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Code · REGISTER · 2006-04-06 · SECURITIES AND EXCHANGE COMMISSION · Notices

Notices. Notice of an application for an order pursuant to Section 26(c) of the Investment Company Act of 1940 (“1940 Act”) approving a substitution of securities

55,616 words·~253 min read·/register/2006/04/06/06-3259

A research copy — for the controlling text, always check the official state or federal source. Not legal advice.

BILLING CODE 7905-01-M SECURITIES AND EXCHANGE COMMISSION [Release No. 34-53581; File No. 81-935] Order Granting an Application of Peoples Financial Corporation Under Section 12(h) of the Securities Exchange Act of 1934 March 31, 2006. Peoples Financial Corporation has filed an application under Section 12(h) of the Securities Exchange Act of 1934, as amended, for certain relief. Peoples states that its principal executive offices are located in Biloxi, Mississippi, which is within one of the Presidentially Declared Disaster Areas where Individual Assistance has been authorized by the Federal Emergency Management Agency as a result of Hurricane Katrina, and that its sixteen branch facilities are also located in the Disaster Areas.
In its application, Peoples asserts that the relief is necessary due to, among other things, the extraordinary impact of Hurricane Katrina on Peoples's facilities, personnel, customers, and independent public accountants. For example, the application indicates that:
(1)Peoples, which is a bank holding company, lost six of the sixteen branch locations of its bank subsidiary, The Peoples Bank;
(2)more than twenty percent of its employees lost their homes, another twenty-five percent had serious damages to their homes and several of Peoples's branches served as temporary housing for employees; and
(3)company personnel have had to focus on on-going post-Katrina recovery issues such as evaluation of the loan portfolio and recovery and decontamination of items from vaults and safe deposit boxes. Further, the application states that:
(1)The Biloxi, Mississippi office of Peoples's independent public accountants, which housed all of their hard copy records and computer files, was destroyed and more than twenty-five percent of their professional and support staff have relocated out of the area; and
(2)Peoples was the only client of its independent public accountants that is subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act. Accordingly, Peoples has asked the Commission that Peoples be required to first include the disclosures specified in paragraphs
(a)and
(b)of Item 308 of Regulation S-K and first comply with Exchange Act Rule 13a-15(c) for the fiscal year ended December 31, 2006. On March 10, 2006, the Commission issued a notice of the filing of the application and provided, until March 30, 2006, an opportunity for interested persons to request a hearing. In its March 10, 2006 notice, the Commission stated that an order disposing of the application might be issued upon the basis of the information stated therein unless a hearing should be ordered. No request for a hearing has been filed and the Commission has not ordered a hearing. The matter having been considered, it is found that the requested relief is appropriate in the public interest and consistent with the protection of investors and the purposes fairly intended by the policy and provisions of the Exchange Act. *It is ordered* , pursuant to Section 12(h) of the Exchange Act, that the application requesting that Peoples be required to first include the disclosures specified in paragraphs
(a)and
(b)of Item 308 of Regulation S-K and first comply with Exchange Act Rule 13a-15(c) for the fiscal year ended December 31, 2006, be, and hereby is, granted, effective immediately. For the Commission, by the Division of Corporation Finance, pursuant to delegated authority. Nancy M. Morris, Secretary. [FR Doc. E6-5014 Filed 4-5-06; 8:45 am] BILLING CODE 8010-01-P SECURITIES AND EXCHANGE COMMISSION [Release No. IC-27277] Notice of Applications for Deregistration Under Section 8(f) of the Investment Company Act of 1940 March 31, 2006. The following is a notice of applications for deregistration under section 8(f) of the Investment Company Act of 1940 for the month of March 2006. A copy of each application may be obtained for a fee at the SEC's Public Reference Branch (tel. 202-551-5850). An order granting each application will be issued unless the SEC orders a hearing. Interested persons may request a hearing on any application by writing to the SEC's Secretary at the address below and serving the relevant applicant with a copy of the request, personally or by mail. Hearing requests should be received by the SEC by 5:30 p.m. on April 25, 2006, and should be accompanied by proof of service on the applicant, in the form of an affidavit or, for lawyers, a certificate of service. Hearing requests should state the nature of the writer's interest, the reason for the request, and the issues contested. Persons who wish to be notified of a hearing may request notification by writing to the Secretary, U.S. Securities and Exchange Commission, 100 F Street, NE., Washington, DC 20549-1090. FOR FURTHER INFORMATION CONTACT: Diane L. Titus at
(202)551-6810, SEC, Division of Investment Management, Office of Investment Company Regulation, 100 F Street, NE., Washington, DC 20549-4041. Noah Investment Group, Inc. [File No. 811-8058] *Summary:* Applicant seeks an order declaring that it has ceased to be an investment company. On June 10, 2005, applicant transferred its assets to Timothy Plan Large/Mid-Cap Growth Fund, a series of the Timothy Plan, based on net asset value. Expenses of $15,525 incurred in connection with the reorganization were paid by Polestar Management Company, Inc., applicant's investment adviser. *Filing Date:* The application was filed on March 13, 2006. *Applicant's Address:* 975 Delchester Rd., Newton Square, PA 19073. Opus Investment Trust [File No. 811-21214] *Summary:* Applicant seeks an order declaring that it has ceased to be an investment company. On January 26, 2006, applicant made a liquidating distribution to its shareholders, based on net asset value. Expenses of approximately $1,840 incurred in connection with the liquidation were paid by applicant. *Filing Dates:* The application was filed on February 13, 2006, and amended on March 16, 2006. *Applicant's Address:* 440 Lincoln St., Worcester, MA 01653. Progressive Capital Accumulation Trust [File No. 811-972] *Summary:* Applicant seeks an order declaring that it has ceased to be an investment company. Applicant has never made a public offering of its securities and does not propose to make a public offering. Applicant will continue to operate as a private investment company in reliance on section 3(c)(1) of the Act. *Filing Dates:* The application was filed on February 10, 2006, and amended on March 14, 2006. *Applicant's Address:* 579 Pleasant St., Suite 4, Paxton, MA 01612. Franklin Floating Rate Trust [File No. 811-8271] *Summary:* Applicant, a closed-end investment company, seeks an order declaring that it has ceased to be an investment company. On June 2, 2005, applicant transferred its assets to Franklin Floating Rate Daily Access Fund, a series of Franklin Investors Securities Trust, based on net asset value. Expenses of $356,674 incurred in connection with the reorganization were paid by applicant, the acquiring fund and Franklin Advisers, Inc., investment adviser for applicant and the acquiring fund. *Filing Date:* The application was filed on February 22, 2006. *Applicant's Address:* One Franklin Parkway, San Mateo, CA 94403-1906. Franklin Multi-Income Trust [File No. 811-5873] *Summary:* Applicant, a closed-end investment company, seeks an order declaring that it has ceased to be an investment company. On July 21, 2005, applicant's outstanding senior notes were prepaid in full in accordance with the terms of its senior note agreement. On August 4, 2005, applicant transferred its assets to Franklin Income Fund, a series of Franklin Custodian Funds, Inc., based on net asset value. Expenses of $104,915 incurred in connection with the reorganization were paid by applicant, the acquiring fund and Franklin Advisers, Inc., investment adviser for applicant and the acquiring fund. *Filing Date:* The application was filed on February 22, 2006. *Applicant's Address:* One Franklin Parkway, San Mateo, CA 94403-1906. First Trust Advantage Series 1 and Subsequent Series [File No. 811-2749] *Summary:* Applicant, a unit investment trust, seeks an order declaring that it has ceased to be an investment company. On July 21, 2004, applicant made a final liquidating distribution to its unitholders, based on net asset value. Applicant incurred no expenses in connection with the liquidation. *Filing Date:* The application was filed on March 1, 2006. *Applicant's Address:* First Trust Portfolios, L.P., 1001 Warrenville Rd., Suite 300, Lisle, IL 60532. Muni California Intermediate Duration Fund, Inc. [File No. 811-21347] *Summary:* Applicant, a closed-end investment company, seeks an order declaring that it has ceased to be an investment company. Applicant has never made a public offering of its securities and does not propose to make a public offering or engage in business of any kind. *Filing Dates:* The application was filed on January 3, 2006, and amended on March 8, 2006. *Applicant's Address:* 800 Scudders Mill Rd., Plainsboro, NJ 08543-9011. Global Capital and Income Strategies Fund, Inc. [File No. 811-21578] *Summary:* Applicant, a closed-end investment company, seeks an order declaring that it has ceased to be an investment company. Applicant has never made a public offering of its securities and does not propose to make a public offering or engage in business of any kind. *Filing Dates:* The application was filed on January 3, 2006, and amended on March 8, 2006. *Applicant's Address:* 800 Scudders Mill Rd., Plainsboro, NJ 08543-9011. Fidelity Government Securities Fund [File No. 811-2869] *Summary:* Applicant seeks an order declaring that it has ceased to be an investment company. On November 28, 1997, applicant transferred its assets to a corresponding series of the Fidelity Income Fund, based on net asset value. Expenses of approximately $12,000 incurred in connection with the reorganization were paid by applicant. *Filing Dates:* The application was filed on November 30, 2005, and amended on February 22, 2006. *Applicant's Address:* 82 Devonshire St., Boston, MA 02109. Hillview Investment Trust II [File No. 811-9901] *Summary:* Applicant seeks an order declaring that it has ceased to be an investment company. On November 25, 2005, applicant made a liquidating distribution to its shareholders, based on net asset value. Expenses of $3,000 incurred in connection with the liquidation were paid by applicant and Hillview Capital Advisors, LLC, applicant's investment adviser. *Filing Dates:* The application was filed on January 25, 2006, and amended on March 3, 2006. *Applicant's Address:* c/o PFPC Inc., 400 Bellevue Parkway, Wilmington, DE 19809. TD Waterhouse Trust [File No. 811-9519] *Summary:* Applicant seeks an order declaring that it has ceased to be an investment company. On July 8, 2005, applicant's six series transferred their assets to corresponding series of T. Rowe Price Index Trust, Inc., T. Rowe Price International Index Fund, Inc., or T. Rowe Price U.S. Bond Index Fund, Inc., based on net asset value. Expenses of $534,576 incurred in connection with the reorganization were paid by TD Waterhouse Investor Services, Inc., an affiliate of applicant's investment adviser. *Filing Dates:* The application was filed on November 29, 2005, and amended on March 6, 2006. *Applicant's Address:* 100 Wall St., New York, NY 10005. Variable Life Account C of ING Life Insurance and Annuity Company [File No. 811-9665] *Summary:* Applicant seeks an order declaring that it has ceased to be an investment company. Prior to April 30, 2003, each existing group life certificate was surrendered and the amount of insurance in effect was converted to a substantially comparable flexible premium general account life insurance policy. Expenses of $4,000 incurred in connection with the liquidation were paid by ING Life Insurance and Annuity Company. *Filing Dates:* The application was filed on February 6, 2006 and amended on March 13, 2006. *Applicant's Address:* 151 Farmington Avenue, Hartford, CT 06156. For the Commission, by the Division of Investment Management, pursuant to delegated authority. Nancy M. Morris, Secretary. [FR Doc. E6-5006 Filed 4-5-06; 8:45 am] BILLING CODE 8010-01-P SECURITIES AND EXCHANGE COMMISSION [Release No. IC-27276; File No. 812-13187] Pacific Life Insurance Company, et al. March 30, 2006. AGENCY: Securities and Exchange Commission (“Commission”). ACTION: Notice of an application for an order pursuant to Section 26(c) of the Investment Company Act of 1940 (“1940 Act”) approving a substitution of securities. Applicants: Pacific Life Insurance Company (“Pacific Life”); Separate Account A of Pacific Life (“Pacific Separate Account A”); Separate Account B of Pacific Life (“Pacific Separate Account B”); Pacific Select Variable Annuity Separate Account of Pacific Life (“PSVA Separate Account”); Pacific Select Exec Separate Account of Pacific Life (“Pacific PSE Separate Account”); Pacific Life & Annuity Company (“PL&A”); Separate Account A of PL&A (“PL&A Separate Account A”); Pacific Select Exec Separate Account of PL&A (“PL&A PSE Separate Account”) (Pacific Separate Account A, Pacific Separate Account B, PSVA Separate Account, Pacific PSE Separate Account, PL&A Separate Account A and PL&A PSE Separate Account, are collectively referred to herein as the “Separate Accounts”); and Pacific Select Fund (“Select Fund”) (Pacific Life, PL&A, the Separate Accounts and Select Fund are collectively referred to herein as the “Applicants”) Summary of Application: Applicants request an order pursuant to section 26(c) of the 1940 Act to permit the substitution of shares of the American Funds Growth-Income Portfolio of Select Fund (“Growth-Income Portfolio” or “Substitute Portfolio”) for shares of the Equity Income Portfolio of Select Fund (“Equity Income Portfolio” or “Replaced Portfolio”) held by each Separate Account (“Substitution”). Filing Dates: The application was filed with the Commission on April 29, 2005. Applicants have agreed to file a final amendment during the notice period, the substance of which is reflected in this notice. Hearing Or Notification: An order granting the Application will be issued unless the Commission orders a hearing. Interested persons may request a hearing by writing to the Commission's secretary and serving Applicants with a copy of the request, personally or by mail. Hearing requests should be received by the Commission by 5:30 p.m., on April 24, 2006, and should be accompanied by proof of service on Applicants, in the form of an affidavit, or, for lawyers, a certificate of service. Hearing requests should state the nature of the writer's interest, the reason for the request, and the issues contested. Persons who wish to be notified of a hearing may request notification by writing to the Secretary of the Commission. ADDRESSES: Secretary, Securities and Exchange Commission, 100 F Street, NE., Washington, DC 20549-1090. Applicants, 700 Newport Center Drive, Newport Beach, CA 92660. FOR FURTHER INFORMATION CONTACT: Michael Kosoff, Staff Attorney, at
(202)551-6754 or Harry Eisenstein, Branch Chief, Office of Insurance Products, Division of Investment Management, at
