. According to the Exchange, allowing the submission of CHXpress orders with an “immediate or cancel” condition would reduce the amount of CHX systems capacity required to process CHXpress orders, by reducing the number of times that an order-sending firm would submit both an order and a later cancellation if the order was not immediately executed. The Exchange also believes that some order-sending firms might welcome the opportunity to submit immediate or cancel orders because of the reduced message traffic that they would otherwise be required to send to the Exchange. The Exchange therefore believes that this relatively minor change to its rules will increase the efficiency of the operation of its systems; at the same time, the Exchange does not believe that the proposal would have any impact on the protection of investors or the public interest. 8 *See* CHX Article XX, Rule 37(b)(11)(A). 2. Statutory Basis The Exchange believes the proposal is consistent with the requirements of the Act and the rules and regulations thereunder that are applicable to a national securities exchange, and, in particular, with the requirements of Section 6(b) of the Act. 9 The Exchange believes the proposal is consistent with Section 6(b)(5) of the Act, 10 in that the proposal is designed to promote just and equitable principles of trade, to remove impediments, and to perfect the mechanism of, a free and open market and a national market system, and, in general, to protect investors and the public interest. 9 15 U.S.C. 78f(b). 10 15 U.S.C. 78f(b)(5). 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. III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action The foregoing proposed rule change is subject to Section 19(b)(3)(A)(iii) of the Act 11 and Rule 19b-4(f)(6) thereunder 12 because the proposal:
(i)Does not significantly affect the protection of investors or the public interest;
(ii)does not impose any significant burden on competition; and
(iii)does not become operative prior to 30 days after the date of filing or such shorter time as the Commission may designate if consistent with the protection of investors and the public interest; provided that the Exchange has given the Commission notice of its intent to file the proposed rule change, along with a brief description and text of the proposed rule change, at least five business days prior to the date of filing of the proposed rule change, or such shorter time as designated by the Commission. 11 15 U.S.C. 78s(b)(3)(A)(iii). 12 17 CFR 240.19b-4(f)(6). The Exchange satisfied the five-day pre-filing requirement. The Exchange has requested that the Commission waive the 30-day operative delay. The Commission believes that waiving the 30-day operative delay is consistent with the protection of investors and the public interest because such waiver would allow Exchange participants to submit an additional order type, which could increase the efficiency of their order submission and cancellation processes. For these reasons, the Commission designates the proposal to be effective and operative upon filing with the Commission. 13 13 For purposes only of waiving the operative delay for this proposal, the Commission has considered the proposed rule's impact on efficiency, competition, and capital formation. 15 U.S.C. 78c(f). At any time within 60 days of the filing of the proposed rule change, the Commission may summarily abrogate the rule change if it appears to the Commission that the action is necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of the Act. 14 14 *See* Section 19(b)(3)(C) of the Act, 15 U.S.C. 78s(b)(3)(C). 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-CHX-2005-18 on the subject line. Paper Comments • Send paper comments in triplicate to Jonathan G. Katz, Secretary, Securities and Exchange Commission, Station Place, 100 F Street, NE., Washington, DC 20549-9303. All submissions should refer to File Number SR-CHX-2005-18. 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 Section, 100 F Street, NE., Washington, DC 20549. 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-CHX-2005-18 and should be submitted on or before July 18, 2005. For the Commission, by the Division of Market Regulation, pursuant to delegated authority. 15 15 17 CFR 200.30-3(a)(12). Jill M. Peterson, Assistant Secretary. [FR Doc. E5-3334 Filed 6-24-05; 8:45 am] BILLING CODE 8010-01-P SECURITIES AND EXCHANGE COMMISSION [Release No. 34-51896; File No. SR-FICC-2004-22] Self-Regulatory Organizations; Fixed Income Clearing Corporation; Order Approving a Proposed Rule Change Establishing a Sponsored Membership Program June 21, 2005. On November 12, 2004, the Fixed Income Clearing Corporation (“FICC”) filed with the Securities and Exchange Commission (“Commission”) a proposed rule change pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”) 1 and on February 28, 2005, and May 6, 2005, amended the proposed rule change. 2 Notice of the proposal was published in the **Federal Register** on May 12, 2005. 3 No comment letters were received. For the reasons discussed below, the Commission is approving the proposed rule change. 1 15 U.S.C. 78s(b)(1). 2 The May 6, 2005, amendment to the proposed rule change clarified that sponsored members must “immediately” notify the sponsoring member (instead of “promptly” notify FICC as would have been required by the original filing) and that sponsoring members must promptly notify FICC if the sponsored member is no longer in compliance with the membership requirements. Because this change is technical in nature, republication of the notice was not required. 3 Securities Exchange Act Release No. 51659 (May 5, 2005); 70 FR 25129. I. Description The rule change creates a new Rule 3A of FICC's Government Securities Division's (“GSD”) rules that will establish new membership categories and requirements for sponsoring members and sponsored members whereby certain existing netting members will be permitted to sponsor certain buy-side entities into membership. The rule change will also make conforming changes to FICC's existing rules to accommodate the introduction of these new membership categories. GSD will initially permit only bank netting members to apply to become sponsoring members. 4 In order to be eligible to become a sponsoring member, a bank netting member will have to meet more stringent minimum financial requirements than those required for GSD netting membership. Specifically, the sponsoring member will have to have a level of equity capital of at least $5 billion and will have to satisfy the ratios established by the Federal Deposit Insurance Corporation for being “well-capitalized.” If the sponsoring member has a bank holding company that is registered under the Bank Holding Company Act of 1956, then the bank holding company will also have to be “well-capitalized” under the relevant regulations of the Board of Governors of the Federal Reserve System. These financial criteria are both the initial and the continuing minimum financial requirements for sponsoring members. All applications for sponsoring membership will be decided on by FICC's Membership and Risk Management Committee. 5 4 FICC will submit a proposed rule change should it decide to expand the types of entities that may be sponsoring members. 5 Rule 3A, Section 2. To become a sponsored member, GSD will permit only entities that are
(i)registered investment companies under the Investment Company Act of 1940 and
(ii)qualified institutional buyers under Rule 144A of the Securities Act of 1933. 6 In addition, an entity will only be able to become a sponsored member if there is a sponsoring member willing to sponsor the entity into membership. FICC will require each sponsoring member to represent in writing that each entity it wishes to sponsor meets these requirements. Thereafter, sponsoring members will have to make these representations to FICC on an on-going basis. Sponsored members will have to immediately notify their sponsoring member anytime it is no longer in compliance with the membership requirements. GSD management will decide on entities applying to become sponsored members. 7 6 FICC will submit a proposed rule change should it decide to expand the types of entities that may be sponsored members. 7 Rule 3A, Sections 2(d) and 3. Since a sponsoring member will act as the processing agent for its sponsored members, FICC will interact solely with the sponsoring member for operational purposes. The sponsoring member will have to establish an omnibus account for all of its sponsored members' activity. The omnibus account will be in addition to the sponsoring member's regular netting account. FICC will permit, but not require, the sponsoring member to submit sponsored member activity on a locked-in basis. 8 8 Rule 3A, Sections 5 and 6. FICC will provide its settlement guaranty to each sponsored member with respect to its respective net settlement positions ( *i.e.* , for clearing fund calculation, each sponsored member's trading activity is treated separately). For operational and securities clearance purposes, however, all of the activity in the omnibus account will be netted as if it were the activity of one netting member. As a result, the omnibus account will have only one net settlement obligation per CUSIP on a daily basis. 9 The same will be true with respect to funds-only settlement for the omnibus account. 10 9 Rule 3A, Sections 7 and 8. 10 Rule 3A, Section 9. The required clearing fund deposit of each sponsored member whose trading activity is submitted to the omnibus account will be calculated in the same manner as is done for the trading activity of a netting member in its regular netting account except that FICC will compute the required clearing fund deposit for each sponsored member on a standalone basis. FICC then will add each sponsored member's calculated requirement to two additional figures that will be calculated at the omnibus account level ( *i.e.* , the portion of the clearing fund calculation for adjusted funds-only settlement amounts for and fail net settlement positions) to come to a total clearing fund requirement for the omnibus account. For risk management purposes, FICC will not net the resulting clearing fund calculations of each sponsored member within the omnibus account with those of other sponsored members in the omnibus account. 11 11 Rule 3A, Section 10. FICC understands that the custodial banks that are likely to be interested in becoming sponsoring members generally collateralize their custody clients ( *i.e.* , the potential sponsored members) at 102 percent for U.S. Treasury repurchase agreements. 12 Under the GSD clearing fund formula, this would cause a sponsoring member to pay clearing fund of an additional 4 percent of its overall transactional volume with its sponsored members, which may potentially amount to hundreds of millions of dollars of additional clearing fund obligations. 13 FICC believes that this potential adverse impact on a sponsoring member is unnecessary because these additional funds payments are pass-through amounts between sponsored members and their sponsoring members do not represent risk to FICC or its members. Therefore, FICC will amend the clearing fund rule to adjust for this funds-only settlement component when calculating the clearing fund requirements for the sponsored members, the omnibus account, and the sponsoring member's regular netting account. FICC will reserve the right to not adjust the funds-only settlement component when, in its discretion, the circumstances warrant such action (for example, under extraordinary market conditions). 12 This means that when a custody client wishes to engage in a reverse repo transaction (for example, the custodian client is lending $100), it will generally require collateral of 102 percent of the value of the money loaned (in this example, $102 worth of U.S. Treasury securities). 13 The following example will illustrate why this occurs under FICC's GSD's clearing fund formula. Assume that the start leg of the repo transaction between the sponsoring member and the sponsored member calls for the sponsored member to lend $100 and receive $102 in securities. The next day, the close leg of the repo transaction to which FICC has become counterparty will call for the sponsored member to send the collateral back to FICC, and FICC, which settles at market value, the sponsored member will pay $102 in funds. This requires FICC to make an adjustment for funds-only settlement purposes by debiting the sponsored member $2 and crediting the sponsoring member $2. These funds-only settlement amount payments are referred to as “transaction adjustment payments” in the GSD's rules. Because one component of the clearing fund requires inclusion of the absolute value of the funds-only settlement amounts ( *i.e.* , regardless of whether they are debits or credits), the transaction adjustment payments will artificially inflate the clearing fund requirements related to both the sponsored member omnibus account and the sponsoring member's regular netting account. Each sponsored member will be principally liable for satisfying its securities and funds-only settlement obligations. For operational and administrative purposes, FICC will interact with the sponsoring member as agent for the sponsored members for day-to-day satisfaction of these obligations. 