(202)551-6795. SUPPLEMENTARY INFORMATION: The following is a summary of the application. The complete application may be obtained for a fee at the Commission's Public Reference Room, 100 F Street, NE., Room 1580, Washington, DC 20549 (202-551-8090). Applicants' Representations 1. Pacific Life is a life insurance company that is domiciled in Nebraska. Along with subsidiaries and affiliates, Pacific Life's operations include life insurance, annuities, pension and institutional products, mutual funds, group employee benefits, broker/dealer operations and investment advisory services. Pacific Life and PL&A issue variable annuity contracts and variable life insurance policies, including those currently funded by a Separate Account (each, a “Variable Contract” and collectively, the “Variable Contracts”). 2. Pacific Separate Account A was established on September 7, 1994, as a segregated asset account of Pacific Life and is registered with the Commission as a unit investment trust. Pacific Separate Account A currently funds the variable benefits available under various variable annuity contracts issued by Pacific Life. Interests in Pacific Separate Account A under each Variable Contract funded by Pacific Separate Account A are registered under the Securities Act of 1933, as amended (the “1933 Act”). 1 Pacific Life is the legal owner of the assets in Pacific Separate Account A. Assets of Pacific Separate Account A attributable to the reserves and other liabilities under the outstanding Variable Contracts funded by Pacific Separate Account A may not be charged with liabilities arising from other Pacific Life business. 1 Pacific Life and Pacific Separate Account A have filed Form N-4 Registration Statements under the 1933 Act registering the various Variable Contracts funded by Pacific Separate Account A (File Nos. 333-60833, 33-88460, 33-88458, 33-88458, 333-93059, 333-93059, 333-53040 and 811-08946). 3. Pacific Separate Account B was established on September 25, 1996, as a segregated asset account of Pacific Life and is registered with the Commission as a unit investment trust. Pacific Separate Account B currently funds the variable benefits available under various variable annuity contracts issued by Pacific Life. Interests in Pacific Separate Account B under each Variable Contract funded by Pacific Separate Account B are registered under the 1933 Act. 2 Pacific Life is the legal owner of the assets in Pacific Separate Account B. Assets of Pacific Separate Account B attributable to the reserves and other liabilities under the outstanding Variable Contracts funded by Pacific Separate Account B may not be charged with liabilities arising from other Pacific Life business. 2 Pacific Life and Pacific Separate Account B have filed a Form N-4 Registration Statement under the 1933 Act relating to the Variable Contracts funded by Pacific Separate Account B (File Nos. 333-14131 and 811-07859). 4. PSVA Separate Account was established on November 30, 1989, as a segregated asset account of Pacific Life and is registered with the Commission as a unit investment trust. PSVA Separate Account currently funds the variable benefits available under a variable annuity contract designated as Pacific Select Variable Annuity (“PSVA”). PSVA Separate Account interests in PSVA are registered under the 1933 Act. 3 Pacific Life is the legal owner of the assets in PSVA Separate Account. Assets of PSVA Separate Account attributable to the reserves and other liabilities under the Variable Contracts funded by PSVA Separate Account may not be charged with liabilities arising from any other Pacific Life business. 3 Pacific Life and PSVA Separate Account have filed a Form N-4 Registration Statement under the 1933 Act relating to the Variable Contracts funded by PSVA Separate Account (File Nos. 33-32704 and 811-05980). 5. Pacific PSE Separate Account was established on May 12, 1988, as a segregated asset account of Pacific Life and is registered with the Commission as a unit investment trust. Pacific PSE Separate Account currently funds the variable benefits available under various flexible premium variable life insurance policies. Interests in Pacific PSE Separate Account under each Variable Contract funded by Pacific PSE Separate Account are registered under the 1933 Act. 4 Pacific Life is the legal owner of the assets in Pacific PSE Separate Account. Assets of Pacific PSE Separate Account attributable to the reserves and other liabilities under the outstanding Variable Contracts funded by Pacific PSE Separate Account may not be charged with liabilities arising from other Pacific Life business. 4 Pacific Life and Pacific PSE Separate Account have filed Form N-6 Registration Statements under the 1933 Act relating to the various Variable Contracts funded by Pacific PSE Separate Account (File Nos. 33-21754, 33-57908, 333-01713, 333-20355, 333-60461, 333-61135, 333-102902, 333-106969, 333-118913 and 811-05563). 6. PL&A is a life insurance company domiciled in Arizona. It is a wholly-owned subsidiary of Pacific Life. PL&A's operations include life insurance, annuity and institutional products, group life and health insurance and various other insurance products and services. PL&A also issues Variable Contracts. PL&A is authorized to conduct life insurance and annuity business in Arizona, New York and certain other states. 7. PL&A Separate Account A was established on January 25, 1999, as a segregated asset account of PL&A and is registered with the Commission as a unit investment trust. PL&A Separate Account A currently funds the variable benefits available under various variable annuity contracts issued by PL&A. Interests in PL&A Separate Account A under each Variable Contract funded by PL&A Separate Account A are registered under the 1933 Act. 5 PL&A is the legal owner of the assets in PL&A Separate Account A. Assets of PL&A Separate Account A attributable to the reserves and other liabilities under the outstanding Variable Contracts funded by PL&A Separate Account A may not be charged with liabilities arising from other PL&A business. 5 PL&A and PL&A Separate Account A have filed Form N-4 Registration Statements under the 1933 Act relating to the various Variable Contracts funded by PL&A Separate Account A (File Nos. 333-71081, 333-100907, 333-107571 and 811-09203). 8. PL&A PSE Separate Account was established on September 24, 1998, as a segregated asset account of PL&A and is registered with the Commission as a unit investment trust. PL&A PSE Separate Account currently funds the variable benefits available under various flexible premium variable life insurance policies. Interests in PL&A PSE Separate Account under each Variable Contract funded by PL&A PSE Separate Account are registered under the 1933 Act. 6 PL&A is the legal owner of the assets in PL&A PSE Separate Account. Assets of PL&A PSE Separate Account attributable to the reserves and other liabilities under the outstanding Variable Contracts funded by PL&A PSE Separate Account may not be charged with liabilities arising from other PL&A business. 6 PL&A and PL&A PSE Separate Account have filed Form N-6 Registration Statements under the 1933 Act relating to the various Variable Contracts funded by PL&A PSE Separate Account (File Nos. 333-62446, 333-80825, 333-106653, 333-106721 and 811-09389). 9. Select Fund is a registered open-end management investment company that currently offers 34 separate portfolios. Shares of Select Fund currently are offered only to the Separate Accounts for the purpose of serving as an investment vehicle for variable annuity contracts and variable life insurance policies offered or administered by Pacific Life and PL&A (collectively, the “PL Insurers”). Pursuant to an Advisory Agreement, Pacific Life serves as the investment adviser of Select Fund. 10. Select Fund began offering shares of the Equity-Income Portfolio (“Replaced Portfolio”) on January 2, 2002. Putnam Investment Management, LLC serves as the Portfolio Manager to the Replaced Portfolio. As of December 31, 2005, the Replaced Portfolio had approximately $160.9 million in assets. 11. Since May 1, 2005, Select Fund has offered shares of the Growth-Income Portfolio (“Substitute Portfolio”). The Substitute Portfolio does not invest directly in securities but instead invests all of its assets in Class 2 shares of the American Funds Growth-Income Fund (the “Master Fund”). The Master Fund is a series of American Funds Insurance Series® and invests directly in securities. Capital Research and Management Company serves as investment adviser to the Master Fund. As of December 31, 2005, the Substitute Portfolio had $783.9 million in assets. 12. The PL Insurers and the Board of Trustees of Select Fund made a strategic determination to replace the sub-adviser of the Replaced Portfolio, which sub-advised two other portfolios in addition to the Replaced Portfolio. This decision was based primarily on the concerns of potential effects of recent regulatory events respecting such sub-adviser. With respect to the Replaced Portfolio, the PL Insurers and the Board of Trustees have determined that this Substitution is an appropriate means to effectively replace the sub-adviser. 13. The following chart sets out the investment objectives and certain policies of each Portfolio as stated in the Fund's most recent post-effective amendment to its registration statement. Replaced Portfolio (Equity Income Portfolio) Substitute Portfolio (Growth-Income Portfolio) Investment Goal: Seeks current income; capital growth is of secondary importance Investment Goal: Seeks long-term growth of capital and income. Main Investments: The Replaced Portfolio invests primarily in common stocks of large U.S. companies, with a focus on value stocks that offer the potential for current income and may also offer the potential for capital growth. Value stocks are those that the manager believes are currently undervalued by the market. To determine whether to buy or sell investments, Putnam Investment Management, LLC, the portfolio manager, will consider, among other factors, a company's financial strength, competitive position in its industry, projected future earnings, cash flows and dividends. The Replaced Portfolio will normally invest at least 80% of its assets in common stocks and other equity investments. The manager may invest up to 20% of its assets in foreign securities that are principally traded outside the U.S. including emerging market securities (American Depositary Receipts
(ADRs)are excluded from this limit), preferred stocks, convertible securities, and fixed income securities, including high yield
(junk)bonds. The Replaced Portfolio may invest up to 20% of its net assets in lower-rated high-yield
(junk)bonds. The manager may use derivatives (such as options, futures contracts, swaps and warrants) to try to increase returns, for hedging purposes, as a substitute for securities, or to otherwise help achieve the Replaced Portfolio's investment goal. The manager may use foreign currency contracts or derivatives to hedge against changes in currency exchange rates Main Investments: The Substitute Portfolio invests all of its assets in Class 2 shares of the Master Fund. In turn, the Master Fund seeks to make shareholders' investments grow and to provide income over time by investing primarily in common stocks or other securities which demonstrate the potential for appreciation and/or dividends. The Master Fund is designed for investors seeking both long-term growth of capital and income. The Master Fund may invest up to 15% of its assets in equity securities of issuers domiciled outside the U.S. and Canada and not included in S&P 500 Index. The Master Fund may invest up to 5% of its assets in nonconvertible debt securities rated Ba or below by Moody's and BB or below by S&P or in unrated securities that are determined to be of equivalent quality (junk bonds). The Master Fund currently does not intend to purchase and sell currencies to facilitate securities transactions and enter into forward currency contracts to protect against changes in currency exchange rates other than to facilitate the settlement of trades. Principal risks: Principal risks: • price volatility risk—the Replaced Portfolio principally invests in equity securities, which tend to go up or down in value, sometimes rapidly and unpredictably. The prices of equity securities change in response to many factors, including a company's historical and prospective earnings, the value of its assets, general economic conditions, interest rates, investor perceptions and market liquidity. The Replaced Portfolio may invest in small and medium-sized companies, which may be riskier and more susceptible to greater price swings than large companies because they may have fewer financial resources, limited product and market diversification, greater potential volatility in earnings and business prospects, and many are dependent on a few key managers • price volatility risk—the Master Fund principally invests in equity securities, which may go up or down in value, sometimes rapidly and unpredictably. The Master Fund invests in companies that the portfolio counselors think have the potential for above average growth, which may give the Master Fund a higher risk of price volatility than a portfolio that invests principally in equities that are “undervalued.” The Master Fund may also invest in small and medium-sized companies, which may be more susceptible to greater price swings than larger companies because they may have fewer financial resources, limited product and market diversification, greater potential volatility in earnings and business prospects and many are dependent on a few key managers. • foreign investment risk—foreign investments may be riskier than U.S. investments for many reasons, including changes in currency exchange rates, unstable political and economic conditions, lack of adequate and timely company information, differences in the way securities markets operate, relatively lower market liquidity, less stringent financial reporting and accounting standards and controls, less secure foreign banks or securities depositories than those in the U.S., foreign taxation issues and foreign controls on investment • foreign investment risk—foreign investments may be riskier than U.S. investments for many reasons, including changes in currency exchange rates, unstable political and economic conditions, lack of adequate and timely company information, differences in the way securities markets operate, relatively lower market liquidity, less stringent financial reporting and accounting standards and controls, less secure foreign banks or securities depositories than those in the U.S., foreign taxation issues and foreign controls on investment. • interest rate risk—the value of bonds and short-term money market instruments may fall when interest rates rise. Bonds with longer durations tend to be more sensitive to changes in interest rates, making them more volatile than bonds with shorter durations or money market instruments • interest rate risk—the value of bonds and short-term money market instruments may fall when interest rates rise. Bonds with longer durations tend to be more sensitive to changes in interest rates, making them more volatile than bonds with shorter durations or money market instruments. • credit risk—a fixed income security's issuer may not be able to meet its financial obligations and go bankrupt. High-yield/high-risk bonds, i.e., low credit ratings by Moody's (Ba and lower) or Standard & Poor's (BB and lower), or no rating, but are of comparable quality, are especially subject to credit risk during periods of economic uncertainty or during economic downturns and are considered to be mostly speculative in nature. Not all U.S. government securities are backed or guaranteed by the U.S. Some are supported only by the credit of the issuing agency, which depend entirely on their own resources to repay their debt, and are subject to the risk of default • credit risk—a fixed income security's issuer may not be able to meet its financial obligations and go bankrupt. High-yield/high-risk bonds, i.e., low credit ratings by Moody's (Ba and lower) or Standard & Poor's (BB and lower), or no rating, but are of comparable quality, are especially subject to credit risk during periods of economic uncertainty or during economic downturns and are considered to be mostly speculative in nature. Not all U.S. government securities are backed or guaranteed by the U.S. Some are supported only by the credit of the issuing agency, which depend entirely on their own resources to repay their debt, and are subject to the risk of default. • emerging countries—investments in emerging market countries (such as many in Latin America, Asia, the Middle East, Eastern Europe and Africa) may be riskier than in developed markets, for many reasons, including smaller market capitalizations, greater price volatility, less liquidity, higher degree of political and economic instability, less governmental regulation of the financial industry and markets, and less stringent financial reporting and accounting standards and controls. Such investments may also involve risk of loss resulting from problems in share registration and custody, especially in Eastern European countries such as Russia • master/feeder mutual fund structure—the Substitute Portfolio operates as a “feeder portfolio” which means it invests all of its assets in the Master Fund. The Substitute Portfolio has a similar investment objective and the same limitations as the master fund in which it invests. The Substitute Portfolio does not buy investment securities directly. The Master Fund, on the other hand, invests directly in portfolio securities. Under the master/feeder structure, the Substitute Portfolio may withdraw its investment in the Master Fund if approved by the Board of Trustees. Prior to any such withdrawal, the Board would consider what action might be taken, including the investment of all the assets of the Substitute Portfolio in another pooled investment entity having the same or similar investment objective as the Substitute Portfolio, request Pacific Life to manage the Substitute Portfolio directly or hire another portfolio manager to manage the Substitute Portfolio, or take other action. Because the Substitute Portfolio invests all of its assets in the Master Fund, the Substitute Portfolio will bear the fees and expenses of the Substitute Portfolio and the Master Fund in which it invests. The Substitute Portfolio's expenses may be higher than those of other mutual funds which invest directly in securities. The master/feeder structure is different from that of most of the other portfolios of Select Fund and many other investment companies. The Master Fund may have other shareholders, each of whom will pay their proportionate share of the Master Fund's expenses. The Master Fund may change its investment objectives, policies, managers, expense limitation agreements and other matters relating to the Master Fund without approval of the Substitute Portfolio or the Substitute Portfolio's Board. • derivatives and forward contracts—derivatives (such as futures and options contracts) derive their value from the value of an underlying security, a group of securities or an index. Synthetics are artificially created by using a collection of other assets whose combined features replicate the economic characteristics of a direct investment. The Replaced Portfolio's use of derivatives, synthetics, forward commitments and currency transactions could reduce returns, increase portfolio volatility, may not be liquid, and may not correlate precisely to the underlying securities or index. All of these investments, including repurchase agreements, are particularly sensitive to counterparty risk. Although both the Master Fund and the Replaced Portfolio are permitted to invest in high yield bonds, derivative instruments and emerging markets securities, neither the Master Fund nor the Replaced Portfolio held significant investments in these categories as of December 31, 2005. Both the Master Fund and the Replaced Portfolio are considered to be “Large Value” funds by Morningstar, Inc., a leading provider of independent investment research. 14. Pacific Life, as investment adviser to the Substitute Portfolio, is responsible for monitoring the performance and continued appropriateness of the Master Fund for the Substitute Portfolio. Pacific Life may recommend to the Substitute Portfolio's Board (or the Board may, on its own determine) that the Substitute Portfolio should withdraw its assets from the Master Fund, upon appropriate notice to the Master Fund. Investment in the Master Fund is not a fundamental policy of the Substitute Portfolio, consequently, the Board may authorize the Substitute Portfolio's withdrawal from the Master Fund without a shareholder vote. 15. The following chart compares the advisory fees, 12b-1 fees (if any), operating expenses and total expenses expressed as an annual percentage of average daily net assets, both before and after giving effect to fee waivers and expense reimbursements. The figures for the Substitute Portfolio set forth the fees and expenses at both the master and feeder levels. The fees and expenses quoted for the Replaced Portfolio, Master Fund and Substitute Portfolio are for the year ended December 31, 2005. As the chart demonstrates, while the Replaced Portfolio has the same total expenses as the Substitute Portfolio has before giving effect to fee waivers, the Substitute Portfolio is expected to have lower total net expenses than the Replaced Portfolio after giving effect to fee waivers. Replaced Portfolio Substitute Portfolio Feeder Fund Level Advisory Fees 0.95% Advisory Fees 7 0.42% Other Expenses 0.06% Other Expenses 0.03% Total Expenses of Replaced Portfolio 1.01% Total Expenses of Feeder Fund 0.45% Advisory Fee Waiver 8 (0.06%) Total Net Expenses of Feeder Fund 0.39% Master Fund Level Advisory Fees 9 0.28% 12b-1 Fees 0.25% Other Expenses 0.01% Total Expenses of Master Fund 10 0.54% Total Expenses of Master and Feeder Total Expenses 0.99% Less Advisory Fee Waiver (0.06%) Total Net Expenses 0.93% Pursuant to the Investment Advisory Agreement between Pacific Life and Select Fund with respect to the Substitute Portfolio, Pacific Life's advisory fee will be 0.95% minus the annual rates of any advisory and 12b-1 fees paid by a master fund in which the Substitute Portfolio invests in a master/feeder arrangement. In the event that the Master Fund level advisory fees and 12b-1 fees exceed 95 basis points, Pacific Life will subsidize any fees in excess of this amount for the life of the Substitute Portfolio or until the fee is changed pursuant to a shareholder vote. 7 Under an addendum to the amended and restated advisory agreement between the Substitute Portfolio and Pacific Life, advisory fees are payable to Pacific Life, as investment adviser to the Substitute Portfolio, at an annual rate of 0.95% reduced by the sum of the annual rates of any investment advisory fees and 12b-1 fees paid by the Master Fund. 8 This waiver reflects the terms of an advisory fee waiver agreement described below. 9 CRMC, the Adviser to the Master Fund, began waiving 5% of its advisory fees on September 1, 2004. Beginning April 1, 2005, this waiver increased to 10% and will continue at this level until further review by CRMC. Total Expenses of the Master Fund do not reflect this waiver. 10 The Total Expenses of the Master Fund do not include a non-contractual advisory fee waiver of 0.02%. The Advisory Fee Waiver, with respect to the Feeder Fund Level expenses, shown in the chart above is put into place through an Advisory Fee Waiver Agreement between Select Fund and Pacific Life (“Waiver Agreement”). Under the terms of the Waiver Agreement, Pacific Life agrees to limit its total advisory fee to 0.36% annually during the term of the agreement. The Waiver Agreement has an initial term ending on the earlier of May 1, 2007, or such time as the Substitute Portfolio no longer invests substantially all of its assets in the Master Fund. In addition to the Waiver Agreement, Pacific Life has contractually committed to waive that portion of its advisory fee and/or reimburse expenses with respect to the Substitute Portfolio such that the net fees and expenses, considering both the master and feeder levels, paid by shareholders invested in the Substitute Portfolio will not exceed an annual rate of 1.01% of the Substitute Portfolio's average daily net assets. In order to effectuate this commitment, Pacific Life and Select Fund have entered into an Expense Limitation Agreement. Under the terms of the Expense Limitation Agreement, Pacific Life will reimburse the Substitute Portfolio an amount necessary to ensure that portfolio net operating expenses do not exceed an annual rate of 1.01% during the term of the Expense Limitation Agreement. The Expense Limitation Agreement has an initial term of two years from the date the Substitution requested by the Application occurs (the “Effective Date”). Separate Account expenses also will not be increased during this two-year period for Contractholders that invest in the Replaced Portfolio on the Effective Date of the substitution (the “Affected Contractholders”). 16. The following chart compares the historical performance of the Replaced Portfolio to the historical performance of the Master Fund for the periods shown. The Master Fund's historical performance has been adjusted to reflect the estimated expenses of the Substitute Portfolio at the feeder fund level, as if the Substitute Portfolio had invested in the Master Fund for the periods presented. Replaced Portfolio Substitute Portfolio *Calendar Year Ended:* *Calendar Year Ended:* 2005 5.63% 2005 5.43% 2004 12.19% 2004 9.98% 2003 26.24% 2003 32.04% 2002* (13.54)% 2002 (18.73)% *Average Annual Total Return as of December 31, 2005:* *Average Annual Total Return as of December 31, 2004:* 1 year 5.63% 1 year 5.44% 3 years 14.37% 3 years 15.26% 5 years N/A 5 years 4.92% 10 years N/A 10 years 10.17% *Inception date 1/2/02. 17. Applicants will effect the Substitution as soon as practicable following the issuance of the requested order. As of the Effective Date, shares of the Replaced Portfolio will be redeemed for cash. The PL Insurers, on behalf of the subaccount of each relevant Separate Account investing in the Replaced Portfolio, will simultaneously place a redemption request with the Replaced Portfolio and a purchase order with the Substitute Portfolio so that the purchase of the Substitute Portfolio shares will be for the exact amount of the redemption proceeds, and thus Variable Contract values will remain fully invested at all times. The proceeds of such redemptions will then be used to purchase the appropriate number of shares of the Substitute Portfolio. Following the Substitution, the Replaced Portfolio will no longer be offered through the Variable Contracts. 18. The Substitution will take place at relative net asset value (in accordance with Rule 22c-1 under the 1940 Act) with no change in the amount of any Affected Contractholder's accumulation value or death benefit or in dollar value of his or her investment in the applicable Separate Account. No brokerage commissions, fees or other remuneration will be paid by either the Replaced Portfolio or the Substitute Portfolio or by Affected Contractholders in connection with the Substitution. The transactions comprising the Substitution will be consistent with the policies of each investment company involved and with the general purposes of the 1940 Act. 19. Affected Contractholders will not incur any fees or charges as a result of the Substitution nor will their rights or the relevant PL Insurer's obligations under the Variable Contracts be altered in any way. The PL Insurers or their affiliates will pay all expenses and transaction costs of the Substitution, including legal and accounting expenses, any applicable brokerage expenses, and other fees and expenses. In addition, the Substitution will not impose any tax liability on Affected Contractholders. The Substitution will not cause the Variable Contract fees and charges currently being paid by Affected Contractholders to be greater after the Substitution than before the Substitution. 20. Currently, each Affected Contractholder is subject to transfer limitations which are stated in the applicable prospectus. Generally, an Affected Contractholder may not make more than twenty-five
(25)transfers per calendar year and may only make one “safe harbor” transfer into the Money Market Portfolio once the 25 transfer limit is reached. Additionally, an Affected Contractholder may not make more than two transfers per calendar month involving international portfolios. Multiple transfers among the portfolios on the same day count as one transfer. Transfers to or from a portfolio cannot be made before the seventh calendar day following the last transfer to or from the same portfolio. If the seventh calendar day is not a business day, then a transfer may not occur until the next business day. The day of the last transfer is not considered a calendar day for purposes of meeting this requirement. Currently, there are no fees imposed for transfers among the investment options, but a transfer fee of up to $15 per transfer may be imposed in the future for transfers in excess of fifteen
(15)in any contract year. The above transfer restrictions are referred to as “Frequent Trading Policies.” However, as described more fully below, for a 60 day period commencing 30 days prior to the Effective Date and ending 30 days after the Effective Date (“Free Transfer Period”), Affected Contractholders may reallocate to any other investment options available under their Variable Contract their accumulation value allocated to each subaccount invested in the Replaced Portfolio (“Replaced Subaccount”) and each subaccount invested in the Substitute Portfolio (together with the Replaced Subaccounts, the “Affected Subaccounts”) without incurring any administrative costs or allocation (transfer) charges and such reallocation will not count toward the Frequent Trading Policies. In effect, each transfer by Affected Contractholders from the Affected Subaccounts during the Free Transfer Period will be a “free transfer;” if Affected Contractholders reallocate accumulation value in the Affected Subaccounts only during the Free Transfer Period, there will be no charge for the entire reallocation of accumulated value from that Affected Subaccount and the entire reallocation will not be counted toward the total number of reallocations made within the calendar year or Variable Contract year for purposes of determining the number of reallocations that may be made pursuant to the Frequent Trading Policies with respect to the Affected Subaccounts, or that may be made without incurring any potential future administrative or transfer fees, if any, under the relevant Variable Contract. The PL Insurers will not exercise any right they may have under the Variable Contracts to impose additional restrictions or fees on the free transfer from the Affected Subaccounts under the Variable Contracts during the Free Transfer Period. 21. All Affected Contractholders have been or will be sent notification of this Application by means of supplements to the prospectuses for the Variable Contracts on or shortly before or after the date that this Application is filed. Among other information regarding the proposed Substitution, the supplements will inform Affected Contractholders that the PL Insurers will not exercise any rights reserved by them under the Variable Contracts to impose additional restrictions or fees on transfers from the Affected Subaccounts during the Free Transfer Period. Following the date the order requested by this Application is issued, but before the Effective Date, PL Insurers will send Affected Contractholders a notice (the “Substitution Notice”) setting forth the scheduled Effective Date as well as the commencement date and precise duration of the Free Transfer Period. The Substitution Notice will advise Affected Contractholders of their right, if they choose, at any time during the Free Transfer Period, to reallocate to any other investment options available under their Variable Contract their accumulation value allocated to each Affected Subaccount 30 days prior to and after the Effective Date without incurring any administrative costs or allocation (transfer) charges and such reallocation will not count toward determining the number of reallocations that may be made pursuant to the Frequent Trading Policies (a “free transfer”). Any additional transfers beyond the “free transfer” must be made in accordance with the terms and conditions of the Variable Contracts. 22. Within five