14 14 Rule 3A, Sections 8 and 9. While the sponsored members will be principally liable for their settlement obligations, the sponsoring member will be required to provide a guaranty to FICC with respect to such obligations. This means that in the event one or more sponsored members do not satisfy their settlement obligations, FICC will be able to invoke the guaranty provided by the sponsoring member. 15 15 Definition of “Sponsoring Member Guaranty” and Rule 3A, Section 2. Sponsored members will not be liable for any loss allocation obligations. To the extent that a “remaining loss” (as defined in the GSD's rules) arises in connection with “direct transactions” (as defined in the GSD's rules) between the sponsoring member and its sponsored members ( *i.e.* , the sponsoring member is the insolvent party), the sponsored members will not be responsible for or considered in the calculation of the loss allocation obligations. Such obligations will be the obligation of the other netting members that had direct transactions with the sponsoring member in its capacity as a netting member. To the extent there is an allocation other than for direct transactions between the sponsoring member and its sponsored members, the sponsored members will be counted as if they were obligated to pay the loss allocation amounts, but it will be the sponsoring member's obligation to pay such amounts. 16 16 Rule 3A, Section 12. II. Discussion Section 17A(b)(3)(F) of the Act requires, among other things, that the rules of a clearing be designed to assure the safeguarding of securities and funds which are in its custody or control. 17 The proposed rule change is consistent with the requirements of Section 17A of the Act and the rules and regulations thereunder because the sponsoring and sponsored membership categories and related rules have been crafted in a manner that, while providing for sponsored members, adequately takes into account any associated risks. 17 15 U.S.C. 78q-1(b)(3)(F). III. Conclusion On the basis of the foregoing, the Commission finds that the proposal is consistent with the requirements of the Act and in particular with the requirements of Section 17A of the Act 18 and the rules and regulations thereunder. 18 15 U.S.C. 78q-1. *It is therefore ordered* , pursuant to Section 19(b)(2) of the Act, that the proposed rule change (File No. SR-FICC-2004-22) be, and hereby is, approved. For the Commission by the Division of Market Regulation, pursuant to delegated authority. 19 19 17 CFR 200.30-3(a)(12). Jill M. Peterson, Assistant Secretary. [FR Doc. E5-3324 Filed 6-24-05; 8:45 am] BILLING CODE 8010-01-P SECURITIES AND EXCHANGE COMMISSION [Release No. 34-51891; File No. SR-NASD-2004-139] Self-Regulatory Organizations; National Association of Securities Dealers, Inc.; Order Approving Proposed Rule Change and Amendment No. 1 and Notice of Filing and Order Granting Accelerated Approval to Amendment No. 2 Relating to the Listing and Trading of Leveraged Index Return Notes Linked to the Dow Jones Industrial Average June 21, 2005. I. Introduction On September 15, 2004, the National Association of Securities Dealers, Inc. (“NASD”), through its subsidiary, The Nasdaq Stock Market, Inc. (“Nasdaq”), filed with the Securities and Exchange Commission (“Commission”), pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”), 1 and Rule 19b-4 thereunder, 2 a proposed rule change to list and trade Leveraged Index Return Notes Linked to the Dow Jones Industrial Average (“Notes”) issued by Merrill Lynch & Co., Inc. (“Merrill Lynch”). On March 21, 2005, Nasdaq submitted Amendment No. 1. 3 The proposed rule change, as modified by Amendment No. 1, was published for notice and comment in the **Federal Register** on March 30, 2005. 4 The Commission received no comment letters regarding the proposed rule change. On May 31, 2005, Nasdaq submitted Amendment No. 2 to the proposal. 5 This order approves the proposed rule change, as modified by Amendment No. 1. Simultaneously, the Commission provides notice of filing of Amendment No. 2 and grants accelerated approval of Amendment No. 2. 1 15 U.S.C. 78s(b)(1). 2 17 CFR 240.19b-4. 3 In Amendment No. 1, Nasdaq provided additional details regarding the proposed index linked notes and underlying index. 4 *See* Securities Exchange Act Release No. 51425 (March 23, 2005), 70 FR 16322 (“Notice”). 5 In Amendment No. 2, Nasdaq modified its proposal to include conditions under which it would commence delisting or removal proceedings with respect to the Notes. II. Description of Proposal Nasdaq proposes to list and trade the Notes, which provide for a return based upon the Dow Jones Industrial Average (“Index”). As set forth in the Notice, the Index is a price-weighted index published by Dow Jones & Company, Inc. A component stock's weight in the Index is based on its price per share, rather than the total market capitalization of the issuer of that component stock. The value of the Index is the sum of the primary market prices of each of the 30 common stocks included in the Index, divided by a divisor that is designed to provide a meaningful continuity in the value of the Index. In order to prevent certain distortions related to extrinsic factors, the divisor may be adjusted appropriately. The current divisor of the Index is published daily in the WSJ and other publications. Other statistics based on the Index may be found in a variety of publicly available sources. The value of the Index is widely disseminated at least every 15 seconds by providers that are independent from Merrill Lynch. In the event the calculation or dissemination of the Index is discontinued, Nasdaq will delist the Notes. The Index is designed to provide an indication of the composite price performance of 30 common stocks of corporations representing a broad cross-section of U.S. industry. The corporations represented in the Index tend to be market leaders in their respective industries, and their stocks are typically widely held by individuals and institutional investors. The component stocks in the Index are selected (and any changes are made) by the editors of the *Wall Street Journal* (“WSJ”). Changes to the stocks included in the Index tend to be made infrequently. Historically, most substitutions have been the result of mergers, but from time to time, changes may be made to achieve what the editors of the WSJ deem to be a more accurate representation of the broad market of the U.S. industry. As of August 27, 2004, the market capitalization of the securities included in the Index ranged from a high of approximately $346 billion to a low of approximately $24 billion. The average daily trading volume for Index components (calculated over the previous thirty trading days) ranged from a high of approximately 24 million shares to a low of approximately 1.7 million shares. In its proposal, Nasdaq also provided the following information relevant to the listing and trading of the Notes: The Notes, which will be registered under Section 12 of the Act, will be subject to Nasdaq's initial listing criteria for other securities under Rule 4420(f). 6 The Notes will be subject to Nasdaq's continued listing criterion for other securities pursuant to Rule 4450(c). Under this criterion, the aggregate market value or principal amount of publicly held units must be at least $1 million. The Notes also must have at least two registered and active market makers as required by Rule 4310(c)(1). Nasdaq specifically represents that it will commence delisting or removal proceedings with respect to the Notes (unless the Commission has approved the continued trading of the Notes) if any of the following standards are not continuously maintained: 6 Under NASD Rule 4420(f), Nasdaq may approve for listing and trading innovative securities that cannot be readily categorized under traditional listing guidelines. *See* Exchange Act Release No. 32988 (September 29, 1993); 58 FR 52124 (October 6, 1993).
(i)Each component security has a minimum market value of at least $75 million, except that for each of the lowest weighted component securities in the Index that in the aggregate account for no more than 10% of the weight of the Index, the market value can be at least $50 million;
(ii)Each component security shall have trading volume in each of the last six months of not less than 500,000 shares, except that for each of the lowest weighted component securities in the Index that in the aggregate account for no more than 10% of the weight of the Index, the trading volume shall be at least 400,000 shares for each of the last six months;
(iii)The total number of components in the Index may not increase or decrease by more than 33 1/3 % from the number of components in the Index at the time of the initial listing of the Notes, and in no event may be fewer than ten
(10)components;
(iv)As of the first day of January and July of each year, no underlying component security will represent more than 25% of the weight of the Index, and the five highest weighted component securities in the index do not in the aggregate account for more than 50% of the weight of the index;
(v)90% of the Index's numerical value and at least 80% of the total number of component securities meet the then current criteria for standardized option trading of a national securities exchange or a national securities association;
(vi)Each component security (except foreign country securities) shall be issued by a 1934 Act reporting company and listed on a national securities exchange or Nasdaq; and
(vii)Foreign country securities or American Depository Receipts (“ADRs”) that are not subject to comprehensive surveillance agreements do not in the aggregate represent more than 20% of the weight of the Index. Nasdaq will also commence delisting or removal proceedings with respect to the Notes (unless the Commission has approved the continued trading of the Notes) under any of the following circumstances:
(i)If the aggregate market value or the principal amount of the Notes publicly held is less than $400,000;
(ii)If the value of the Index is no longer calculated or widely disseminated on at least a 15-second basis; or
(iii)If such other event shall occur or condition exists which in the opinion of Nasdaq makes further dealings on Nasdaq inadvisable. Nasdaq will also consider prohibiting the continued listing of the Notes if Merrill Lynch is not able to meet its obligations on the Notes. Because the Notes will be deemed equity securities for the purpose of Rule 4420(f), the NASD and Nasdaq's existing equity trading rules will apply to the Notes. Thus, Nasdaq states that, in accordance with NASD Rule 2310(a) and IM-2310-2, Nasdaq will advise members recommending a transaction in the Notes to have reasonable grounds for believing that the recommendation is suitable for such customer upon the basis of the facts, if any, disclosed by such customer as to his other security holdings and as to his financial situation and needs. In addition, pursuant to Rule 2310(b), prior to the execution of a transaction in the Notes that has been recommended to a non-institutional customer, a member shall make reasonable efforts to obtain information concerning:
(1)The customer's financial status;
(2)the customer's tax status;
(3)the customer's investment objectives; and
(4)such other information used or considered to be reasonable by such member in making recommendations to the customer. Also, the Notes will be considered non-conventional investments for purposes of NASD's Notice to Members 03-71. 7 Furthermore, the Notes will be subject to the equity margin rules. Lastly, the regular equity trading hours of 9:30 a.m. to 4 p.m. will apply to transactions in the Notes. 7 *See* NASD, NTM 03-71 (November 2003), note 1. The Notes are a series of senior non-convertible debt securities that will be issued by Merrill Lynch and will not be secured by collateral. The Notes will be issued in denominations of whole units (“Unit”), with each Unit representing a single Note. The original public offering price will be $10 per Unit. The Notes will not pay interest and are not subject to redemption by Merrill Lynch or at the option of any beneficial owner before maturity. The Notes' term to maturity is five years. At maturity, if the value of the Index has increased, a beneficial owner of a Note will be entitled to receive the original offering price ($10), plus an amount calculated by multiplying the original offering price ($10) by an amount expected to be between 105% and 115% (“Participation Rate”) of the percentage increase in the Index. 8 If, at maturity, the value of the Index has not changed or has decreased by up to 20%, then a beneficial owner of a Note will be entitled to receive the full original offering price. 8 The actual Participation Rate date will be determined on the day the Notes are priced for initial sale to the public and disclosed in the final prospectus supplement. However, unlike ordinary debt securities, the Notes do not guarantee any return of principal at maturity. Therefore, if the value of the Index has declined at maturity by more than 20%, a beneficial owner will receive less, and possibly significantly less, than the original offering price: for each 1% decline in the Index below 20%, the redemption amount of the Note will be reduced by 1.25% of the original offering price. The change in the value of the Index will normally (subject to certain modifications explained in the prospectus supplement) be determined by comparing