(5)business days after the Effective Date, Affected Contractholders will be sent a notice (“Post-Substitution Confirmation”) showing that each Affected Contractholder's interest in the Affected Subaccount invested the Replaced Portfolio has been transferred in exchange for units of the Subaccounts that invest in the Substitute Portfolio, and confirming the transactions effected on behalf of the respective Affected Contractholder with regard to the Substitution. All current Contractholders will have been sent a Select Fund prospectus containing a description of the Substitute Portfolio before the Effective Date. Applicants' Legal Analysis 1. Section 26(c) of the 1940 Act prohibits any depositor or trustee of a unit investment trust that invests exclusively in the securities of a single issuer from substituting the securities of another issuer without the approval of the Commission. Section 26(c) provides that such approval shall be granted by order of the Commission, if the evidence establishes that the substitution is consistent with the protections of investors and the purposes fairly intended by the policy and the provisions of the 1940 Act. 2. Section 26(c) of the 1940 Act was enacted as part of the Investment Company Act Amendments of 1970. Prior to the enactment of these amendments, a depositor or a unit investment trust could substitute new securities for those held by the trust by notifying the trust's security holders of the substitution within five days of the substitution. In 1966, the Commission, concerned with the high sales charges then common to most unit investment trusts and the disadvantageous position in which such charges placed investors who did not want to remain invested in the substituted fund, recommended that Section 26 be amended to require that a proposed substitution of the underlying investments of a trust receive prior Commission approval. 3. Applicants assert that the proposed Substitution appears to involve a substitution of securities within the meaning of section 26(c) of the 1940 Act. The Applicants therefore request an order from the Commission pursuant to Section 26(c) approving the proposed Substitution. 4. Applicants contend that although not identical, the investment objective of the Substitute Portfolio is compatible with that of the Replaced Portfolio. In addition, Applicants believe that the investment policies of the Substitute Portfolio are substantially similar to those of the Replaced Portfolio and assure that the investment objectives of Affected Contractholders can continue to be met. 5. Applicants note that the Commission has previously granted Section 26(c) orders to permit the substitution of one fund for another where the investment policies or restrictions or both were not exactly the same. In addition to the foregoing, Applicants generally submit that the Substitution meets the standards that the Commission and its staff have applied to similar substitutions that have been approved in the past. 6. Applicants state that the expenses of the Substitute Portfolio will be slightly lower than those experienced by the Replaced Portfolio, after giving effect to applicable fee waivers. The total net annualized expenses of the Replaced Portfolio, expressed as a percentage of net assets, is 1.01%. The total net annualized expenses of the Substitute Portfolio (including the net fees and expenses incurred by the Master Fund), expressed as a percentage of net assets, is expected to be 0.93%. Pursuant to the Expense Limitation Agreement with respect to the Substitute Portfolio, the total net annualized expenses are limited to 1.01% of the Substitute Portfolios average daily net assets for a period not less than two years from the Effective Date. 7. Applicants state that the Substitution will take place at relative net asset value (in accordance with Rule 22c-1 under the 1940 Act) with no change in the amount of any Affected Contractholder's accumulation value or death benefit or in dollar value of his or her investment in the Separate Accounts. Affected Contractholders will not incur any fees or charges as a result of the Substitution, nor will their rights or the PL Insurer' obligations under the affected Variable Contracts be altered in any way. In addition, the Substitution will not impose any tax liability on Affected Contractholders. The PL Insurers or their affiliates will pay all expenses incurred with the Substitution, including legal, accounting, and other fees and expenses. 8. Applicants also note that the Substitution will not cause the affected Variable Contract fees and charges currently being paid by Affected Contractholders to be greater after the Substitution than before the Substitution. In addition, while the PL Insurers do not anticipate increasing Variable Contract fees and/or charges paid by any current Contractholders, the PL Insurers have agreed not to increase the Variable Contract fees and charges specified in the Variable Contracts for a period of at least two years following the Substitution. 9. Applicants note that each Affected Contractholder will be sent a copy of:
(1)A supplement informing shareholders of the proposed substitution;
(2)a Substitution Notice setting forth the Effective Date and advising Affected Contractholders of their right to reconsider the Substitution and, if they so choose, any time during the Free Transfer Period, to withdraw or reallocate accumulation value under the affected Variable Contract; and
(3)within five business days of the Effective Date, a Post-Substitution Confirmation. 10. Applicants note that each of the Variable Contracts reserves to the PL Insurers the right, subject to compliance with applicable law, to substitute shares of another open end management investment company for shares of an open end management investment company held by a subaccount of a Separate Account. The prospectuses for the Variable Contracts and the Separate Accounts contain appropriate disclosure of this right. The PL Insurers reserve this right of substitution to address situations where continued investment in an underlying investment option becomes unsuitable or unavailable. 11. Applicants assert that unlike traditional unit investment trusts where a depositor could only substitute an investment security in a manner which permanently affected all the investors in the trust, the Variable Contracts provide each Contractholder with the right to exercise his or her own judgment and transfer accumulation values into other subaccounts. Moreover, the Variable Contracts will offer Contractholders the opportunity to transfer amounts out of the affected subaccounts into any of the remaining subaccounts without cost or other disadvantage. The Substitution, therefore, will not result in the type of costly forced redemption which Section 26(c) was designed to prevent. 12. Applicants also contend that the Substitution also is unlike the type of substitution which Section 26(c) was designed to prevent in that by purchasing a Variable Contract, Contractholders select much more than a particular investment company in which to invest their account values. They also select the specific type of death benefit and other optional benefits offered by the PL Insurers in their Variable Contracts as well as numerous other rights and privileges set forth in the Variable Contracts. Contractholders may also have considered the PL Insurers' size, financial condition, and reputation for service in selecting their Variable Contract. The Applicant states that these factors will not change as a result of the Substitution. 13. Applicants contend that the Substitution will not result in the type of costly forced redemption that Section 26(c) was intended to guard against and is consistent with the protection of investors and the purposes fairly intended by the 1940 Act, because of what the Applicants consider to be the significant terms of the Substitution. These terms include:
(a)The Replaced Portfolio has investment objectives that Applicants believe are compatible with and policies and risks substantially similar to those of the Substitute Portfolio so that the objective of the Affected Contractholders can continue to be met.
(b)For two years following the implementation of the Substitution described herein, the net operating expenses of the Substitute Portfolio (including the net fees and expenses incurred by the Master Fund) will not exceed an annual rate of 1.01% of its average daily net assets.
(c)Affected Contractholders may reallocate accumulation value in the Affected Subaccounts during the sixty-day Free Transfer Period, with no charge for the reallocations of accumulated value from each Affected Subaccount. The reallocations will not be counted toward the total number of reallocations made within the calendar year or Variable Contract year for purposes of determining whether the number of reallocations that may be made pursuant to the Frequent Trading Policies has been exceeded, or that may be made without incurring administrative or transfer fees, if any, under the relevant Variable Contract. Alternately, Affected Contractholders may withdraw amounts held in any Affected Subaccount at any time during the Free Transfer Period in accordance with the terms and conditions of the relevant Variable Contract. The Free Transfer Period commences upon a date declared in the Substitution Notice (which will be thirty days prior to the Effective Date) and will last for 30 days after the Effective Date.
(d)The Substitution will be effected at the net asset value of the shares in conformity with Section 22(c) of the 1940 Act and Rule 22c-1 thereunder, without the imposition of any transfer or similar charge by Applicants.
(e)The Substitution will take place at relative net asset value without change in the amount or value of any Variable Contract held by Affected Contractholders. Affected Contractholders will not incur any fees or charges as a result of the Substitution, nor will their rights or the obligations of the PL Insurers under such Variable Contracts be altered in any way. In addition, the PL Insurers will not increase the Variable Contract fees and charges specified in the Variable Contracts for a period of at least two years following the Substitution.
(f)The Substitution will be effected in such a manner that Applicants believe will continue to fulfill Affected Contractholders' objectives and risk expectations, because, according to Applicants, the investment objectives of the Substitute Portfolio are substantially similar to those of the Replaced Portfolio.
(g)No brokerage commissions, fees or other remuneration will be paid by the Replaced Portfolio or the Substitute Portfolio or Affected Contractholders in connection with the Substitution.
(h)The Substitution will not alter in any way the annuity, life or tax benefits afforded under the Variable Contracts held by any Affected Contractholder.
(i)The PL Insurers will send to their Affected Contractholders within five
(5)business days of the Effective Date a copy of the Post-Substitution Confirmation confirming the transactions effected on behalf of the respective Affected Contractholder with regard to the Substitution. *Conditions:* Applicants agree that the proposed Substitution and related transaction will not be completed unless all of the following conditions are met: 1. The Commission shall have issued an order approving the Substitution under Section 26(c) of the 1940 Act. 2. Each Affected Contractholder will have been sent a copy of
(i)a supplement informing shareholders of this Application;
(ii)a prospectus for the Substitute Portfolio,
(iii)a Substitution Notice setting forth the scheduled Effective Date and advising Affected Contractholders of their right, if they so choose, to reallocate or withdraw amounts allocated to the Affected Subaccount under their Variable Contract at any time during the sixty-day Free Transfer Period, in accordance with the terms and conditions of their Variable Contract; and
(iv)within five business days of the Effective Date, a Post-Substitution Confirmation confirming the transactions effected on behalf of the respective Affected Contractholder with regard to the Substitution. 3. The PL Insurers shall have satisfied themselves that
(i)the Variable Contracts allow the substitution of investment company shares in the manner contemplated by the Substitution and related transactions described herein;
(ii)the transactions can be consummated as described in this Application under applicable insurance laws; and
(iii)any regulatory requirements in each jurisdiction where the Variable Contracts are qualified for sale, have been complied with to the extent necessary to complete the transactions. 4. Pacific Life and Select Fund have entered into an Expense Limitation Agreement, with respect to the Substitute Portfolio, whereby Pacific Life will reimburse the Substitute Portfolio an amount necessary to ensure that net operating expenses do not exceed an annual rate of 1.01% during a two-year period from the date the Substitution occurs. Separate Account expenses will not be increased during this two-year period for Affected Contractholders. 5. Pacific Life will amend its advisory agreement with the Substitute Portfolio to reflect that in the event that the Master Fund level advisory fees and 12b-1 fees exceed 95 basis points, Pacific Life will subsidize any fees in excess of this amount for the life of the Substitute Portfolio or until the fee is changed pursuant to a shareholder vote. *Conclusion:* Applicants submit that, for all reasons stated above, the proposed Substitution is consistent with the protection of investors and the purposes fairly intended by the policy and provisions of the 1940 Act, and that the requested order should be granted. For the Commission, by the Division of Investment Management, under delegated authority. Nancy M. Morris, Secretary. [FR Doc. E6-5016 Filed 4-5-06; 8:45 am] BILLING CODE 8010-01-P SECURITIES AND EXCHANGE COMMISSION [Release No. 34-53582; File No. SR-Amex-2005-127] Self-Regulatory Organizations; American Stock Exchange LLC; Order Approving Proposed Rule Change and Amendment Nos. 1 and 2 Thereto Relating to the Listing and Trading of Units of the United States Oil Fund, LP March 31, 2006. I. Introduction On December 6, 2005, the American Stock Exchange LLC (“Amex” or “Exchange”) filed with the Securities and Exchange Commission (“Commission”) the proposed rule change pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”) 1 and Rule 19b-4 thereunder. 2 On January 20, 2006, the Exchange filed Amendment No. 1 to the proposed rule change. 3 On February 15, 2006, the Exchange filed Amendment No. 2 to the proposed rule change. 4 The proposed rule change, as amended by Amendment Nos. 1 and 2, was published for comment in the **Federal Register** on February 24, 2006. 5 The Commission received no comments on the proposal. This order approves the proposed rule change, as amended by Amendment Nos. 1 and 2. 1 15 U.S.C. 78s(b)(1). 2 17 CFR 240.19b-4. 3 *See* Partial Amendment dated, January 20, 2006 (“Amendment No. 1”). In Amendment No. 1, the Amex made clarifying changes to the “purpose” section of the proposed rule change. 4 *See* Partial Amendment dated, February 15, 2006 (“Amendment No. 2”), which made technical and clarifying changes to the “purpose” section of the proposed rule change. 5 *See* Securities Exchange Act Release No. 53324 (February 16, 2006), 71 FR 9614 (February 24, 2006)(“USOF Notice”). II. Description of the Proposal The Exchange proposes to add new Rules 1500 *et seq.* to permit the listing and trading of units in a partnership that is a commodity pool under the Commodity Exchange Act (“CEA”) 6 that are designed to track a specified commodity or index of commodities by holding any combination of investments
(i)comprised of or based on futures contracts, options on futures contracts, forward contracts, swaps, and over-the-counter (“OTC”) contracts for commodities or based on price changes in commodities, and
(ii)in securities that may be required to satisfy margin or collateral requirements associated with investments in the financial instruments listed in item
(i)above. Pursuant to these proposed rules, the Amex proposes to list and trade units (the “Units”) of the United States Oil Fund, LP (“USOF” or the “Partnership”). The Units represent ownership of a fractional undivided beneficial interest in the net assets of USOF. 6 The offering of the Units of the Partnership is registered with the Commission under the Securities Act of 1933. USOF, a Delaware limited partnership, is a commodity pool. 7 It is operated by Victoria Bay Asset Management, LLC, a single member Delaware limited liability company (the “General Partner” or “Victoria Bay”), which is wholly owned by Wainwright Holdings, Inc. The General Partner was formed for the specific purpose of managing and controlling USOF and has registered as a Commodity Pool Operator (“CPO”) with the Commodity Futures Trading Commission (“CFTC”) and become a member of the National Futures Association (“NFA”). 8 7 The Exchange states that USOF is not an investment company as defined in Section 3(a) of the Investment Company Act of 1940. 8 Telephone conversation between Jeffrey Burns, Senior Associate General Counsel, Amex, Florence Harmon, Senior Special Counsel, Division of Market Regulation (“Division”), Commission, and Johnna B. Dumler, Attorney, Division, Commission, on February 15, 2006. Additional information about the management and structure of USOF is found in the USOF Notice, *supra* note 5. The investment objective of the USOF is for its net asset value (“NAV”) 9 to reflect the performance of the spot price of West Texas Intermediate light, sweet crude oil delivered to Cushing, Oklahoma (the “WTI light, sweet crude oil”), 10 as represented by the performance of the price of the “Benchmark Oil Futures Contract,” 11 less the expense of operation of USOF. The “Benchmark Oil Futures Contract” is the near-month ( *i.e.* , spot month) future contract for delivery of WTI light, sweet crude oil traded on the New York Mercantile Exchange (“NYMEX”). 12 The Exchange states that an investment in the Units will allow both retail and institutional investors to easily gain exposure to the crude oil market in a cost-effective manner. 9 NAV is the total assets, less total liabilities of USOF, determined on the basis of generally accepted accounting principles. NAV per Unit is the NAV of USOF divided by the number of outstanding Units. 10 The types of crude oil are typically described by a combination of their physical attributes and their place of origin. A few of these types of crude oil are widely traded and their prices serve as benchmarks in determining the spot and forward prices of the other types of crude oil. The three most important types of crude oil that are used as benchmarks are the light, sweet crude from the United States known as “West Texas Intermediate,” a light, sweet crude from Europe's North Sea known as “Brent Crude,” and a medium crude oil from the Middle East known as “Dubai Crude.” These three types of crude oil are the ones used most frequently in the trading of listed futures contracts, listed options, and non-exchange listed derivative contracts based on crude oil. 11 Telephone conversation between Florence E. Harmon, Senior Special Counsel, Division, Commission, and Cliff Weber, Senior Vice President, Amex, on March 24, 2006. 12 The Exchange will file a Form 19b-4 to obtain Commission approval for the continued listing and trading of the Units should the General Partner change the Benchmark Oil Futures Contract from this NYMEX WTI light, sweet crude oil futures contract. Telephone conversation between Jeffrey Burns, Senior Associate General Counsel, Amex, Florence Harmon, Senior Special Counsel, Division, Commission, and Johnna B. Dumler, Attorney, Division, Commission, on February 13, 2006. The assets of USOF will consist of futures contracts for light, sweet crude oil and other petroleum based fuels that are traded on the NYMEX or other U.S. and foreign exchanges 13 (collectively, “Oil Futures Contracts”). USOF will also purchase other oil interests, such as cash-settled options on Oil Futures Contracts, forward contracts for oil, and OTC transactions that are based on the price of oil, other petroleum-based fuels, and indices based on the foregoing (collectively, “Other Oil Interests”) (Oil Futures Contracts and Other Oil Interests are collectively referred to as “Oil Interests.”) The Oil Interests for light, sweet crude oil and other petroleum based fuels in which USOF will invest are based on domestic oil, (WTI light, sweet crude), international oil (Brent Crude Oil), heating oil, natural gas, and gasoline. A description of these commodities and the primary trading market for futures contracts based on such commodities is set out in the USOF Notice. 14 13 USOF will primarily purchase WTI light, sweet crude Oil Futures Contracts traded on the NYMEX, but may also purchase Oil Futures Contracts on other exchanges, including the Intercontinental Exchange, formerly known as the International Petroleum Exchange, which operates its futures business through ICE Futures (“ICE Futures”), and the Singapore Oil Exchange. 14 *See* USOF Notice, *supra* note 5. USOF will also invest in short term obligations of the United States Government (“Treasuries”) to be used to satisfy its current or future margin and collateral requirements and to otherwise satisfy its obligations with respect to its investments in Oil Interests. Commodity-Based Trust Shares are trust issued receipts (“TIRs”) based on the value of an underlying commodity or index of commodities held by a trust. 15 Because of USOF's structure as a partnership and the nature of its investments, the current Commodity-Based Trust Shares rules (Amex Rules 1200A *et seq.* ) do not specifically permit the Exchange to list this product. This proposal seeks to expand the ability of the Exchange to list and/or trade securities based on a portfolio of underlying investments that may not be “securities” in circumstances where the issuer is a partnership, organized as a commodities pool under the CEA. 15 *See* Securities Exchange Act Release No. 51446 (March 29, 2005), 70 FR 17272 (April 5, 2005). The Exchange listed and traded the iShares® COMEX Gold Trust under Amex Rule 1200A as the first Commodity Based Trust Share. Recently, the Exchange commenced the trading of shares of the streetTRACKS® Gold Trust
(GLD)pursuant to Amex Rule 1000B on an unlisted trading privileges (“UTP”) basis. *See also* Securities Exchange Act Release No. 53105 (January 11, 2006), 71 FR 3129 (January 19, 2006) (order approving listing and trading of DB Commodity Index Tracking Fund). Under proposed Amex Rule 1501, the Exchange would be able to list and trade the Units issued by USOF. For units issued by other commodity-based partnerships or other types of units issued by USOF, if any, the Exchange will submit a filing pursuant to Section 19(b) of the Act, subject to the review and approval of the Commission. The Exchange submits that the Units will conform to the initial and continued listing criteria under proposed Amex Rule 1502. 16 16 Proposed Amex Rule 1502 for listing the Units is substantially similar to current Amex Rule 1202A relating to Commodity-Based Trust Shares. As set forth in the section “Initial and Continued Listing” of proposed Amex Rule 1502, the minimum number of Units required to be outstanding at the time of trading will be 100,000. This section of the proposed rule specifically details the initial and continued listing standards for the Units. Information about the liquidity, depth, and pricing mechanisms of the international oil market, operation of the USOF, and descriptions of the Units of USOF follows below. 17 17 Further information about the USOF is provided in the USOF Notice, *supra* note 5. Description of the Oil Market The Exchange states that crude oil is the world's most actively traded commodity. The investment objective of USOF is to track the spot month futures contracts for WTI light, sweet crude traded on the NYMEX, and thus USOF will primarily purchase WTI light, sweet crude Oil Futures Contracts traded on the NYMEX. The Oil Futures Contracts for light, sweet crude oil that are traded on the NYMEX are the world's most liquid forum for crude oil trading, as well as the most liquid futures contracts on a physical commodity. Due to the liquidity and price transparency of Oil Futures Contracts, they are used as a principal international pricing benchmark. Oil Futures Contracts for WTI light, sweet crude oil trade on the NYMEX in units of 1,000 U.S. barrels (42,000 gallons) and, if not closed out before maturity, will result in delivery of the oil to Cushing, Oklahoma, which is also accessible to the world market by two major interstate petroleum pipeline systems. 18 18 In practice, few Oil Futures Contracts result in delivery of the underlying oil. Futures Regulation The CEA 19 governs the regulation of commodity interest transactions, markets, and intermediaries. The CFTC administers the CEA. Among other things, the CEA provides that the trading of commodity interest contracts generally must be upon exchanges designated as contract markets or derivatives transaction execution facilities and that all trading on those exchanges must be done by or through exchange members. Commodity interest trading between sophisticated persons may be traded on a trading facility not regulated by the CFTC. As a general matter, the Exchange states that trading in spot contracts, forward contracts, options on forward contracts or options on commodities, or swap contracts between eligible contract participants is not within the jurisdiction of the CFTC and may therefore be effectively unregulated. 19 7 U.S.C. 1 *et seq.* The Exchange states that non-U.S. futures exchanges differ in certain respects from their U.S. counterparts. Importantly, non-U.S. futures exchanges are not subject to regulation by the CFTC, but rather are regulated by their home country regulator. In contrast to U.S. designated contract markets, some non-U.S. exchanges are principals' markets, where trades remain the liability of the traders involved, and the exchange or an affiliated clearing organization, if any, does not become substituted for any party. Due to the absence of a clearing system, the Exchange states that such exchanges are significantly more susceptible to disruptions. Further, participants in such markets must often satisfy themselves as to the individual creditworthiness of each entity with which they enter into a trade. Trading on non-U.S. exchanges is often in the currency of the exchange's home jurisdiction. Consequently, USOF may be subject to the additional risk of fluctuations in the exchange rate between such currencies and U.S. dollars and the possibility that exchange controls could be imposed in the future. Investment Strategy In connection with tracking the price of the Benchmark Oil Futures Contract, the General Partner will endeavor to place USOF's trades in Oil Futures Contracts and Other Oil Interests and otherwise manage USOF's investments so that “A” will be within ±10 percent of “B”, where: • A is the average daily change in USOF's NAV for any period of 30 successive valuation days, *i.e.* , any day as of which USOF calculates its NAV; and • B is the average daily change in the price of the Benchmark Oil Futures Contract over the same period. Therefore, USOF's investment objective is to manage its assets so that the average daily change in the NAV for any period of 30 successive valuation days will be within 10% of the average daily change in the price of the Benchmark Oil Futures Contract over the same period. 20 20 Telephone conversation between Jeffrey Burns, Senior Associate General Counsel, Amex, Florence Harmon, Senior Special Counsel, Division, Commission, and Johnna B. Dumler, Attorney, Division, Commission, on February 13, 2006. The Exchange believes that market arbitrage opportunities should cause USOF's Unit price to closely track USOF's per Unit NAV, which is targeted at the current Benchmark Oil Futures Contract. The price of the Benchmark Oil Futures Contract has closely tracked the spot price of WTI light, sweet crude oil over time. 21 Accordingly, the General Partner expects that the price of USOF's Units on the Exchange will closely track the spot price of a barrel of WTI light, sweet crude oil, less USOF's expenses. 21 *See* Exhibit A attached to the Form 19b-4 filed by the Exchange, showing the tracking of the Benchmark Oil Futures Contract and the WTI spot price. Investments USOF believes that it will be able to use a combination of Oil Futures Contracts and Other Oil Interests to manage the portfolio to achieve its investment objective of tracking the price of the Benchmark Oil Futures Contract. USOF further anticipates that the exact mix of Oil Futures Contracts and Other Oil Interests held by the portfolio will vary over time depending on, among over things, the amount of invested assets in the portfolio, price movements of oil, the rules and regulations of the various futures and commodities exchanges and trading platforms that deal in Oil Interests, and innovations in the Oil Interests marketplace including both the creation of new Oil Interest investment vehicles and the creation of new trading venues that trade in Oil Interests. USOF's total portfolio composition will be disclosed each business day that the Amex is open for trading on its Web site at *http://www.unitedstatesoilfund.com* and/or the Exchange's Web site at *http://www.amex.com.* USOF states that Web site disclosure of portfolio holdings will be made daily and will include, as applicable, the name and value of each Oil Interest, the specific types of Other Oil Interests and characteristics of such Other Oil Interests, Treasuries and amount of cash held in the portfolio of USOF. 22 22 *See* Amendment No. 1. The public Web site disclosure of the portfolio composition of USOF will coincide with the disclosure by the Administrator on each business day of the NAV for the Units and the Basket Amount (for orders placed during the day). Therefore, the same portfolio information will be provided on the public Web site, as well as in the facsimile or electronic mail message to Authorized Purchasers containing the NAV and Basket Amount (“Daily Dissemination”). The format of the public Web site disclosure and the Daily Dissemination will differ because the public Web site will list all portfolio holdings, while the Daily Dissemination will provide the portfolio holdings in a format appropriate for Authorized Purchasers, *i.e.* , the exact components of a Creation Unit. Oil Futures Contracts The principal Oil Interests to be invested in by USOF are Oil Futures Contracts. In particular, USOF expects to purchase futures on the WTI light, sweet crude oil traded on the NYMEX. USOF may also purchase futures on Brent crude oil traded on NYMEX. 23 Brent crude oil futures contracts are also listed on the ICE Futures. In addition to the commodities and futures exchanges in New York and London, several other established futures exchanges currently offer, or have announced plans to offer, trading in futures contracts on light, medium, or heavy crude oils, including exchanges in Singapore, Tokyo, Shanghai and Dubai. 24 As noted above, the NYMEX futures contracts on WTI light, sweet crude oil have historically closely tracked the investment objective of USOF over both the short-term, medium-term, and the long-term. 25 For that reason, USOF anticipates making significant investments in the current Benchmark Oil Futures Contract. The General Partner submits that Other Oil Futures Contracts, such as the Brent crude oil futures contract traded on the NYMEX and ICE Futures, the Dubai crude oil futures contract traded in Singapore and elsewhere, and other NYMEX petroleum-based futures contracts such as heating oil and gasoline, have also tended to track the investment objective of USOF, though not as closely as the NYMEX light, sweet crude
(WTI)oil futures contract. 26 23 Brent crude oil is the price reference for two-thirds of the world's traded oil. 24 The Exchange has represented that the USOF will only purchase Oil Futures Contracts on markets where the Exchange has entered into the appropriate comprehensive surveillance sharing arrangements. *See infra,* note 53. 25 *See supra* note 21 and text accompanying note 12. 26 *See* Exhibit B attached to the Form 19b-4 filed by the Exchange, tracking the NYMEX futures contracts on light, sweet crude oil, heating oil, natural gas and gasoline from November 17, 1995 to November 11, 2005. Other Oil Interests In addition to Oil Futures Contracts, there are also a number of listed options on Oil Futures Contracts on the principal commodities and futures exchanges. These option contracts offer investors and hedgers another vehicle for managing exposure to the crude oil market. USOF may purchase oil-related listed options on these exchanges in pursuing its investment objective. In addition to the Oil Futures Contracts and related listed options, there also exists an active OTC market in derivatives linked to crude oil. These OTC derivative transactions are privately-negotiated agreements between two parties. Unlike most of the exchange-traded Oil Futures Contracts or related options, each party to an OTC contract bears the credit risk that the counterparty may not be able to perform its obligations. Some oil-based derivatives transactions contain fairly generic terms and conditions and are available from a wide range of participants. Other oil-based derivatives have highly customized terms and conditions and are not as widely available. Many of these OTC contracts are cash-settled forwards for the future delivery of oil-or petroleum-based fuels that have terms similar to the Oil Futures Contracts. Others take the form of “swaps” in which the two parties exchange cash flows based on pre-determined formulas tied to the price of oil as determined by the spot, forward, or futures markets. USOF may enter into OTC derivative contracts whose value will be tied to changes in the difference between the WTI spot price, the price of Oil Futures Contracts traded on NYMEX, and the prices of non-NYMEX Oil Futures Contracts that may be invested in by USOF. To protect itself from the credit risk that arises in connection with such contracts, USOF will enter into agreements with each counterparty that provide for the netting of its overall exposure to its counterparty and/or provide collateral or other credit support to address USOF's exposure. 27 The counterparties to an OTC contract will generally be major broker-dealers and banks or their affiliates, though certain institutions, such as large energy companies or other institutions active in oil commodities markets, may also be counterparties. The creditworthiness of each potential counterparty will be assessed by the General Partner. The General Partner will assess or review, as appropriate, the creditworthiness of each potential or existing counterparty to an OTC contract pursuant to guidelines approved by the General Partner's Board of Directors. Furthermore, the General Partner on behalf of USOF will only enter into OTC contracts with
(a)members of the Federal Reserve System or foreign banks with branches regulated by the Federal Reserve Board;
(b)primary dealers in U.S. government securities;
(c)broker-dealers;
(d)commodities futures merchants; or