(a)the average of the values of the Index at the close of the market on five business days shortly before the maturity of the Notes to
(b)the closing value of the Index on the date the Notes are priced for initial sale to the public. The value of the Participation Rate will be determined by Merrill Lynch on the date the Notes are priced for initial sale based on the market conditions at that time. Both the value of the Index on the date the Notes are priced and the Participation Rate will be disclosed in Merrill Lynch's final prospectus supplement, which Merrill Lynch will deliver in connection with the initial sale of the Notes. The Notes are cash-settled in U.S. dollars and do not give the holder any right to receive a portfolio security, dividend payments, or any other ownership right or interest in the portfolio of securities comprising the Index. The Notes are designed for investors who want to participate or gain exposure to the Index, and who are willing to forego market interest payments on the Notes during the term of the Notes. Pursuant to Securities Exchange Act Rule 10A-3 and Section 3 of the Sarbanes-Oxley Act of 2002, Public Law 107-204, 116 Stat. 745 (2002), Nasdaq will prohibit the initial or continued listing of any security of an issuer that is not in compliance with the requirements set forth therein. Nasdaq represents that the NASD's surveillance procedures are adequate to properly monitor the trading of the Notes. Specifically, the NASD will rely on its current surveillance procedures governing equity securities and will include additional monitoring on key pricing dates. III. Commission Findings After careful consideration, the Commission finds that the proposed rule change is consistent with the requirements of Section 15A of the Act, 9 applicable to a national securities association, and, in particular, with the requirements of Section 15A(b)(6) of the Act, 10 in that it is designed to promote just and equitable principles of trade, to remove impediments to and perfect the mechanism of a free and open market, and, in general, to protect investors and the public interest. 11 9 9 15 U.S.C. 78o-3. 10 15 U.S.C. 78o-3(b)(6). 11 In approving the proposed rule, the Commission has considered the proposed rule's impact on efficiency, competition, and capital formation. 15 U.S.C. 78c(f). The Commission has previously approved the listing of securities with a structure similar to that of the Notes, which have been linked to, or based on, the Index or another broad-based index. 12 The Notes, however, are different from prior products because their return does not directly correspond to the index performance when the index declines. Rather, for each 1% decline in the Index below 20%, the redemption amount of the Note will be reduced by 1.25% of the original offering price. However, NASD Rules 2310(a) and (b), along with NASD IM 2310-2, and NASD NTM 03-71 address member obligations with respect to customers of the Notes. Consequently, the Commission believes that it is appropriate to permit investors to benefit from the flexibility afforded by trading these products. 12 *See, e.g.* , Securities Exchange Act Release Nos. 49301 (February 23, 2004), 69 FR 9665 (March 1, 2004) (approving the listing and trading of 97% principal protected notes linked to the Index); 48486 (September 11, 2003), 68 FR 54758 (September 18, 2003) (approving the listing and trading of contingent principal protected notes linked to the S&P 500 Index); 48152 (July 10, 2003), 68 FR 42435 (July 17, 2003) (approving the listing and trading of partial principal protected notes linked to the S&P 500 Index); 46883 (Nov. 21, 2002), 67 FR 71216 (Nov. 29, 2002) (approving the listing and trading of notes linked to the Index); 39525 (Jan. 8, 1998), 63 FR 2438 (Jan. 15, 1998) (approving the listing and trading of DIAMONDS Trust Units, portfolio depositary receipts based on the Index); and 39011 (Sept. 3, 1997), 62 FR 47840 (Sept. 11, 1997) (approving the listing and trading of options on the Index). The hybrid listing standards set forth in NASD Rule 4420(f) were designed to address the concerns attendant to the trading of securities, like the Notes. 13 The 30 component stocks that comprise the Index are reporting companies under the Act, and the Notes will be registered under Section 12 of the Act. Thus, by imposing the hybrid listing standards, heightened suitability, disclosure, and compliance requirements set forth in Nasdaq's proposal, the Commission should adequately address the potential problems that could arise from listing and trading the Notes. 13 *See* Securities Exchange Act Release No. 32988 (September 29, 1993), 58 FR 52124 (October 6, 1993). For example, NASD Rule 4420(f) provides that only issuers satisfying substantial asset and equity requirements may issue securities such as the Notes. In addition, Nasdaq's continued listing criteria require that the Notes maintain a market value of at least $1 million. *See* NASD Rule 4450(c). The Commission notes that Nasdaq will distribute a circular to its membership that provides guidance regarding member firm compliance responsibilities and requirements, including suitability recommendations, and highlights the special risks and characteristics associated with the Notes. Among other things, the circular should indicate that the Notes do not guarantee a total return of principal at maturity; that for each 1% decline in the Index below 20%, the redemption amount of the Note will be reduced by 1.25% of the original offering price; that the Participation Rate on the Notes is expected to be between 105% and 115% per unit; that the Notes will not pay interest; and that the Notes will provide exposure in the Index. The circular will also explain Merrill Lynch's calculation of the Notes' Participation Rate. Distribution of the circular should help to ensure that only customers with an understanding of the risks attendant to the trading of the Notes and who are able to bear the financial risks associated with transactions in the Notes will trade the Notes. In addition, the Commission notes that Merrill Lynch will deliver a prospectus in connection with the initial purchase of the Notes. In approving the product, the Commission recognizes that the Index is a price-weighted index of 30 of the largest and most active common stocks listed on Nasdaq and the NYSE. The Commission notes that the Index is determined, composed, and calculated by the editors of the WSJ, which is not a broker-dealer. The underlying stocks comprising the Index are well-capitalized, highly liquid stocks. Given the large trading volume and capitalization of each of the stocks underlying the Index, the Commission believes that the listing and trading of the proposed Notes should not unduly impact the market for the securities underlying the Index or raise manipulative concerns. Moreover, as noted above, the issuers of the underlying securities comprising the Index are subject to reporting requirements under the Act, and all of the component stocks are either listed or traded on, or traded through the facilities of, U.S. securities markets. In addition, NASD's surveillance procedures should serve to deter as well as detect any potential manipulation. Regarding the systemic concern that a broker-dealer, such as Merrill Lynch, or a subsidiary providing a hedge for the issuer will incur position exposure, the Commission finds, as in previous approval orders for hybrid instruments similar to Notes issued by broker-dealers, that this concern is minimal given the size of the Notes issuance in relation to the net worth of Merrill Lynch. 14 14 *See supra* note 12. *See also* Securities Exchange Act Release Nos. 44913 (October 9, 2001), 66 FR 52469 (October 15, 2001) (approving the listing and trading of notes issued by Morgan Stanley Dean Witter & Co. whose return is based on the performance of the Nasdaq-100 Index); 44483 (June 27, 2001), 66 FR 35677 (July 6, 2001) (approving the listing and trading of notes issued by Merrill Lynch whose return is based on a portfolio of 20 securities selected from the Amex Institutional Index); and 37744 (September 27, 1996), 61 FR 52480 (October 7, 1996) (approving the listing and trading of notes issued by Merrill Lynch whose return is based on a weighted portfolio of the Healthcare/Biotechnology industry securities). Nasdaq also represents that index value of the Index is widely disseminated at least every 15 seconds. The Commission finds that such public dissemination of the index valuation will provide investors with timely and useful information concerning the value of their Notes. The Commission finds good cause for approving proposed Amendment No. 2 before the thirtieth day of publication of notice of filing thereof in the **Federal Register** because Amendment No. 2 simply clarifies the continued listing criteria for the Notes. IV. Solicitation of Comments Interested persons are invited to submit written data, views, and arguments concerning Amendment No. 2, including whether the amendment 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-2004-139 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 20549-0609. All submissions should refer to File Number SR-NASD-2004-139. 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 Section, 100 F Street, NE, Washington, DC 20549. 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-2004-139 and should be submitted on or before July 18, 2005. V. Conclusion *It is therefore ordered,* pursuant to Section 19(b)(2) of the Act, 15 that the proposed rule change, as amended by Amendment No. 1 (SR-NASD-2004-139), is hereby approved, and that Amendment No. 2 to the proposed rule change is approved on an accelerated basis. 15 15 U.S.C. 78s(b)(2). For the Commission, by the Division of Market Regulation, pursuant to delegated authority. 16 16 17 CFR 200.30-3(a)(12). Jill M. Peterson, Assistant Secretary. [FR Doc. E5-3326 Filed 6-24-05; 8:45 am] BILLING CODE 8010-01-P SECURITIES AND EXCHANGE COMMISSION [Release No. 34-51890; File No. SR-NASD-00-23] Self-Regulatory Organizations; Notice of Filing of Amendment No. 2 to Proposed Rule Change by National Association of Securities Dealers, Inc. Relating to Amendments To Order Audit Trail System Rules June 21, 2005. 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 April 19, 2000, the National Association of Securities Dealers, Inc. (“NASD”) filed with the Securities and Exchange Commission (“SEC” or “Commission”) a proposed rule change relating to its Order Audit Trail System (“OATS”). On September 5, 2000, NASD filed Amendment No. 1 to the proposed rule change. The proposed rule change, as amended by Amendment No. 1, was published for comment in the **Federal Register** on October 3, 2000. 3 The Commission received 13 comment letters from 12 commenters in response to the publication. 4 1 15 U.S.C. 78s(b)(1). 2 17 CFR 240.19b-4. 3 *See* Securities Exchange Act Release No. 43344 (September 26, 2000), 65 FR 59038. 4 *See* letters to Jonathan G. Katz, Secretary, Commission, from Harold M. Golz, Krys Boyle Freedman & Sawyer, P.C. on behalf of Rocky Mountain Securities & Investments, Inc., dated October 20, 2000; Mitchell M. Almy, President, Mitchell Securities Corporation of Oregon, dated October 20, 2000; Joanne Ferrari, Compliance Manager, Weeden & Co., dated October 23, 2000; Bonnie K. Wachtel, CEO and Wendie L. Wachtel, COO, Wachtel & Co., Inc., dated October 24, 2000 and March 26, 2001; Laurence Storch, Storch & Brenner, LLP, dated October 24, 2000; Allen Thomas, Vice President, A.G. Edwards & Sons, Inc., dated October 24, 2000; Stuart J. Kaswell, Senior Vice President and General Counsel, Securities Industry Association, Ad Hoc Committee, dated October 24, 2000; W. Leo McBlain, Chairman and Thomas J. Jordan, Executive Director, Financial Information Forum, dated October 24, 2000; Thomas F. Guinan, Senior Vice President, Pershing Division of Donaldson, Lufkin & Jenrette Securities Corporation, dated October, 24, 2000; Paul A Merolla, Senior Vice President and General Counsel, Instinet Corporation, dated October 25, 2000; Richard E. Schell, Vice President and Assistant General Counsel, First Options of Chicago, dated October 25, 2000; Jill W. Ostergaard, Vice President, Morgan Stanley Dean Witter, dated October 27, 2000. On June 10, 2005, NASD filed Amendment No. 2 to the proposed rule change. Amendment No. 2 is described in Items I, II, and III below, which Items have been prepared by NASD. The Commission is publishing this notice to solicit comments on Amendment No. 2 to the proposed rule change from interested persons. I. Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change NASD is proposing amendments to its OATS rules. The text of the proposed rule change follows. Proposed new language is in italics; proposed deletions are in brackets. 6951. Definitions For purposes of Rules 6950 through 6957:
(a)Through
(m)No Change.