(e)affiliates of the foregoing. Existing counterparties will also be reviewed periodically by the General Partner. 27 The agreements published by the International Swap and Derivatives Association (“ISDA”) and used extensively in the OTC derivatives market provides “netting” provisions. As discussed above, USOF's total portfolio composition will be disclosed, each business day that the Amex is open for trading, on its Web site at *http://www.unitedstatesoilfund.com* and/or the Exchange's Web site at *http://www.amex.com* , with a valuation assigned to these instruments. USOF anticipates that the use of Other Oil Interests, together with its investments in Oil Futures Contracts, will produce price and total return results that closely track the investment objective of USOF. Treasuries and Cash USOF will invest virtually all of its assets not invested in Oil Interests in Treasuries, currently anticipated to be those securities with a remaining maturity of two years or less. The Treasuries and any cash will be available to be used to meet USOF's current or potential margin and collateral requirements with respect to its investments in Oil Interests. USOF will not use Treasuries as margin for new investments unless it has a sufficient amount of Treasuries and cash to meet the margin or collateral requirements that may arise due to changes in the value of its currently held Oil Interests. Other than in connection with a redemption of Units, USOF does not intend to distribute cash or property to its Unit holders. Interest earned on Treasuries and cash held by USOF will be retained by it to pay its expenses, to make investments to satisfy its investment objectives, or to satisfy its margin or collateral requirements. Impact of Speculative Position Limits The CFTC and U.S. designated contract markets, such as the NYMEX, have speculative position limits or position limits on the maximum net long or net short speculative position that any person or group of persons under common trading control (other than a hedger) may hold, own, or control in commodity interests. Among the purposes of speculative position limits is to prevent a corner or squeeze on a market or undue influence on prices by any single trader or group of traders. 28 28 Most U.S. futures exchanges limit the amount of fluctuation in some futures contracts or options on futures contract prices during a single trading session. These regulations specify what are referred to as daily price fluctuation limits ( *i.e.* , daily limits). The daily limits establish the maximum amount that the price of a futures contract or options on a futures contract may vary either up or down from the previous day's settlement price. Once the daily limit has been reached in a particular futures contract or options on a futures contract, no trades may be made at a price beyond the limit. The foregoing speculative position limits will impact the mix of investments in Oil Interests by USOF, with such mix varying depending on the level of assets held by USOF. The following example illustrates how the mix will vary as assets increase, assuming the spot price of WTI light, sweet crude oil remains the same: Assuming the spot price for WTI light, sweet crude oil and the Unit price were each $60, USOF anticipates that it would invest the first $300 million of its daily net assets only in Oil Futures Contracts. The majority of those contracts will consist of the current Benchmark Oil Futures Contract. At this level, USOF could purchase 5,000 of such contacts or 25% of the NYMEX's speculative position limit for such contracts. When daily net assets exceed $300 million, USOF anticipates that it will invest the majority of its assets above that amount in the current Benchmark Oil Futures Contract with the balance of its net assets being invested in a mix of other Oil Futures Contracts, such as the Brent crude oil futures contract traded on NYMEX or the ICE Futures, and Other Oil Interests. At this level, USOF anticipates that it would also invest in various OTC derivative contracts to hedge the short-term price movements of Oil Futures Contracts against the current Benchmark Oil Futures Contract. Once the daily net assets of the portfolio exceed approximately $1.2 billion, USOF anticipates that a majority of all further investments will be made in Oil Futures Contracts, other than the current Benchmark Oil Futures Contract, and in Other Oil Interests. USOF anticipates that once the daily net assets of the portfolio exceed approximately $2.4 billion, the ability of the portfolio to invest in additional current Benchmark Oil Futures Contracts may be sharply limited due to speculative position limit rules in effect on the NYMEX. Assuming the current Benchmark Oil Futures Contract is at the same price level and half of the USOF's assets were then fully invested in such contracts ($1.2 billion), the current NYMEX position limits for such contracts (20,000 contracts) would be met. Under that scenario, all additional investments above the $2.4 billion level would be required to be invested in other Oil Future Contracts and Other Oil Interests. USOF anticipates that at or above the $2.4 billion daily net asset level, the majority of the total portfolio holdings would be in other Oil Futures Contracts or Other Oil Interests. Issuance and Redemption of USOF Units There will be two markets for investors to purchase and sell Units. New issuances of the Units will be made only in baskets of 100,000 Units or multiples thereof (a “Basket”). USOF will issue and redeem Baskets of the Units on a continuous basis by or through participants who have entered into authorized purchaser agreements (“Authorized Purchaser Agreement” and each such participant, an “Authorized Purchaser”) 29 with the General Partner, at the NAV per Unit next determined after an order to purchase the Units in a Basket is received in proper form. Baskets may be issued and redeemed on any Business day (defined as any day other than a day on which the Amex, the NYMEX or the New York Stock Exchange is closed for regular trading) through the Marketing Agent in exchange for cash and/or Treasuries, which the Custodian receives from Authorized Purchasers or transfers to Authorized Purchasers, in each case on behalf of USOF. Baskets are then separable upon issuance into identical Units that will be listed and traded on the Exchange as equity securities. 30 29 An “Authorized Purchaser” is a person, who at the time of submitting to the General Partner an order to create or redeem one or more Baskets:
(i)Is a registered broker-dealer or other market participants, such as banks and other financial institutions, that are exempt from broker-dealer registration;
(ii)is a DTC Participant; and
(iii)has in effect a valid Authorized Participant Agreement. Telephone conversation between Jeffrey Burns, Senior Associate General Counsel, Amex, Florence Harmon, Senior Special Counsel, Division, Commission, and Johnna B. Dumler, Attorney, Division, Commission, on February 13, 2006 (clarifying that the reference to “trustee” in this sentence should be changed to “General Partner”). 30 The Exchange expects that the number of outstanding Units will increase and decrease as a result of creations and redemptions of Baskets. Baskets will be issued in exchange for Treasuries and/or cash in an amount equal to the NAV per Unit times 100,000 Units (the “Basket Amount”). Authorized Purchasers that wish to purchase a Basket must transfer the Basket Amount to the Administrator (the “Deposit Amount”). Authorized Purchasers that wish to redeem a Basket will receive an amount of Treasuries and cash in exchange for each Basket surrendered in an amount equal to the NAV per Basket (the “Redemption Amount”). On each business day, the Administrator will make available prior to the opening of trading on the Exchange, the estimated Basket Amount for the creation of a Basket based on the prior day's NAV. 31 The Exchange will disseminate at least every 15 seconds throughout the trading day, via the facilities of the Consolidated Tape Association (“CTA”), an amount representing, on a per Unit basis, the current indicative value of the Basket Amount ( *See* “Indicative Partnership Value” below). Shortly after 4 p.m. Eastern Time (“ET”), the Administrator will determine the NAV for USOF as described below. At or about 4 p.m. ET on each business day, the Administrator will determine the Actual Basket Amount (“Actual Basket Amount”) for orders placed by Authorized Purchasers received before 12 p.m. ET that day. 32 Thus, although Authorized Purchasers place orders to purchase Units during the trading day until 12 p.m. ET, the Actual Basket Amount is determined as of 4 p.m. ET. 31 Amex clarified that it intended for this sentence to indicate that the Administrator will make available an “estimated” Basket Amount prior to the opening of trading on the Exchange, rather than the Actual Basket Amount (as described below), which will not be available until shortly after the close of trading on each business day. Additionally, such information (NAV, Actual Basket Amount, Estimated Basket Amount, daily disclosure of portfolio holdings) will be available to all market participants at the same time to avoid any informational advantage. Telephone conversation between Jeffrey Burns, Senior Associate General Counsel, Amex, Florence Harmon, Senior Special Counsel, Division, Commission, and Johnna B. Dumler, Attorney, Division, Commission, on February 8, 2006. 32 *See* Amendment No. 2, *supra* note 4. *See also* “Calculation and Payment of Deposit Amount” and “Calculation and Payment of Redemption Amount,” *infra.* Shortly after 4 p.m. ET on each business day, the Administrator, Amex, and the General Partner will disseminate the NAV for the Units and the Actual Basket Amount (for orders placed during the day). The Basket Amount and the NAV are communicated by the Administrator to all Authorized Purchasers via facsimile or electronic mail message. The Amex will also disclose the NAV and the Actual Basket Amount on its Web site at *http://www.amex.com.* 33 On each day that the Amex is open for regular trading, the Administrator will adjust the Deposit Amount as appropriate to reflect the prior day's Partnership NAV and accrued expenses. The Administrator will then determine the Deposit Amount for a given business day. 33 *See supra* , note 32. Calculation of USOF's NAV The Administrator will calculate NAV as follows:
(1)Determine the current value of USOF assets and
(2)subtract the liabilities of USOF. The NAV will be calculated at 4 p.m. ET using the settlement value 34 of Oil Futures Contracts traded on the NYMEX as of the close of open-outcry trading on the NYMEX at 2:30 p.m. ET, 35 and for the value of other Oil Futures Interests and Treasuries, the value of such investments as of the earlier of 4 p.m. ET or the close of trading on the New York Stock Exchange. The NAV is calculated by including any unrealized profit or loss on Oil Futures Contracts and other Oil Interests and any other credit or debit accruing to USOF but unpaid or not received by USOF. The NAV is then used to compute all fees (including the management and administrative fees) that are calculated from the value of Partnership assets. The Administrator will calculate the NAV per unit by dividing the NAV by the number of Units outstanding. 34 *See* Rule 6.52 of the NYMEX Rulebook. 35 Telephone conversation between Jeffrey Burns, Senior Associate General Counsel, Amex, Florence Harmon, Senior Special Counsel, Division, Commission, and Johnna B. Dumler, Attorney, Division, Commission, on February 8, 2006. When calculating NAV for USOF, the Administrator will value Oil Futures Contracts based on the closing settlement prices quoted on the relevant commodities and futures exchange and obtained from various market data vendors such as Bloomberg or Reuters. 36 The value of the Other Oil Interests for purposes of determining the NAV will be valued based upon the determination of the Administrator as to their fair market value. Certain types of Other Oil Interests, such as listed options on futures contracts, have closing prices that are available from the exchange upon which they are traded or from various market data vendors. If available from an exchange, Other Oil Interests will be valued based on the last sale price on the exchange or market where traded. If a contract fails to trade, the value shall be the most recent bid quotation from the third-party source. 36 The Amex confirmed that the pricing for the NAV also will be derived from the NYMEX futures contract nearest to settlement (spot month) for WTI light, sweet crude. Other types of Other Oil Interests, such as crude oil forward contracts do not trade on established exchanges, but typically have prices that are widely available from third-party sources. The Administrator may make use of such third-party sources in calculating a fair market value of these Other Oil Interests. Certain types of Other Oil Interests, such as “swaps,” also do not have established exchanges upon which they trade and may not have readily available price quotes from third parties. Swaps and other similar derivative or contractual-type instruments will be first valued at a price provided by a single broker or dealer, typically the counterparty. If no such price is available, the contract will be valued at the price at which the counterparty to such contract would repurchase the instrument or terminate the contract. In determining the fair market value of such derivative contracts, the Administrator may make use of quotes from other providers of similar derivatives. If these are not available, the Administrator may calculate a fair market value of the derivative contract based on the terms of the contract and the movement of the underlying price factors of the contract. Calculation and Payment of the Deposit Amount The Deposit Amount of Treasuries and cash will be in the same proportion to the total net assets of USOF as the number of Units to be created is in proportion to the total number of Units outstanding. The General Partner will determine the requirements for the Treasuries that may be included in the Deposit Amount and will disseminate these requirements prior to the start of each business day. The amount of cash that is required is the difference between the aggregate market value of the Treasuries required to be included in the Deposit Amount as of 4 p.m. ET on the date of purchase and the total required deposit. All purchase orders must be received by the Marketing Agent by 12 p.m. ET. Delivery of the Deposit Amount, *i.e.* , Treasuries and cash, to the Administrator must occur by the third Business day following the purchase order date. 37 Thus, the General Partner will disseminate shortly after 4 p.m. ET the amount of Treasuries and cash to be deposited with the Custodian for each Basket (100,000 Units) order properly submitted by Authorized Purchasers by 12 p.m. ET that business day, ( *e.g.* , the Actual Basket Amount). 37 Authorized Purchasers are required to pay a transaction fee of $1,000 for each order to create one or more Baskets. Calculation and Payment of the Redemption Amount The Units will not be individually redeemable but will only be redeemable in Baskets. To redeem, an Authorized Purchaser will be required to accumulate enough Units to constitute a Basket ( *i.e.* , 100,000 Units). An Authorized Purchaser redeeming a Basket will receive the Redemption Amount. Upon the surrender of the Units and payment of applicable redemption transaction fee, 38 taxes or charges, the Custodian will deliver to the redeeming Authorized Purchaser the Redemption Amount. The Redemption Amount of Treasuries and cash will be in the same proportion to the total net assets of USOF as the number of Units to be redeemed is in proportion to the total number of Units outstanding. The General Partner will determine the Treasuries to be included in the Redemption Amount. The amount of cash that is required is the difference between the aggregate market value of the Treasuries required to be included in the Redemption Amount calculated as of 4:00 p.m. ET on the date of redemption and the total Redemption Amount. All redemption orders must be received by the Marketing Agent by 12:00 p.m. ET on the date redemption is requested. Delivery of the Basket to be redeemed to the Custodian and payment of Redemption Amount will occur by the third business day (T+3) following the redemption order date. 38 Authorized Purchasers are required to pay a transaction fee of $1,000 for each order to redeem one or more Baskets. The Exchange believes that the Units will not trade at a material discount or premium to a Unit's NAV based on potential arbitrage opportunities. Due to the fact that the Units can be created and redeemed only in Baskets at the NAV, the Exchange submits that arbitrage opportunities should provide a mechanism to mitigate the effect of any premiums or discounts that may exist from time to time. Dissemination and Availability of Information Oil Futures Contracts The daily settlement prices for the NYMEX traded Oil Futures Contracts held by USOF are publicly available on the NYMEX Web site at *http://www.nymex.com* . The Exchange's Web site at *http://www.amex.com* will also include a hyperlink to the NYMEX Web site for the purpose of disclosing futures contract pricing. In addition, various market data vendors and news publications publish futures prices and related data. The Exchange represents that quote and last sale information for the Oil Futures Contracts are widely disseminated through a variety of market data vendors worldwide, including Bloomberg and Reuters. Thus, last sale information for the Benchmark Oil Futures Contract will be updated and disseminated at least every 15 seconds in accordance with the continued listing standards by one or more major market data vendors during the time the Units trade on Amex. 39 From 2:30 p.m. ET to the opening of NYMEX ACCESS at 3:15 p.m. ET, the pricing for the Benchmark Oil Futures Contract will not be updated. The Exchange further represents that real-time futures data is available by subscription from Reuters and Bloomberg. The NYMEX also provides delayed futures information on current and past trading sessions and market news free of charge on its Web site. The specific contract specifications for the Oil Futures Contracts are also available on the NYMEX Web site and the ICE Futures Web site at *https://www.the ice.com.* 39 Telephone conversation between Florence E. Harmon, Senior Special Counsel, Division, Commission, and Cliff Weber, Senior Vice President, Amex, on March 24, 2006. USOF Units The Web site for USOF, which will be publicly accessible at no charge, will include the following information:
(1)The prior business day's NAV and the reported closing price;
(2)the mid-point of the bid-ask price 40 in relation to the NAV as of the time the NAV is calculated (the “Bid-Ask Price”);
(3)calculation of the premium or discount of such price against such NAV;
(4)data in chart form displaying the frequency distribution of discounts and premiums of the Bid-Ask Price against the NAV, within appropriate ranges for each of the four
(4)previous calendar quarters;
(5)the prospectus and the most recent periodic reports filed with the Commission or required by the CFTC; and
(6)other applicable quantitative information. In addition, information on USOF's daily portfolio holdings will be available on its Web site at *http://www.unitedstatesoilfund.com* and will be equally accessible to investors and Authorized Purchasers. 41 40 The Bid-Ask Price of Units is determined using the highest bid and lowest offer as of the time of calculation of the NAV. 41 *See* Amendment No. 1, *supra* note 3. As described above, the NAV for USOF will be calculated and disseminated daily. The Amex also intends to disseminate for USOF on a daily basis by means of CTA/CQ High Speed Lines information with respect to the Indicative Partnership Value (as discussed below), recent NAV, Units outstanding, the estimated Basket Amount and the Deposit Amount ( *e.g.* , the Actual Basket Amount). The Exchange will also make available on its Web site daily trading volume, closing prices and the NAV. The closing price and settlement prices of the Oil Futures Contracts held by USOF are also readily available from the NYMEX, automated quotation systems, published or other public sources, or on-line information services such as Bloomberg or Reuters. In addition, the Exchange will provide a hyperlink on its Web site at *http://www.amex.com* to USOF's Web site. Indicative Partnership Value The Exchange will disseminate through the facilities of the CTA an updated Indicative Partnership Value (the “Indicative Partnership Value”) per Unit basis at least every 15 seconds during the regular Amex trading hours of 9:30 a.m. to 4:15 p.m. ET. The Indicative Partnership Value will be calculated based on the Treasuries and cash required for creations and redemptions ( *i.e.* , NAV per limit x 100,000) adjusted to reflect the price changes of the current Benchmark Oil Futures Contract. The Indicative Partnership Value will not reflect price changes to the price of the current Benchmark Oil Futures Contract between the close of open-outcry trading of these oil futures contract on the NYMEX at 2:30 p.m. ET and the open of trading on the NYMEX ACCESS market at 3:15 p.m. ET. 42 The Indicative Partnership Value after 3:15 p.m. ET will reflect changes to the current Benchmark Oil Futures Contract as provided for through NYMEX ACCESS. The value of a Unit may accordingly be influenced by the non-concurrent trading hours of the Amex and NYMEX. While the Units will trade on the Amex from 9:30 a.m. to 4:15 p.m. ET, the current Benchmark Oil Futures Contract will trade, in open-outcry, on the NYMEX from 10:00 a.m. ET to 2:30 p.m. ET and NYMEX ACCESS from 3:15 p.m. ET through the following morning 9:30 a.m. ET. 42 NYMEX ACCESS(r), an electronic trading system, is open for price discovery on the NYMEX light, sweet crude oil futures contract each Monday through Thursday at 3:15 p.m. ET through the following morning at 9:30 a.m. ET, and from 7:00 p.m. Sunday night until Monday morning 9:30 a.m. ET. The Exchange represents that while the NYMEX (open outcry) is open for trading, the Indicative Partnership Value can be expected to closely approximate the value per unit of the Basket Amount. However, during Amex trading hours when the Oil Futures Contracts have ceased trading, spreads and resulting premiums or discounts may widen, and therefore, increase the difference between the price of the Units and the NAV of the Units. The Exchange believes that dissemination of the Indicative Partnership Value based on the cash amount required for a Basket provides additional information that is not otherwise available to the public and is useful to professionals and investors in connection with the Units trading on the Exchange or the creation or redemption of the Units. Criteria for Initial and Continued Exchange Listing USOF will be subject to the criteria in proposed Amex Rule 1502 for initial and continued listing of the Units. These continued listing criteria provide for the delisting or removal from listing of the Units under any of the following circumstances: • Following the initial twelve month period from the date of commencement of trading of the Units:
(i)If USOF has more than 60 days remaining until termination and there are fewer than 50 record and/or beneficial holders of the Units for 30 or more consecutive trading days;
(ii)if USOF has fewer than 50,000 Units issued and outstanding; or
(iii)if the market value of all Units issued and outstanding is less than $1,000,000. • If the value of the underlying spot commodity or Oil Futures Contract is no longer calculated or available on at least a 15-second delayed basis or the Exchange stops providing a hyperlink on its Web site to any such investment commodity or asset value. • The Indicative Partnership Value is no longer made available on at least a 15-second delayed basis. • If such other event shall occur or condition exists which in the opinion of the Exchange makes further dealings on the Exchange inadvisable. A minimum of 100,000 Units will be required to be outstanding at the start of trading. 43 It is anticipated that the initial price of a Unit will be approximately $67.00 based upon the WTI light, sweet crude oil spot price on March 30, 2006. 44 USOF expects that the initial Authorized Purchaser will purchase the initial Basket of 100,000 Units at the initial offering price per Unit equal to the closing price of the expiration month light, sweet crude
(WTI)oil futures contract listed on the NYMEX on the first Business day prior to the launch date. On the date of the public offering and thereafter, USOF will continuously issue Units in Baskets of 100,000 Units to Authorized Purchasers at NAV. The Exchange believes that the anticipated minimum number of Units outstanding at the start of trading is sufficient to provide adequate market liquidity and to further USOF's objective to seek to provide a simple and cost effective means of accessing the commodity futures markets. 43 Telephone conversation between Florence E. Harmon, Senior Special Counsel, Division, Commission, and Cliff Weber, Senior Vice President, Amex, on March 29, 2006. 44 Telephone conversation between Jeffrey Burns, Associate General Counsel, Amex, and Florence E. Harmon, Senior Special Counsel, Division, Commission, on March 31, 2006. As of March 30, 2006, the settlement spot price was $67.15 for a barrel of oil. The exact price of a Unit will be determined on the date of launch. *Id.* The Exchange represents that it prohibits the initial and/or continued listing of any security that is not in compliance with Rule 10A-3 under the Act. 45 45 The Exchange represents that the listed issuer of the USOF Units qualifies for the exemption in Rule 10A-3(c)(7) of the Act. Original and Annual Listing Fees The Amex original listing fee applicable to the listing of USOF is $5,000. In addition, the annual listing fee applicable under Section 141 of the Amex *Company Guide* will be based on the year-end aggregate number of Units in all series of USOF outstanding at the end of each calendar year. Trading Rules The Units are equity securities subject to Amex Rules governing the trading of equity securities, including, among others, rules governing priority, parity and precedence of orders, specialist responsibilities and account opening and customer suitability (Amex Rule 411). Initial equity margin requirements of 50% will apply to transactions in the Units. Units will trade on the Amex until 4:15 p.m. ET each business day and will trade in a minimum price variation of $0.01 pursuant to Amex Rule 127. Trading rules pertaining to odd-lot trading in Amex equities (Amex Rule 205) will also apply. Amex Rule 154, Commentary .04(c) provides that stop and stop limit orders to buy or sell a security (other than an option, which is covered by Amex Rule 950(f) and Commentary thereto) the price of which is derivatively priced based upon another security or index of securities, may with the prior approval of a Floor Official, be elected by a quotation, as set forth in Commentary .04(c)(i-v). The Exchange has designated the Units as eligible for this treatment. 46 46 *See* Securities Exchange Act Release No. 29063 (April 10, 1991), 56 FR 15652 (April 17, 1991) at note 8, regarding the Exchange's designation of equity derivative securities as eligible for such treatment under Amex Rule 154, Commentary .04(c). The Units will be deemed “Eligible Securities”, as defined in Amex Rule 230, for purposes of the Intermarket Trading System Plan and therefore will be subject to the trade-through provisions of Amex Rule 236 which require that Amex members avoid initiating trade-throughs for ITS securities. Specialist transactions of the Units made in connection with the creation and redemption of Units will not be subject to the prohibitions of Amex Rule 190, which generally prohibits business transactions between a specialist (or its member organization) and a company (or its officers, directors, or 10% stockholder) in which the specialist is registered. 47 Unless exemptive or no-action relief is available, the Units will be subject to the short sale rule, Rule 10a-1 under the Act and Regulation SHO. 48 If exemptive or no-action relief is provided, the Exchange will issue a notice detailing the terms of the exemption or relief. The Units will generally be subject to the Exchange's stabilization rule, Amex Rule 170, except that specialists may buy on “plus ticks” and sell on “minus ticks,” in order to bring the Units into parity with the underlying commodity or commodities and/or futures contract price. Commentary .01 to Amex Rule 1503 sets forth this limited exception to Amex Rule 170. 47 *See* Commentary .05 to Amex Rule 190. 48 USOF expects to seek relief, in the near future, from the Commission in connection with the trading of the Units from the operation of the short sale rule, Rule 10a-1 under the Act, no-action relief from Regulation SHO, and other no-action or exemptive relief from the Act. The Amex proposes Rule 1503 to address potential conflicts of interest in connection with acting as a specialist in the Units. Specifically, Amex Rule 1503 provides that the prohibitions in Amex Rule 175(c) apply to a specialist in the Units so that the specialist or affiliated person may not act or function as a market-maker in an underlying asset, related futures contract or option or any other related derivative. An affiliated person of the specialist, consistent with Amex Rule 193, may be afforded an exemption to act in a market making capacity, other than as a specialist in the Units on another market center, in the underlying asset, related futures or options or any other related derivative. Amex Rule 1504(a) provides that the member organization acting as specialist in the Units is obligated to conduct all trading in the Units in its specialist account, subject to only the ability to have one or more investment accounts, all of which must be reported to the Exchange ( *See* Rule 170). Moreover, Amex Rule 1504(b) requires that the specialist in the Units make available to the Exchange information relating to its transactions or the transactions of any member, member organization, limited partner, officer or approved person thereof, registered or non-registered employee affiliated with such entity for its or their own accounts in the underlying physical asset or commodity, related futures or options on futures, or any other related derivatives. 49 Finally, Amex Rule 1504(c) prohibits the specialist registered as such in the Units from using any material nonpublic information received from any person associated with a member, member organization or employee of such person regarding trading by such person or employee in the physical asset or commodity, futures or options on futures, or any other related derivatives. 49 As a general matter, the Exchange has regulatory jurisdiction over its members, member organizations and approved persons of a member organization. The Exchange also has regulatory jurisdiction over any person or entity controlling a member organization, as well as a subsidiary or affiliate of a member organization that is in the securities business. A subsidiary or affiliate of a member organization that does business only in commodities or futures contracts would not be subject to Exchange jurisdiction, but the Exchange could obtain information regarding the activities of such subsidiary or affiliate through surveillance sharing agreements with regulatory organizations of which such subsidiary or affiliate is a member. Trading Halts Prior to the commencement of trading, the Exchange will issue an Information Circular (described below) to members informing them of, among other things, Exchange policies regarding trading halts in the Units. First, the Information Circular will advise that trading will be halted in the event the market volatility trading halt parameters set forth in Amex Rule 117 have been reached. Second, the Information Circular will advise that, in addition to the parameters set forth in Amex Rule 117, the Exchange will halt trading in the Units if trading in the current Benchmark Oil Futures Contract is halted or suspended. Third, with respect to a halt in trading that is not specified above, the Exchange may also consider other relevant factors and the existence of unusual conditions or circumstances that may be detrimental to the maintenance of a fair and orderly market. Additionally, the Exchange represents that it will cease trading the Units if the conditions in Amex Rule 1202(d)(2)(ii) or