(n)“Reporting Member” shall mean a member that receives or originates an order and has an obligation to record and report information under Rules 6954 and 6955. *A member shall not be considered a Reporting Member in connection with an order, if the following conditions are met:* *(1) The member engages in a non-discretionary order routing process, pursuant to which it immediately routes, by electronic or other means, all of its orders to a single receiving Reporting Member;* *(2) The member does not direct and does not maintain control over subsequent routing or execution by the receiving Reporting Member;* *(3) The receiving Reporting Member records and reports all information required under Rules 6954 and 6955 with respect to the order; and* *(4) The member has a written agreement with the receiving Reporting Member specifying the respective functions and responsibilities of each party to effect full compliance with the requirements of Rules 6954 and 6955.* 6954. Recording of Order Information
(a)No Change.
(b)Order Origination and Receipt. Unless otherwise indicated, the following order information must be recorded under this Rule when an order is received or originated. *For purposes of this Rule, the order origination or receipt time is the time the order is received from the customer.*
(1)through
(18)No Change.
(c)Order Transmittal. Order information required to be recorded under this Rule when an order is transmitted includes the following.
(1)When a Reporting Member transmits an order to a[nother] department within the member, [other than to the trading department,] the Reporting Member shall record:
(A)Through
(C)No Change.
(D)An identification of the department *and nature of the department* to which the order was transmitted, [and]
(E)The date and time the order was received by that department,
(F)the number of shares to which the transmission applies, and
(G)Any special handling requests.[;]
(2)Through
(6)No Change.
(d)No Change. 6955. Order Data Transmission Requirements
(a)Through
(c)No Change. *(d) Exemptions.* *(1) Pursuant to the Rule 9600 Series, the staff, for good cause shown after taking into consideration all relevant factors, may exempt, subject to specified terms and conditions, a member from the order data transmission requirements of this Rule for manual orders, if such exemption is consistent with the protection of investors and the public interest, and the member meets the following criteria:* *(A) The member and current control affiliates and associated persons of the member have not been subject within the last five years to any final disciplinary action, and within the last ten years to any disciplinary action involving fraud;* *(B) The member has annual revenues of less than $2 million;* *(C) The member does not conduct any market making activities in Nasdaq Stock Market equity securities;* *(D) The member does not execute principal transactions with its customers (with limited exception for principal transactions executed pursuant to error corrections); and* *(E) The member does not conduct clearing or carrying activities for other firms.* *(2) An exemption provided pursuant to this paragraph
(d)shall not exceed a period of two years. At or prior to the expiration of a grant of exemptive relief under this paragraph (d), a member meeting the criteria set forth in paragraph (d)(1) may request, pursuant to the Rule 9600 Series, a subsequent exemption, which will be considered at the time of the request, consistent with the protection of investors and the public interest.* *(3) This paragraph shall be in effect until [five years from the effective date of the proposed rule change].* 9600. Procedures for Exemptions 9610. Application
(a)Where To File A member seeking an exemption from Rule 1021, 1022, 1070, 2210, 2320, 2340, 2520, 2710, 2720, 2810, 2850, 2851, 2860, Interpretive Material 2860-1, 3010(b)(2), 3020, 3210, 3230, 3350, *6955,* 8211, 8212, 8213, 11870, or 11900, Interpretive Material 2110-1, or Municipal Securities Rulemaking Board Rule G-37 shall file a written application with the appropriate department or staff of NASD and provide a copy of the application to the Office of General Counsel of NASD.
(b)and
(c)No Change. 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 Rule Filing History On April 19, 2000, NASD filed with the Commission proposed rule change SR-NASD-00-23, proposed amendments to the OATS rules (the “original filing”). On September 5, 2000, NASD filed with the Commission Amendment No. 1 to SR-NASD-00-23, which proposed to make certain changes to the original filing. On September 26, 2000, the Commission published for comment the proposed rule change in the **Federal Register** . 5 Based on comments received in response to the publication of the proposed rule change in the **Federal Register** and discussions with the staff of the SEC, NASD is filing this Amendment No. 2 to SR-NASD-00-23 to make certain changes as described herein. 6 5 *See supra* note 3. 6 NASD withdrew and separately proposed a portion of one of the proposed changes in SR-NASD-00-23, specifically the proposed change to require that electronic communications networks (“ECNs”) that electronically receive routed orders capture and report a routed order identifier. Because such change was proposed separately in SR-NASD-2004-137 and subsequently approved by the Commission ( *see* Securities Exchange Act Release No. 50409 (September 17, 2004), 69 FR 57113 (September 23, 2004), it is not addressed herein.) Specifically, Amendment No. 2 would:
(1)Provide that members are required to capture and report both the time the order is received by the member from the customer and the time the order is received by the member's trading desk or trading department, 7 if those times are different; 8
(2)exclude certain members from the definition of “Reporting Member” for those orders that meet specified conditions and are recorded and reported to OATS by another member; and
(3)permit NASD to grant exemptive relief from the OATS reporting requirements in certain circumstances to members that meet specified criteria. 7 The terms “trading desk” and “trading department” are used interchangeably in this rule filing. 8 Members currently are required to capture and report the time the order is received by the member from the customer. Background On March 6, 1998, the SEC approved NASD Rules 6950 through 6957 (“OATS Rules”). 9 OATS provides a substantially enhanced body of information regarding orders and transactions that improves NASD's ability to conduct surveillance and investigations of member firms for potential violations of NASD rules and the federal securities laws. OATS is designed, at a minimum, to:
(1)Provide an accurate, time-sequenced record of orders and transactions, beginning with the receipt of an order at the first point of contact between the broker/dealer and the customer or counterparty and further documenting the life of the order through the process of execution; and
(2)provide for market-wide synchronization of clocks used in connection with the recording of market events. 9 *See* Securities Exchange Act Release No. 39729, 63 FR 12559 (March 13, 1998). The OATS Rules generally impose obligations on member firms to record in electronic form and report to NASD on a daily basis certain information with respect to orders originated or received by NASD members relating to securities listed on Nasdaq. OATS captures this order information reported by NASD members and integrates it with quote and transaction information to create a time-sequenced record of orders and transactions. This information is critical to NASD staff in conducting surveillance and investigations of member firms for violations of federal securities laws and NASD rules. The OATS requirements were implemented in three phases. All members were required to synchronize their computer system clocks and all mechanical clocks that record times for regulatory purposes by August 7, 1998, and July 1, 1999, respectively. In addition, electronic orders received at the trading department of a market maker and those received by ECNs were required to be reported to OATS as of March 1, 1999 (“Phase One”). Additional information relating to market maker and ECN electronic orders and all other electronic orders were required to be reported to OATS by August 1, 1999 (“Phase Two”). Pursuant to Rule 6957(c), the OATS Rules will apply to all manual orders effective 120 days after Commission approval of SR-NASD-00-23 (“Phase Three”). 10 10 The original effective date for Phase Three was July 31, 2000. NASD filed a proposed amendment with the SEC for immediate effectiveness to extend the implementation date of Phase Three to 120 days after SEC approval of SR-NASD-00-23. *See* Securities Exchange Act Release No. 43654 (December 1, 2000), 65 FR 77405 (December 11, 2000). Since the implementation of OATS, NASD staff has reviewed OATS activities with the goal of identifying ways in which to improve OATS and enhance its effectiveness as a regulatory tool. In this regard, NASD identified several changes to OATS that it believed would enhance NASD's automated surveillance for compliance with trading and market making rules such as Interpretive Material
(IM)2110-2, (commonly referred to as the “NASD's Limit Order Protection Interpretation”), the SEC's Order Handling Rules and a member firm's best execution obligations. NASD proposed these changes in SR-NASD-00-23 and Amendment No. 1 thereto. Provided below is a description of each of the proposed changes, a summary of the comments received in response to the SEC's publication of the proposed changes, and NASD's response, as applicable. Proposed Definition of Time of Receipt NASD Rule 6954 requires certain identifying information be recorded at various critical points during the life of an order, thereby assisting NASD in carrying out its regulatory responsibilities. In particular, NASD Rule 6954(b)(16) requires that members record and report the date and time the order is originated or received by a Reporting Member (“time of receipt”). The OATS Rules, which currently only apply to electronic orders, require that the time of receipt for an electronic order be the time an order is received by a firm's electronic order handling system. Once the OATS Rules are fully phased in, members will be required to record and report OATS information for manual orders. The time of receipt for manual orders is the time the order is received by the member from the customer, whether that is at a trading desk or at another location. In the original filing, NASD proposed that the time of receipt for manual orders be the time the order is received by the member firm's trading desk or trading department for execution or further routing purposes. NASD also proposed to codify the staff's position that the time of receipt for electronic orders is the time the order is captured by a member's electronic order-routing or execution system. NASD amended its original filing and proposed in Amendment No. 1 that the time of receipt for manual orders of less than 10,000 shares be the time the order is received by the member's trading desk or trading department for execution or routing purposes. For manual orders that are 10,000 shares or greater, the time of receipt would continue to be the time the order is received by the member from the customer. 11 11 Because certain order handling rules may apply differently to block orders of 10,000 shares or greater, Amendment No. 1 defined the time of receipt differently depending on the size of the order. For example, members may attach terms and conditions to certain block orders of 10,000 shares or greater for purposes of the NASD's Limit Order Protection Interpretation, and such orders are excepted from the SEC's limit order display rule unless a customer expressly requests otherwise. Comments on Proposed Definition of Time of Receipt Commenters opposed having two definitions of time of receipt for manual orders. Specifically, commenters opposed the requirement that the time of receipt for a manual order of 10,000 shares or greater be the time the order is received by the member from the customer, rather than the time the order is received at the member's trading desk or trading department for execution or routing purposes. Commenters asserted that eliminating the time a 10,000 share or greater order is received by the trading desk for OATS purposes would impede NASD surveillance capabilities while, conversely, the inclusion of the customer order receipt time for these orders would not improve significantly NASD's ability to oversee and enforce sales practice violations. Further, commenters noted that NASD, where necessary, can obtain from members the customer order receipt time from members, which is required to be maintained under Rule 17a-3(a)(6) of the Act. 12 In addition, commenters indicated that the two differing definitions of receipt time would create unnecessary costs and burdens for members in establishing automated systems to capture OATS data at branch locations, as well as confusion for salespersons in the branches and trading desk personnel of firms, and would lead to inadvertent mistakes and delays in executions. 12 17 CFR 240.17a-3(a)(6). NASD agrees with commenters that having two differing definitions of time of receipt based solely on the size of the order would create burdens for members. However, because NASD believes that it is critical to NASD automated surveillance systems that OATS capture the time that an order is received by the trading desk, and have an electronic record of when orders, especially larger orders, are received at a firm to enable the staff to perform surveillance to detect violations such as frontrunning, NASD staff has determined that OATS should capture both the time the order is received by the member from the customer and the time the order is received by the member's trading desk or trading department, if those times are different. Given that orders may be routed to multiple locations within a firm prior to reaching the trading desk (or even routed outside the firm directly from a desk other than the trading desk), NASD is proposing to capture the various receipt times (customer receipt time, trading desk receipt time, etc.) by expanding the OATS order transmittal requirements that apply to intra-firm routes to include orders routed to the trading department. 13 Specifically, if an order is not received immediately at the trading department, members would be required to capture information relating to the transfer of that order to the trading department under the order transmittal requirements of NASD Rule 6954(c). To the extent that the time of receipt of the order from the customer and receipt of the order by the trading department are the same, no Desk Report would be required, given that the New Order Report would accurately capture the time of receipt at the trading department. 13 NASD Rule 6954(c) currently requires that certain information be recorded when an order is transmitted to a department within a firm, other than the trading department. In furtherance of this provision, the *OATS Reporting Technical Specifications* requires that this information be reported to OATS via a “Desk Report.” When the OATS Rules originally were adopted in 1998, the OATS reporting framework was based on NASD staff's understanding that most electronic orders received by members were transferred to the trading department for execution and that such transfer was instantaneous with receipt of the order. Members had indicated that the “routine” order flow from point of receipt to the trading department would generate a significant number of OATS Desk Reports, and that reporting that information to OATS would be very burdensome and provide little additional information, since the transfer was instantaneous. As a result, Desk Reports only were required in those instances where orders were transmitted to departments other than the trading department ( *e.g.,* block desk, arbitrage desk). Since that time, member order routing and handling systems have changed and a larger percentage of orders are not routed immediately to the trading desk. Therefore, NASD staff believes the exclusion for orders routed to the trading department no longer makes sense and may result in gaps in the audit trail. The proposed rule change would apply equally to both electronic and manual orders. In other words, the time of receipt for purposes of order origination would always be the time the order is received from the customer. The proposed rule change also would require that members provide information on the nature of the department to which an order was transmitted, the number of shares to which the transmission applies, and any special handling requests. As with other technical requirements relating to OATS, NASD will specify in the *OATS Reporting Technical Specifications* how firms should report this information. By proposing this change, NASD will capture the complete lifecycle of an order within a firm, even in those situations where an order is held at the sales trading or other desk within a member firm, and then later routed to the trading desk. Although NASD staff understands that this requirement may impose additional costs on member firms, NASD believes that it is critical to NASD's surveillance systems and regulatory program that OATS capture the full lifecycle of an order within a firm and, in particular, both the time that an order is received from the customer and the time the order is received by the trading desk. In recognition of the technological burdens that may be imposed on members as a result of this proposal, NASD staff proposes to provide an implementation date that is 120 days from Commission approval of the proposed change. Exclusion From the Definition of “Reporting Member” Certain NASD members engage in non-discretionary order routing processes whereby, immediately after receipt of a customer order, the member routes the order, by electronic or other means, to another member (“receiving Reporting Member”) for further routing or execution at the receiving Reporting Member's discretion. Currently, the OATS rules require both the member with which the order originated and the receiving Reporting Member to create and report new order reports and possibly route reports. This results in the receipt of duplicative information by OATS. Therefore, NASD proposed in the original filing that the OATS rules be amended to require, in such instances, that only the receiving Reporting Member report OATS data. Under the proposed rule change, a member would not be required to report OATS data regarding an order, if the following conditions are met:
(1)The member engages in a non-discretionary order routing process, pursuant to which it immediately routes, by electronic or other means, all of its orders to a single receiving Reporting Member; 14 14 If any delay results in the routing of an order due to systems problems or other reasons, the member with which the order originated would be required to report OATS data.
(2)The member does not direct or maintain control over subsequent routing or execution by the receiving Reporting Member;
(3)The receiving Reporting Member records and reports all information required under NASD Rules 6954 and 6955 with respect to the order; and
(4)The member has a written agreement with the receiving Reporting Member specifying the respective functions and responsibilities of each party to effect full compliance with the requirements of NASD Rules 6954 and 6955. In addition to eliminating the reporting of duplicative information to OATS, the NASD believes that proposed rule change will reduce the regulatory burdens on members, particularly smaller members, that route all their orders to another receiving Reporting Member by means of a non-discretionary order routing process, for execution or further routing purposes. 15 15 This exclusion would not change a member's requirement to capture and retain the time an order was received from a customer under SEC Rule 17a-3(a)(6). Comments on the Exclusion From the Definition of “Reporting Member” Commenters suggested that the exclusion from the definition of “Reporting Member” for members that use a non-discretionary order routing process as described in the proposed rule change be expanded to allow for an additional exclusion for members that regularly route all of a particular type of order or class of securities to a single receiving Reporting Member pursuant to a contractual arrangement. For example, if a firm regularly routes to a receiving Reporting Member all transactions in margin accounts and the receiving Reporting Member otherwise has total execution discretion and meets the other requirements set forth in the proposed rule change, the firm should be excluded from reporting these orders under the OATS rules. A commenter noted that such an exclusion could be limited to no more that two or three such relationships. One commenter also suggested an order-by-order exclusion. NASD amended its original filing and proposed in Amendment No. 1 that the time of receipt for manual orders of less than 10,000 shares be the time the order is received by the member's trading desk or trading department for execution or routing purposes. For manual orders that are 10,000 shares or greater, the time of receipt would continue to be the time the order is received by the member from the customer. 11 11 Because certain order handling rules may apply differently to block orders of 10,000 shares or greater, Amendment No. 1 defined the time of receipt differently depending on the size of the order. For example, members may attach terms and conditions to certain block orders of 10,000 shares or greater for purposes of the NASD's Limit Order Protection Interpretation, and such orders are excepted from the SEC's limit order display rule unless a customer expressly requests otherwise. Comments on Proposed Definition of Time of Receipt Commenters opposed having two definitions of time of receipt for manual orders. Specifically, commenters opposed the requirement that the time of receipt for a manual order of 10,000 shares or greater be the time the order is received by the member from the customer, rather than the time the order is received at the member's trading desk or trading department for execution or routing purposes. Commenters asserted that eliminating the time a 10,000 share or greater order is received by the trading desk for OATS purposes would impede NASD surveillance capabilities while, conversely, the inclusion of the customer order receipt time for these orders would not improve significantly NASD's ability to oversee and enforce sales practice violations. Further, commenters noted that NASD, where necessary, can obtain from members the customer order receipt time from members, which is required to be maintained under Rule 17a-3(a)(6) of the Act. 12 In addition, commenters indicated that the two differing definitions of receipt time would create unnecessary costs and burdens for members in establishing automated systems to capture OATS data at branch locations, as well as confusion for salespersons in the branches and trading desk personnel of firms, and would lead to inadvertent mistakes and delays in executions. 12 17 CFR 240.17a-3(a)(6). NASD agrees with commenters that having two differing definitions of time of receipt based solely on the size of the order would create burdens for members. However, because NASD believes that it is critical to NASD automated surveillance systems that OATS capture the time that an order is received by the trading desk, and have an electronic record of when orders, especially larger orders, are received at a firm to enable the staff to perform surveillance to detect violations such as frontrunning, NASD staff has determined that OATS should capture both the time the order is received by the member from the customer and the time the order is received by the member's trading desk or trading department, if those times are different. Given that orders may be routed to multiple locations within a firm prior to reaching the trading desk (or even routed outside the firm directly from a desk other than the trading desk), NASD is proposing to capture the various receipt times (customer receipt time, trading desk receipt time, etc.) by expanding the OATS order transmittal requirements that apply to intra-firm routes to include orders routed to the trading department. 13 Specifically, if an order is not received immediately at the trading department, members would be required to capture information relating to the transfer of that order to the trading department under the order transmittal requirements of NASD Rule 6954(c). To the extent that the time of receipt of the order from the customer and receipt of the order by the trading department are the same, no Desk Report would be required, given that the New Order Report would accurately capture the time of receipt at the trading department. 13 NASD Rule 6954(c) currently requires that certain information be recorded when an order is transmitted to a department within a firm, other than the trading department. In furtherance of this provision, the *OATS Reporting Technical Specifications* requires that this information be reported to OATS via a “Desk Report.” When the OATS Rules originally were adopted in 1998, the OATS reporting framework was based on NASD staff's understanding that most electronic orders received by members were transferred to the trading department for execution and that such transfer was instantaneous with receipt of the order. Members had indicated that the “routine” order flow from point of receipt to the trading department would generate a significant number of OATS Desk Reports, and that reporting that information to OATS would be very burdensome and provide little additional information, since the transfer was instantaneous. As a result, Desk Reports only were required in those instances where orders were transmitted to departments other than the trading department ( *e.g.,* block desk, arbitrage desk). Since that time, member order routing and handling systems have changed and a larger percentage of orders are not routed immediately to the trading desk. Therefore, NASD staff believes the exclusion for orders routed to the trading department no longer makes sense and may result in gaps in the audit trail. The proposed rule change would apply equally to both electronic and manual orders. In other words, the time of receipt for purposes of order origination would always be the time the order is received from the customer. The proposed rule change also would require that members provide information on the nature of the department to which an order was transmitted, the number of shares to which the transmission applies, and any special handling requests. As with other technical requirements relating to OATS, NASD will specify in the *OATS Reporting Technical Specifications* how firms should report this information. By proposing this change, NASD will capture the complete lifecycle of an order within a firm, even in those situations where an order is held at the sales trading or other desk within a member firm, and then later routed to the trading desk. Although NASD staff understands that this requirement may impose additional costs on member firms, NASD believes that it is critical to NASD's surveillance systems and regulatory program that OATS capture the full lifecycle of an order within a firm and, in particular, both the time that an order is received from the customer and the time the order is received by the trading desk. In recognition of the technological burdens that may be imposed on members as a result of this proposal, NASD staff proposes to provide an implementation date that is 120 days from Commission approval of the proposed change. Exclusion From the Definition of “Reporting Member” Certain NASD members engage in non-discretionary order routing processes whereby, immediately after receipt of a customer order, the member routes the order, by electronic or other means, to another member (“receiving Reporting Member”) for further routing or execution at the receiving Reporting Member's discretion. Currently, the OATS rules require both the member with which the order originated and the receiving Reporting Member to create and report new order reports and possibly route reports. This results in the receipt of duplicative information by OATS. Therefore, NASD proposed in the original filing that the OATS rules be amended to require, in such instances, that only the receiving Reporting Member report OATS data. Under the proposed rule change, a member would not be required to report OATS data regarding an order, if the following conditions are met:
(1)The member engages in a non-discretionary order routing process, pursuant to which it immediately routes, by electronic or other means, all of its orders to a single receiving Reporting Member; 14 14 If any delay results in the routing of an order due to systems problems or other reasons, the member with which the order originated would be required to report OATS data.
(2)The member does not direct or maintain control over subsequent routing or execution by the receiving Reporting Member;
(3)The receiving Reporting Member records and reports all information required under NASD Rules 6954 and 6955 with respect to the order; and
(4)The member has a written agreement with the receiving Reporting Member specifying the respective functions and responsibilities of each party to effect full compliance with the requirements of NASD Rules 6954 and 6955. In addition to eliminating the reporting of duplicative information to OATS, the NASD believes that proposed rule change will reduce the regulatory burdens on members, particularly smaller members, that route all their orders to another receiving Reporting Member by means of a non-discretionary order routing process, for execution or further routing purposes. 15 15 This exclusion would not change a member's requirement to capture and retain the time an order was received from a customer under SEC Rule 17a-3(a)(6). Comments on the Exclusion From the Definition of “Reporting Member” Commenters suggested that the exclusion from the definition of “Reporting Member” for members that use a non-discretionary order routing process as described in the proposed rule change be expanded to allow for an additional exclusion for members that regularly route all of a particular type of order or class of securities to a single receiving Reporting Member pursuant to a contractual arrangement. For example, if a firm regularly routes to a receiving Reporting Member all transactions in margin accounts and the receiving Reporting Member otherwise has total execution discretion and meets the other requirements set forth in the proposed rule change, the firm should be excluded from reporting these orders under the OATS rules. A commenter noted that such an exclusion could be limited to no more that two or three such relationships. One commenter also suggested an order-by-order exclusion. Other commenters stated that it is inequitable to provide an exclusion to correspondent firms that send all their order flow to their clearing firm, but not other kinds of order entry firms. The commenters generally argued that this proposed exclusion is unfair to other firms with different business models and is likely to hasten the decision by some firms to entrust all of their order flow with one executing party. As discussed above, the proposed exclusion from the definition of Reporting Member is directed at those members that use a non-discretionary order routing process whereby, immediately after receipt of its customer orders, the member routes all its orders, by electronic or other means, to a single receiving Reporting Member for further routing or execution at the receiving Reporting Member's discretion. This proposed exclusion is not limited to correspondent/clearing relationships, but applies to any relationship that meets the proposed conditions. The goal of the proposed rule is to eliminate the reporting of duplicative information to OATS where *all* of the OATS data of one member would be captured by the receiving Reporting Member. If the proposed rule were to permit deviations from this as commenters suggest, the exclusion would, in effect, permit an exclusion for almost any category of orders that are routed to another firm. Without the condition that all orders be routed to one firm, NASD will not have the ability to easily identify which receiving Reporting Member is providing the OATS order information that corresponds to the orders initially received by the member. Therefore, NASD does not believe any further changes to this proposed rule as described by commenters are appropriate. However, NASD is proposing an amendment to the rule text to clarify that, to qualify for the proposed exclusion to the definition of “Reporting Member,” the member must route all of its orders to a *single* receiving Reporting Member. Recording and Reporting a Routed Order Identifier OATS has the capability of tracking the history of an order by linking such orders across firms through the use of a routed order identifier. If the order does not contain a routed order identifier, the order cannot be linked systematically to subsequent actions, such as further routing or execution by other firms or Nasdaq systems. In this regard, the complete history of a significant percentage of orders may not be tracked because the OATS rules do not require a receiving Reporting Member to capture and report a routed order identifier if the order is routed to it manually. Comments on Recording and Reporting a Routed Order Identifier Several commenters opposed the proposed requirement that members be required to capture and report a transmitting member's unique identifier for all manually routed orders. Commenters stated that members should not be responsible for capturing accurately on a manual basis the routed order identifier from other firms. Errors will be frequent and carried on to the next firm to which the order is routed. Further, commenters indicated that this would impose a significant increase in numeric data that must be captured for a limited amount of heightened surveillance ability. Commenters further noted that the proposed requirement would lead to delays in order communication and executions and ultimately harm public investors. Because orders that are transmitted manually may not be entered into a firm's system and no systematic order identifier generated, commenters indicated that the proposed requirement would pose serious operational and logistical problems. Commenters also argued that NASD could effectively link or match together routed orders with new orders of the firm they are routed to, without the routed order identifier information. As discussed above, the use of a routed order identifier reported through OATS permits NASD to track the history of orders routed between firms on an automated basis. If the order does not contain a routed order identifier, the order cannot be linked systematically on an automated basis to subsequent actions, such as further routing or execution by other firms. In the case of manually routed orders, however, NASD does not believe that the benefits provided by such an identifier clearly outweigh the related costs to members. NASD notes in particular the commenters' concerns that requiring routed order identifiers for manually routed orders creates potential delays in the handling and execution of customer orders and creates the likelihood of high levels of data errors. Further, while NASD will not be able to track the history of manual orders between firms on an automated basis without a routed order identifier, the staff can create, on an order by order basis, a process that links manual orders to subsequent events with an acceptable level of accuracy. Therefore, the staff has concluded that the costs imposed by this proposed requirement relating to manually routed orders as described by commenters are not outweighed by the incremental benefits to NASD regulatory data and surveillance systems. Exemptive Relief Finally, NASD proposed in Amendment No. 1 new paragraph
(d)of NASD Rule 6955 and an amendment to NASD Rule 9610(a) to permit NASD to grant exemptive relief to certain members from the reporting requirements of the OATS rules under the procedures set forth in the NASD Rule 9600 series. Specifically, members that meet the following criteria would be eligible to request an exemption to the OATS reporting requirements for manual orders:
(1)The member and current control affiliates and associated persons of the member have not been subject within the last five years to any disciplinary action, and within the last ten years to any disciplinary action involving fraud;
(2)The member has annual revenues of less than $2 million;
(3)The member does not conduct any market making activities in Nasdaq Stock Market equity securities;
(4)The member does not execute principal transactions with its customers (with limited exceptions for error corrections); and
(5)The member does not conduct clearing or carrying activities for other firms. Under the proposed rule change, any exemptive relief granted would expire no later than two years from the date the member receives the exemptive relief. At or prior to the expiration of a grant of exemptive relief, members meeting the specified criteria may request a subsequent exemption. In addition, under the proposed rule change, NASD's exemptive authority shall be in effect for five years from the effective date of the proposed rule change. The proposed exemptive authority would provide NASD the ability to grant relief to members meeting the specified criteria in situations where, for example, reporting of such information would be unduly burdensome for the member or where temporary relief from the rules (in the form of additional time to achieve compliance) would permit the member to avoid unnecessary expense or hardship. Comments on Exemptive Relief Commenters generally supported the proposed rule change that would provide NASD with the authority to exempt certain members from OATS reporting for manual orders, but opposed many of the conditions placed on members in order for them to request exemptive relief. For example, several commenters suggested changes to the proposed condition that requires that members requesting exemptive relief not have been subject within the last five years to any disciplinary action, and within the last ten years to any disciplinary action involving fraud. Commenters indicated that the five and ten year disciplinary action test should commence from the date the disciplinary action is initiated, rather than when the disciplinary action is finalized. Commenters indicated that the date of initiation of the disciplinary action is the date most closely linked to the conduct that is triggering the sanction and that members should not be discouraged from seeking a hearing or other recourse due to the proposed condition on obtaining exemptive relief for OATS purposes. One commenter suggested a *de minimis* exception for single disciplinary action incurring a fine of not more than $10,000, while another commenter suggested that NASD be provided discretion to consider a firm's overall disciplinary history in determining whether to grant an exemption. One commenter suggested that exemptive relief be available for market makers that conduct principal trades. Another commenter recommended eliminating the condition restricting firms that clear for others from obtaining exemptive relief where the introducing firm is not a reporting member under NASD Rule 6951 (except the exclusion that another member report its trades) and/or the introducing firm obtains an exemption under NASD Rule 6955. One commenter noted that the five-year “sunset” provision on NASD's ability to grant exemptions should be extended indefinitely, noting that there currently is no reason to believe the rationale for providing NASD exemptive authority will be any different in five years. Moreover, the procedural impediments necessary for NASD to request that its exemptive authority be extended would be very burdensome. Another commenter stated that exemptive relief should be provided from all OATS reporting requirements for any NASD member that:
(1)Carries no accounts for customers;
(2)provides execution services in Nasdaq equity securities only to other dealers who are acting as market makers or proprietary traders and not on behalf of a customer; and
(3)does not itself (other than in an error account) engage in market making or proprietary trading. NASD is not proposing any changes to this exemptive provision at this time. However, if the rule change is approved, NASD staff intends to review and analyze closely the application of such conditions to exemptive authority and determine whether it would be appropriate to seek changes to these conditions, including the types of changes suggested by commenters. Clarifying Change to Rule Language NASD also is amending proposed NASD Rule 6955(d)(1)(A) to clarify that this condition on members that may request exemptive relief under the proposed rule only applies to *final* disciplinary actions within the last five years and does not include minor rule violations pursuant to Rule 19d-1(c)(2) of the Act. 16 16 17 CFR 240.19d-1(c)(2). The effective date of the proposed rule change will be 120 days following Commission approval. NASD will announce the effective date of the proposed rule change in a *Notice to Members* to be published no later than 60 days following Commission approval. 2. Statutory Basis NASD believes that the proposed rule change is consistent with the provisions of Section 15A(b)(6) of the Act, 17 which requires, among other things, that NASD rules must 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 that the proposed rule change will enhance NASD's ability to conduct surveillance and investigations of member firms for violations of NASD's and other applicable rules. 17 15 U.S.C. 78o3(b)(6). 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, as amended. C. Self-Regulatory Organization's Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others Written comments on the proposed rule change were solicited by the Commission in response to SR-NASD- 00-23, which proposed several changes relating to OATS requirements. The Commission received 13 comment letters from 12 commenters in response to the **Federal Register** publication of SR-NASD-00-23. The comments are summarized above. 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-NASD-00-23 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-NASD-00-23. 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, 100 F Street, NE, Washington, DC 20549. Copies of such filing also will be available for inspection and copying at the principal office of 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 the File Number SR-NASD-00-23 and should be submitted on or before July 18, 2005. For the Commission, by the Division of Market Regulation, pursuant to delegated authority. 18 18 17 CFR 200.30-3(a)(12). Jill M. Peterson, Assistant Secretary. [FR Doc. E5-3329 Filed 6-24-05; 8:45 am] BILLING CODE 8010-01-P SECURITIES AND EXCHANGE COMMISSION [Release No. 34-51882; File No. SR-NSCC-2005-06] Self-Regulatory Organizations; National Securities Clearing Corporation; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Expand the Number of Extended Settlement Days for Fixed Income Securities June 20, 2005. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”), 1 notice is hereby given that on June 8, 2005, National Securities Clearing Corporation (“NSCC”) filed with the Securities and Exchange Commission (“Commission”) the proposed rule change described in Items I, II, and III below, which items have been prepared primarily by NSCC. The Commission is publishing this notice to solicit comments on the rule change from interested parties. 1 15 U.S.C. 78s(b)(1). I. Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change The rule change expands NSCC's number of extended settlement days for fixed income securities. II. Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, NSCC 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. NSCC has prepared summaries, set forth in sections (A), (B), and
(C)below, of the most significant aspects of these statements. 2 2 The Commission has modified the text of the summaries prepared by NSCC.
(A)Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change Under NSCC's current debt securities processing procedures, members can designate a maximum of 18 days for a fixed income transaction to settle. However, debt securities are now processed at NSCC by a real-time trade matching (“RTTM”) mechanism, which operationally has the capability to provide a settlement option of up to 50 days. NSCC is proposing to amend its Rules and Procedures to provide for this increased functionality. The change will be implemented no sooner than two weeks after the date of this filing, and NSCC will announce the effective date to its members by an Important Notice. NSCC believes the proposed rule change is consistent with the requirements of Section 17A of the Act 3 and the rules and regulations thereunder applicable to NSCC because it modifies NSCC's procedures to allow the implementation of a mechanism that enhances the settlement of fixed income transactions. As such, NSCC believes it is a change to an existing service that will not affect the safeguarding of securities and funds in NSCC's custody or control. 3 15 U.S.C. 78q-1.
(B)Self-Regulatory Organization's Statement on Burden on Competition NSCC does not believe that the proposed rule change will have an impact or impose any burden on competition.
(C)Self-Regulatory Organization's Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others Written comments relating to the proposed rule change have not been solicited or received. III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action The foregoing proposed rule change has become effective upon filing pursuant to Section 19(b)(3)(A) of the Act 4 and Rule 19b-4(f) 5 thereunder because it does not significantly affect the respective rights or obligations of the clearing agency or persons using the service and does not adversely affect the safeguarding of securities or funds in the custody or control of NSCC or for which it is responsible. At any time within sixty days of the filing of the 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. 4 15 U.S.C. 78s(b)(3)(A). 5 17 CFR 240.19b-4(f). 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-NSCC-2005-06 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-NSCC-2005-06. 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 Section, 100 F Street, NE, Washington, DC 20549. Copies of such filings also will be available for inspection and copying at the principal office of NSCC and on NSCC's Web site at *http://www.nscc.com* . 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-NSCC-2005-06 and should be submitted on or before July 18, 2005. For the Commission by the Division of Market Regulation, pursuant to delegated authority. 6 6 17 CFR 200.30-3(a)(12). Jill M. Peterson, Assistant Secretary. [FR Doc. E5-3328 Filed 6-24-05; 8:45 am] BILLING CODE 8010-01-P SECURITIES AND EXCHANGE COMMISSION [Release No. 34-51861 No. SR-OCC-2005-07] Self-Regulatory Organizations; The Options Clearing Corporation; Notice of Filing and Immediate Effectiveness of Proposed Rule Change and Amendment No. 1 to Update Its By-Laws and Rules Pertaining to the Settlement of Exercised Cross-Rate Foreign Currency Options June 16, 2005. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”), 1 notice is hereby given that on May 13, 2005, The Options Clearing Corporation (“OCC”) filed with the Securities and Exchange Commission (“Commission”) and on June 14, 2005, amended 2 the proposed rule change described in Items I, II, and III below, which items have been prepared primarily by OCC. The Commission is publishing this notice to solicit comments on the rule change from interested parties. 1 15 U.S.C. 78s(b)(1). 2 The amendment corrected an erroneous cross-reference in the proposed rule. I. Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change The rule change updates OCC's By-Laws and Rules pertaining to the settlement of exercised cross-rate foreign currency options (“Cross-Rate Options”) in connection with the recent installation of that portion of OCC's ENCORE clearing system that processes those settlements. II. Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, OCC 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. OCC has prepared summaries, set forth in sections (A), (B), and
(C)below, of the most significant aspects of these statements. 3 3 The Commission has modified the text of the summaries prepared by OCC.
(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 update OCC's By-Laws and Rules pertaining to the settlement of Cross-Rate Options in connection with the recent installation of OCC's ENCORE clearing system that processes those settlements. The installation, which occurred in April, 2005, converted existing Cross-Rate Options processing to the ENCORE technology with only a few variations. OCC also wishes to update its Rules by eliminating detail that is more appropriately included in operational procedures than in OCC's rulebook and by making a few other changes described below to reflect OCC's experience and certain developments since the Cross-Rate Options rules initially were adopted. As proposed to be amended, these provisions of the By-Laws and Rules apply equally to processing under both ENCORE and its predecessor system. Overview of the Exercise Settlement Process for Cross-Rate Options As set forth in revised Rules 2105 and 2106, following the assignment of exercise notices with respect to Cross-Rate Options, the gross settlement obligations for each currency arising from obligations to pay and rights to receive trading currencies and underlying currencies are calculated for all accounts with a particular clearing number. Those gross amounts are netted down to a single pay or collect amount for each currency for all such accounts. In the event that two or more settlements in a currency arising from different exercise/assignment dates settle on the same date, those settlements are also netted. If such processing nets out all settlement obligations for a currency then such obligations are deemed discharged. Settlement obligations arising from multiple clearing numbers controlled by the same clearing member are not netted against each other. To the extent a settlement obligation remains, OCC makes available to each clearing member that is obligated to pay a currency (“Paying Clearing Member”) and each clearing member that is entitled to receive a currency payment (“Collecting Clearing Member”) a report showing the net amount of the currency they are obligated to pay or entitled to receive. On the exercise settlement date, OCC drafts the bank account of each Paying Clearing Member in the amount of the foreign currency there are obligated to pay (“Payment Amount”) and then pays the Payment Amount to each Collecting Clearing Member in such amounts as they are entitled to receive. Description of the Specific Rule Changes The principal changes are to Rules 2105 through 2107. Rules 2105 and 2106 have been substantially redrafted to provide for the settlement process described above. Rule 2107, which described an alternate settlement procedure known as Delivery versus Payment (“DVP”), is removed because there are no systems or banking mechanisms to support DVP settlements for Cross-Rate Options. Rule 2104(b) is being amended to grant the Chairman, Management Vice Chairman, President, and any delegate of such officers the authority to advance or postpone the settlement date for exercises of Cross-Rate Options. This change is being implemented because it may be impractical to convene a Board meeting in time to take action on the day that unusual conditions arise and because OCC needs the flexibility to respond quickly to events affecting the exercise settlement date for Cross-Rate Options. 4 4 Similar changes were recently implemented to Rule 903(b) (“Obligations to Deliver”) and Rule 1604(b) (“Exercise Settlement Date for Foreign Currency Options”). Securities Exchange Act Release Nos. 34-47629 (Apr. 3, 2003), 68 FR 17715 (Apr. 10, 2003) [File No. SR-OCC-2002-21] and 34-49987 (July 8, 2004), 69 FR 42490 (July 15, 2004) [File No. SR-OCC-2004-07]. Certain non-substantive changes are made to Rules 602(f)(2), 2102, 2108-10, and 2112 and to Article XX, Section 1 of the By-laws to correct cross-references and to conform to terminology used elsewhere in the revised rules. OCC believes the rule change is consistent with Section 17A of the Act, 5 as amended, because the changes are designed to promote the prompt and accurate clearance and settlement of transactions in and exercises of cross-rate foreign currency options and to assure safeguarding of securities and funds in the custody and control of OCC. 5 15 U.S.C. 78q-1.
(B)Self-Regulatory Organization's Statement on Burden on Competition OCC does not believe that the proposed rule change would impose any burden on competition.
(C)Self-Regulatory Organization's Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others Written comments were not and are not intended to be solicited with respect to the proposed rule change and none have been received. III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action The foregoing proposed rule change has become effective upon filing pursuant to Section 19(b)(3)(A) of the Act 6 and Rule 19b-4(f)(4) 7 thereunder because it does not adversely affect the safeguarding of securities or funds in the custody or control of OCC or for which it is responsible and does not significantly affect the respective rights or obligations of the clearing agency or persons using the service. At any time within sixty days of the filing of the 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. 6 15 U.S.C. 78s(b)(3)(A). 7 17 CFR 240.19b-4(f)(4). 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-OCC-2005-07 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-OCC-2005-07. 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 Section, 100 F Street, NE, Washington, DC 20549. Copies of such filings also will be available for inspection and copying at the principal office of OCC and on OCC's Web site at *http://www.optionsclearing.com* . 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-OCC-2005-07 and should be submitted on or before July 18, 2005. For the Commission by the Division of Market Regulation, pursuant to delegated authority. 8 8 17 CFR 200.30-3(a)(12). Jill M. Peterson, Assistant Secretary. [FR Doc. E5-3330 Filed 6-24-05; 8:45 am] BILLING CODE 8010-01-P SECURITIES AND EXCHANGE COMMISSION [Release No. 34-51885; File No. SR-PCX-2005--71] Self-Regulatory Organizations; Pacific Exchange, Inc.; Notice of Filing of a Proposed Rule Change and Amendment No. 1 Relating to Complex Orders on the PCX Plus System June 20, 2005. 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 June 7, 2005, the Pacific Exchange, Inc. (“PCX” 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 PCX. On June 14, 2005, the PCX submitted Amendment No. 1 to the proposed rule change. 3 The Commission is publishing this notice to solicit comments on the proposed rule change, as amended, from interested persons. 1 15 U.S.C. 78s(b)(1). 2 17 CFR 240.19b-4. 3 In Amendment No. 1, the PCX revised Exhibit 5 to the proposal to add underscoring that was inadvertently deleted from the text of proposed PCX Rule 6.91(b). I. Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change The PCX proposes to adopt PCX Rule 6.91, “Complex Orders on the PCX Plus System,” in order to create a mechanism to electronically enter and execute complex orders on the PCX Plus system. The text of the proposed rule change is set forth below. Proposed new language is in *italics;* proposed deletions are in [brackets]. Complex Orders on the PCX Plus System RULE 6.91 [Reserved] *(a) Definition: A complex order is any order for the same account as defined below:* *(1) Spread Order: A spread order is as defined in Rule 6.62(d)* *(2) Straddle Order: A straddle order is as defined in Rule 6.62(g).* *(3) Strangle Order: A strangle order is an order to buy
(sell)a number of call option contracts and the same number of put option contracts in the same underlying security, which contracts have the same expiration date (e.g., an order to buy two XYZ June 35 calls and to buy two XYZ June 40 puts).* *(4) Combination Order: A combination order is as defined in Rule 6.62(h).* *(5) Ratio Order: A ratio order is as defined in Rule 6.62(k)* *(6) Butterfly Spread Order: A butterfly spread order is an order involving three series of either put or call options all having the same underlying security and time of expiration and, based on the same current underlying value, where the interval between the exercise price of each series is equal, which orders are structured as either
(i)a “long butterfly spread” in which two short options in the same series offset by one long option with a higher exercise price and one long option with a lower exercise price or
(ii)a “short” butterfly spread” in which two long options in the same series are offset by one short option with a higher exercise price and one short option with a lower exercise price.* *(7) Box/Roll Spread Order: Box spread means an aggregation of positions in a long call option and short put option with the same exercise price (“buy side”) coupled with a long put option and short call option with the same exercise price (“sell side”) all of which have the same aggregate current underlying value, and are structured as either: A) a “long box spread” in which the sell side exercise price exceeds the buy side exercise price or B) a “short box spread” in which the buy side exercise price exceeds the sell side exercise price.* *(8) Collar Orders and Risk Reversals: A collar order (risk reversal) is an order involving the sale (purchase) of a call
(put)option coupled with the purchase
(sale)of a put
(call)option in equivalent units of the same underlying security having a lower (higher) exercise price than, and same expiration date as, the sold (purchased) call
(put)option.* *(9) Conversions and Reversals: A conversion (reversal) order is an order involving the purchase
(sale)of a put option and the sale (purchase) of a call option in equivalent units with the same strike price and expiration in the same underlying security, and the purchase
(sale)of the related instrument.* *(b) Types of Complex Orders: Complex orders may be entered as fill-or-kill, immediate or cancel, day orders and good-til-cancelled. Complex orders may be entered as “all or none orders”.* *(c) Complex Trading Engine* *(1) Routing of Complex Orders: Complex orders on PCX Plus will route either to the Electronic Order Capture system (“EOC”) or the Complex Trading Engine (“CTE”). Order types eligible for routing to the CTE will be determined by the Exchange. All pronouncements regarding routing procedures will be announced to OTP Holders and OTP Firms via Regulatory Bulletin. Both public customers and registered broker-dealer orders are eligible to be routed to the CTE.* *(2) Priority of Complex Orders in the CTE: Orders from public customers have priority over orders from non-public customers. Multiple public customer complex orders at the same price are accorded priority based on time.* *(3) Execution of Complex Orders in the CTE: Complex orders resting in the CTE may be executed without consideration to prices of the same complex order that might be available on other exchanges. Complex orders resting in the CTE may trade in the following way:* *(i) Orders in the Consolidated Book: A complex order in the CTE will automatically execute against individual orders or quotes residing in the Consolidated Book provided the complex order can be executed in full (or in a permissible ratio) by the orders in the Consolidated Book.* *(ii) Orders in CTE: Complex orders in the CTE that are marketable against each other will automatically execute.* *(iii) OTP Holders or OTP Firms will have the ability to view orders in the CTE via an electronic interface and may submit orders to trade against orders in the CTE. The allocation of complex trades among OTP Holders and OTP Firms shall be done pursuant to PCX Rule 6.76.* *(4) Only those complex orders with no more than four legs are eligible for placement into the CTE. Only those orders having a ratio of one-to-three or lower are eligible for placement in the CTE.* *Commentary:* *.01 Conversions and reversals are not eligible for routing to the Complex Trading Engine. Changes to this policy will be submitted to the Securities and Exchange Commission via a rule filing pursuant to section 19(b)(3)(A) of the Exchange Act.* II. Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, the PCX 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 Exchange 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 Complex orders involve multiple option transactions that are executed simultaneously as part of the same strategy. The PCX currently routes incoming complex orders to the Electronic Order Capture System (“EOC”), which is a function of the Floor Broker Hand Held System. Orders on the trading floor are announced by a Floor Broker to the trading crowd and the order trades in open outcry. As an enhancement to the PCX Plus system, the Exchange intends to develop a Complex Trading Engine (“CTE”), which will facilitate more automated handling of complex orders. Additionally, the Exchange proposes to adopt a separate complex order rule applicable solely to the PCX Plus system. 1. *Definitional.* Proposed paragraph
(a)of PCX Rule 6.91 is a definitional section. The first four order types in that section (spread order, straddle order, strangle order, and combination order) are defined in other PCX rules (most notably PCX Rule 6.62, “Certain Types of Orders Defined”) but for ease of reference, the Exchange includes them in this new rule. The next four order type definitions (ratio order, butterfly spread order, box/roll spread order, and collar orders and risk reversals) are new but are substantially identical to those contained in both the International Securities Exchange and the Chicago Board of Options Exchange rules. The last order type definitions are for conversions and reversals, which are a type of stock-option order, as explained in PCX Rule 6.8, “Position Limits.” Conversions and reversals will not be eligible for trading in the CTE but they are an existing type of complex order under the rules of the PCX. These definitions are included here merely for ease of reference. Changes to this policy will be made via rule filing to the Commission pursuant to Section 19(b)(3)(A) of the Act. 2. *Complex Trading Engine.* A. Routing Complex Orders: Proposed paragraph
(c)governs the CTE. Proposed paragraph
(1)governs routing and provides that the Exchange will determine which order types that are entered into the PCX Plus system are eligible to route to the CTE. Paragraph
(1)also deals with routing of customer and broker-dealer orders. Anytime the Exchange changes or amends complex order routing procedures, it will announce such changes via Regulatory Bulletin. This will provide that all OTP Holders and OTP Firms will have access to all current information regarding the routing of complex orders. OTP Holders and OTP Firms will still have the ability to enter orders, via telephone, directly to an OTP Broker for manual representation utilizing the EOC system. As with the trading of complex orders today, Market Makers or other OTP Brokers will have the ability to trade the order at the limit price or offer price improvement for that order. Alternatively, trading crowd members may choose not to trade the order, in which case it will reside on EOC, or at the discretion of the Floor Broker, be entered into the CTE. Any complex orders represented by an OTP Broker will be subject to all provisions regarding due diligence and order handling of PCX Rule 6.46(a). Proposed paragraph (c)(3) governs execution of orders in the CTE and is described below. As stated in the introductory paragraph of this rule filing, complex orders currently route to, and continue to reside on, EOC until they are traded in open outcry. Accordingly, manual intervention is necessary before complex orders will execute. The proposal enhances the treatment of complex orders by making them eligible for placement into an electronic format ( *i.e.,* into the CTE). Once these orders rest in the CTE, they may trade electronically (as described below), which means that they may trade more quickly than they otherwise may have in an open outcry environment. Moreover, complex orders residing on EOC are not displayed. When orders are routed into the CTE, OTP Holders and OTP Firms will use an electronic interface to the PCX to view complex orders resting in the CTE, which will enhance transparency. For these reasons, the Exchange believes that routing orders to the CTE will enhance the treatment these orders currently receive and allow the Exchange to compete more effectively for this type of order flow. Proposed paragraph (c)(4) provides that only those complex orders with no more than four legs are eligible for placement into the CTE. B. Trading Complex Orders: When an order is routed directly into the CTE, the order may trade in one of three ways. First, if individual orders or quotes in the Exchange's consolidated book “line-up” against the legs of the complex order, an automatic execution occurs, provided the complex order can be executed in full (or in a permissible ratio) by the orders in the consolidated book. Second, if a subsequent incoming complex order is marketable against a resting complex order in the CTE, it will automatically execute against the resting complex order in the CTE. Third, OTP Holders and OTP Firms will have the ability to view orders in the CTE and submit orders to trade against those orders. Under this option, the complex order in the CTE would be allocated to market participants pursuant to PCX Rule 6.76(b). It is also noted here that PCX Rule 6.76(c) that deals with crossing orders on PCX Plus will also apply to orders in the CTE. Proposed paragraph (c)(3) provides that complex orders resting in the CTE may be executed without consideration to prices of the same complex orders that might be available on other exchanges. C. Priority and Complex Orders: This rule filing does not negatively affect the existing priority rules. In this regard, proposed paragraph (c)(2) explicitly provides that orders from public customers have priority over orders from non-public customers. For example, presently if members of the trading crowd wish to trade a complex order resting on EOC that is marketable against individual public customer orders in the consolidated book, public customers would have priority. These same practices will apply in the CTE. Multiple public customer complex orders at the same price are accorded priority based on time. The current complex order priority exceptions contained in PCX Rule 6.75, Commentary .04, will continue to be applicable. The complex order priority exception generally states that a member holding a qualifying complex order may trade ahead of a customer order in the consolidated book on one leg of the order provided the other leg of the order betters the corresponding bid (offer) in the consolidated order book. For example, assume a complex order rests in the CTE (priced at a net debit or credit). If this resting complex order were marketable against both legs in the consolidated book, the resting complex order would have already traded automatically. This makes it impossible for a marketable incoming complex order to trade ahead of resting orders in the consolidated book that are marketable against all legs of the resting complex order. Accordingly, when a marketable incoming complex order trades against a resting complex order, it is only because the resting complex order is at a better price than the orders in the consolidated book. Adoption of a complex order rule provides a framework for the trading of complex orders on the PCX Plus system. This, in turn, should provide investors with greater certainty in the routing of their complex orders. The Exchange believes that the development of a complex order trading engine will provide deeper and more liquid markets for complex orders and will provide order entry firms with a trading platform the Exchange believes is more conducive to satisfying their best execution and due diligence obligations with respect to these types of orders. 2. Statutory Basis For the above reasons, the Exchange believes that the proposed rule change would enhance competition. The Exchange believes that the proposed rule change is consistent with Section 6(b) 4 of the Act, in general, and furthers the objectives of Section 6(b)(5), 5 in particular, in that it is designed to facilitate transactions in securities, to promote just and equitable principles of trade, and to protect investors and the public interest. 4 15 U.S.C. 78f(b). 5 15 U.S.C. 78f(b)(5). 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 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 on the proposed rule change were neither solicited nor received. 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 PCX 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, as amended, 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-PCX-2005-71 on the subject line. Paper Comments • Send paper comments in triplicate to Jonathan G. Katz, Secretary, Securities and Exchange Commission, Station Place, 100 F Street, NE, Washington, DC 20549-9303. All submissions should refer to File Number SR-PCX-2005-71. 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 the filing also will be available for inspection and copying at the principal office of the PCX. 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-PCX-2005-71 and should be submitted on or before July 18, 2005. For the Commission, by the Division of Market Regulation, pursuant to delegated authority. 6 6 17 CFR 200.30-3(a)(12). Jill M. Peterson, Assistant Secretary. [FR Doc. E5-3332 Filed 6-24-05; 8:45 am] BILLING CODE 8010-01-P SMALL BUSINESS ADMINISTRATION Data Collection Available for Public Comments and Recommendations ACTION: Notice and request for comments. SUMMARY: In accordance with the Paperwork Reduction Act of 1995, this notice announces the Small Business Administration's intentions to request approval on a new and/or currently approved information collection. DATES: Submit comments on or before August 26, 2005. ADDRESSES: Send all comments regarding whether this information collection is necessary for the proper performance of the function of the agency, whether the burden estimates are accurate, and if there are ways to minimize the estimated burden and enhance the quality of the collection, to Sandra Johnston, Program Analyst, Office of Financial Assistance, Small Business Administration, 409 3rd Street SW., Suite 8300, Washington, DC 20416. FOR FURTHER INFORMATION CONTACT: Sandra Johnston, Program Analyst, 202-205-7528 *sandra.johnston@sba.gov* Curtis B. Rich, Management Analyst, 202-205-7030 *curtis.rich@sba.sba* . SUPPLEMENTARY INFORMATION: *Title:* “Lender Transcript of Account”. *Description of Respondents:* Lenders requesting SBA to provide the Agency with breakdown of payments. *Form No:* 1149. *Annual Responses:* 5,000. *Annual Burden:* 5,000. Jacqueline White, Chief, Administrative Information Branch. [FR Doc. 05-12670 Filed 6-24-05; 8:45 am]
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U.S. Code
- Transactions of certain affiliated persons and underwriters§ 80a–17
- Registration, responsibilities, and oversight of self-regulatory organizations§ 78s
- National securities exchanges§ 78f
- Public information; agency rules, opinions, orders, records, and proceedings§ 552
- Definitions and application§ 78c
- National system for clearance and settlement of securities transactions§ 78q–1
- Registered securities associations§ 78o–3
- Registration and regulation of brokers and dealers§ 78o
CFR
9 references not yet in our index
- 44 USC 3501-3520
- 15 USC 80a
- 17 CFR 270.17
- 17 CFR 270.19
- 15 USC 78
- 17 CFR 240.12
- 17 CFR 240.19
- Pub. L. 107-204
- 17 CFR 240.17
Citation graph
cites case law
Notices
Notice and request for comments
Cite44 USC 3501-3520
Cite15 USC 80a
Cite17 CFR 270.17
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