(iii)exist ( *i.e.* , if there is a halt or disruption in the dissemination of the Indicative Partnership Value and/or underlying Benchmark Futures Contract (spot commodity) value). 50 50 In the event the Benchmark Oil Futures Contract value or Indicative Partnership Value is no longer calculated or disseminated, the Exchange would immediately contact the Commission to discuss measures that may be appropriate under the circumstances. Telephone conversation between Jeffrey Burns, Associate General Counsel, Amex, Florence Harmon, Senior Special Counsel, Division, Commission and Johnna B. Dumler, Attorney, Division, Commission on February 8, 2006. Information Circular The Amex will distribute an Information Circular to its members in connection with the trading of the Units. The Information Circular, will discuss the special characteristics of and risks of trading in the Units. Specifically, the Information Circular, among other things, will discuss what the Units are, how a basket is created and redeemed, the requirement that members and member firms deliver a prospectus to investors purchasing newly issued Units prior to or concurrently with the confirmation of a transaction, applicable Amex rules, dissemination information regarding the per unit Indicative Partnership Value, trading information and applicable suitability rules. The Information Circular will also explain that USOF is subject to various fees and expenses described in the Registration Statement. The Information Circular will also reference the fact that there is no regulated source of last sale information regarding physical commodities, that the Commission has no jurisdiction over the trading of WTI light, sweet crude oil, Brent crude oil, heating oil, gasoline, natural gas or other petroleum-based fuels, that the CFTC has regulatory jurisdiction over the trading of oil-based futures contracts and related options, and that trading in certain OTC commodity based derivatives is not within the jurisdiction of the CFTC and may therefore be effectively unregulated. 51 51 Telephone conversation between Jeffrey Burns, Senior Associate General Counsel, Amex, and Florence Harmon, Senior Special Counsel, Division, Commission, on March 31, 2006. The Information Circular will inform members and member organizations, prior to commencement of trading, of the prospectus delivery requirements applicable to USOF. The Exchange notes that investors purchasing Units directly from USOF (by delivery of the Deposit Amount) will receive a prospectus. Amex members purchasing Units from USOF for resale to investors will deliver a prospectus to such investors. The Information Circular will also notify members and member organizations about the procedures for purchases and redemptions of Units in Baskets, and that Units are not individually redeemable but are redeemable only in Baskets or multiples thereof. The Information Circular will advise members of their suitability obligations with respect to recommended transactions to customers in the Units pursuant to Amex Rule 411. The Information Circular will also discuss any exemptive or no-action relief, if granted, by the Commission or the staff from any rules under the Act. The Information Circular will disclose that the NAV for Units will be calculated shortly after 4:00 p.m. ET each trading day. Surveillance The Exchange submits that its surveillance procedures are adequate to deter and detect violations of Exchange rules relating to the trading of the units. The surveillance procedures for the Units will be similar to those used for the iShares(®) COMEX Gold Trust and the streetTRACKS(®) Gold Trust Shares, as well as other TIRs and exchange-traded funds. In addition, the surveillance procedures will incorporate and rely on existing Amex surveillance procedures governing options and equities. 52 52 Proposed Rule 1504 will aid the Exchange in conducting appropriate surveillance. The Exchange currently has in place a comprehensive surveillance sharing agreement with the NYMEX for the purpose of providing information in connection with trading in or related to futures contracts traded on the NYMEX. In addition, the Exchange has entered into a comprehensive surveillance sharing arrangement with ICE Futures for the purpose of providing information in connection with the trading in or related to futures contracts traded on the ICE Futures. To the extent that USOF invests in Oil Interests traded on other exchanges, the Amex will enter into comprehensive surveillance sharing arrangements, acceptable to the Commission staff, with those particular exchanges. 53 53 In such event, the Exchange will file a proposed rule change pursuant to Rule 19b-4 of the Act, indicating such surveillance arrangements. Telephone conversation between Jeffrey Burns, Senior Associate General Counsel, Amex, and Florence Harmon, Senior Special Counsel, Division, Commission, on March 29, 2006. *See also* USOF Notice, *supra* note 5, at n.14. III. Discussion and Commission's Findings After careful consideration, the Commission finds that the proposed rule change, as amended, is consistent with the requirements of the Act and the rules and regulations thereunder applicable to a national securities exchange. 54 In particular, the Commission finds that the proposed rule change, as amended, is consistent with the requirements of Section 6(b)(5) of the Act, 55 which requires, among other things, that the Exchange's rules be designed 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. 54 In approving this proposed rule change, the Commission notes that it has considered the proposed rule's impact on efficiency, competition, and capital formation. *See* 15 U.S.C. 78c(f). 55 15 U.S.C. 78f(b)(5). A. Surveillance Information sharing agreements with primary markets are an important part of a self-regulatory organization's ability to monitor for trading abuses in derivative products. The Commission believes that the Exchange's comprehensive surveillance sharing agreements with the NYMEX and ICE Futures for the purpose of providing information in connection with trading in or related to futures contracts traded on the NYMEX and the ICE Futures create the basis for the Amex to monitor for fraudulent and manipulative practices in the trading of the Units. Should the USOF invest in oil derivatives traded on markets such as the Singapore Oil Market, the Exchange represents that it will file a proposed rule change pursuant to Section 19(b) of the Act, seeking Commission approval of the Exchange's surveillance arrangement with such market. Moreover, Amex Rule 1504(b) requires that specialists handling the Units provide the Exchange with necessary information relating to its transactions and the trading activities of any member, member organization, limited partner, officer or approved person thereof, registered or non-registered employee affiliated with such entity in the underlying physical assets or commodities, related futures contracts and options thereon or any other derivative. Furthermore, Amex Rule 1504(c) prohibits the specialist registered as such in the Units from using any material nonpublic information received from any person associated with a member, member organization or employee of such person regarding trading by such person or employee in the physical asset or commodity, futures or options on futures, or any other related derivatives. The Commission believes that these rules provide the Amex with the tools necessary to adequately surveil trading in the Units. B. Dissemination of Information The Commission believes that sufficient venues exist for obtaining reliable information so that investors in the Units can monitor the underlying Benchmark Oil Futures Contract market relative to the NAV of their Units. There is a considerable amount of oil futures contract price and information available through public Web sites and professional subscription services, including Bloomberg and Reuters. Other than from 2:30 p.m. to 3:15 p.m. ET, quote and last sale information for the Benchmark Oil Futures Contract will be updated and disseminated at least every 15 seconds, in accordance with the continued listing standards, by one or more major market data vendors during the time the Units trade on Amex. In addition, the daily settlement prices for the NYMEX traded Oil Futures Contracts held by USOF are publicly available on the NYMEX Web site at ( *http://www.nymex.com* ) and various market data vendors, and news publications publish futures prices and related data. The NYMEX also provides delayed futures information on current and past trading sessions and market news free of charge on its Web site. The Commission further notes that the Web site for USOF, which will publicly accessible at no charge, will contain the following information:
(1)The prior business day's NAV and the reported closing price;
(2)the mid-point of the bid-ask price 56 in relation to the NAV as of the time the NAV is calculated (the “Bid-Ask Price”);
(3)calculation of the premium or discount of such price against such NAV;
(4)data in chart form displaying the frequency distribution of discounts and premiums of the Bid-Ask Price against the NAV, within appropriate ranges for each of the four
(4)previous calendar quarters;
(5)the prospectus and the most recent periodic reports filed with the Commission or required by the CFTC; and
(6)other applicable quantitative information. In addition, information on USOF's daily portfolio holdings will be available on its Web site at ( *http://www.unitedstatesoilfund.com* ) and will be equally accessible to investors and Authorized Purchasers. 56 The Bid-Ask Price of Units is determined using the highest bid and lowest offer as of the time of calculation of the NAV. In addition, the NAV for the USOF will be calculated and disseminated on a daily basis. The Exchange represents that it intends to disseminate for USOF on a daily basis by means of CTA/CQ High Speed Lines information with respect to the Indicative Partnership Value, recent NAV, Units outstanding, the estimated Basket Amount and the Actual Basket Amount. The Exchange will also make available on its Web site ( *http://www.amex.com* ) daily trading volume, closing prices and the NAV. The Commission believes that the wide availability of information about the Units the Oil Futures Contracts held by the USOF and NAV will facilitate transparency with respect to the proposed Units and diminish the risk of manipulation or unfair informational advantage. C. Listing and Trading The Commission finds that the Exchange's proposed rules and procedures for the listing and trading of the proposed Units are consistent with the Act. The Units will trade as equity securities subject to Amex rules including, among others, rules governing priority, parity and precedence of orders, specialist responsibilities, account opening and customer suitability requirements. The Commission believes that the listing and delisting criteria for the Units should help to maintain a minimum level of liquidity and therefore minimize the potential for manipulation of the Units. Finally, the Commission notes that the Information Circular the Exchange will distribute will inform members and member organizations about the terms, characteristics and risks in trading the Units, including their prospectus delivery obligations. IV. Conclusion *It is therefore ordered,* pursuant to Section 19(b)(2) of the Act, that the proposed rule change (SR-Amex-2005-127), as amended, be, and it hereby is, approved. For the Commission, by the Division of Market Regulation, pursuant to delegated authority. 57 57 17 CFR 200.30-3(a)(12). Nancy M. Morris, Secretary. [FR Doc. E6-4971 Filed 4-5-06; 8:45 am] BILLING CODE 8010-01-P SECURITIES AND EXCHANGE COMMISSION [Release No. 34-53576; File No. SR-CBOE-2006-14] Self-Regulatory Organizations; Chicago Board Options Exchange, Incorporated; Notice of Filing of Proposed Rule Change Relating to Customer Portfolio Margining Requirements March 30, 2006. Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 (the “Exchange Act” or “Act”), 1 and Rule 19b-4 thereunder, 2 notice is hereby given that on February 2, 2006, the Chicago Board Options Exchange, Incorporated (“CBOE” or the “Exchange”) filed with the Securities and Exchange Commission (the “Commission”) the proposed rule change as described in Items I, II, and III 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. 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 CBOE is proposing to broaden its Rule 12.4— *Portfolio Margin and Cross-Margin for Index Options* —to allow portfolio margining of listed equity options, narrow-based index options, and security futures, as well as certain OTC instruments. The text of the proposed rule change is below. Additions are in italics. Deletions are in brackets. Chicago Board Options Exchange, Inc. Chapter XII Margins Rule 12.4. Portfolio Margin for Index and Equity Options, and Cross-Margin for Index Options As an alternative to the transaction / position specific margin requirements set forth in Rule 12.3 of this Chapter 12, members may require margin for listed[, broad-based U.S.] index *and equity* options *(defined below as a “listed option”), options on exchange traded funds, security futures products,* index warrants, [and] underlying instruments *and unlisted derivatives* (as defined below) in accordance with the portfolio margin requirements contained in this Rule 12.4. In addition, members, provided they are a Futures Commission Merchant (“FCM”) and are either a clearing member of a futures clearing organization or have an affiliate that is a clearing member of a futures clearing organization, are permitted under this Rule 12.4 to combine a customer's related instruments (as defined below), *listed index options, options on exchange traded funds* [and listed, broad-based U.S. index options], index warrants *,* [and ]underlying instruments *and unlisted derivatives* and compute a margin requirement (“cross-margin”) on a portfolio margin basis. Members must confine cross-margin positions to a portfolio margin account dedicated exclusively to cross-margining. Application of the portfolio margin and cross-margining provisions of this Rule 12.4 to IRA accounts is prohibited.
(a)Definitions.
(1)The term “listed option” shall mean any option traded on a registered national securities exchange or automated facility of a registered national securities association. *(2) The term “security future” means a contract of sale for future delivery of a single security or of a narrow-based security index, including any interest therein or based on the value thereof, to the extent that that term is defined in Section 3(a)(55) of the Securities Exchange Act of 1934.* *(3) The term “security futures product” means a security future, or an option on any security future.* ([2] *4* ) The term “unlisted *derivative* [option]” means any *equity-based (or equity index-based) unlisted* option, *forward contract or swap that can be priced by a model approved by a “DEA” covering the same underlying instrument* [ not included in the definition of listed option].
(5)The term “option series” means all option contracts of the same type (either a call or a put) and exercise style, covering the same underlying instrument with the same exercise price, expiration date, and number of underlying units. ([3] *6* ) *The term “options class” refers to all options contracts covering the same underlying instrument.* ([4] *7* ) The term “portfolio” means options of the same options class *grouped with their corresponding security futures products,* underlying instruments and related instruments. ([6] *8* ) The term “related instrument” within an option class or product group means futures contracts and options on futures contracts covering the same underlying instrument *, but does not include security futures products.* ([7] *9* ) The term “underlying instrument” means long and short positions, *as appropriate, covering the same security, group or index of securities, or a security which is exchangeable for or convertible into the underlying security or group of securities within a period of 90 days, or* [in ]an exchange traded fund or other fund product registered under the Investment Company Act of 1940 that holds the same securities, and in the same proportion, as contained in *an* [broad-based ]index on which options are listed. The term underlying instrument shall not be deemed to include futures contracts, options on futures contracts[,] *or* underlying stock baskets[, or unlisted instruments]. *Securities that are included in the FT Actuaries World index can qualify as an underlying instrument. Restricted and control stock qualify as an underlying instrument provided that the offsetting option or other eligible derivative has been established in a manner consistent with SEC Rule 144 or SEC “no-action” positions to permit the sale of the stock without restriction upon exercise of the option or other eligible derivative.* ([8] *10* ) The term “product group” means two or more portfolios of the same type [(see subparagraph (a)(9) below) ]for which it has been determined by Rule 15c3-1 *a(b)(ii)* under the Securities Exchange Act of 1934 that a percentage of offsetting profits may be applied to losses at the same valuation point. ([9] *11* ) The terms “theoretical gains and losses” means the gain and loss in the value of *each eligible position* [individual option series and related instruments] at 10 equidistant intervals (valuation points) ranging from an assumed movement (both up and down) in the current market value of the underlying instrument. The magnitude of the valuation point range shall be as follows: Portfolio type Up/down market move (high & low valuation points) [Non-]High Capitalization, Broad-based U.S. Market Index [Option] 1 [+/−10%] *+6%/−8%* *Non-* High Capitalization, Broad-based U.S. Market Index [Option] 1 [+6%/−8%] *+/−10%* *Narrow-based Index* 1 *+/−15%* *Individual Equity* 1 *+/−15%* 1 In accordance with sub-paragraph (b)(1)(i)(B) of Rule 15c3-1a under the Securities Exchange Act of 1934.
(b)Eligible Participants. *Any member organization intending to apply the portfolio margin provisions of this Rule 12.4 to its accounts must receive prior approval from its Designated Examining Authority (“DEA”). The member organization will be required to, among other things, demonstrate compliance with Rule 15.8A—Risk Analysis of Portfolio Margin Accounts, and with the net capital requirements of Rule 13.5—Customer Portfolio Margin Accounts.* The application of the portfolio margin provisions of this Rule 12.4, including cross-margining, is limited to the following:
(1)Any broker or dealer registered pursuant to section 15 of the Securities Exchange Act of 1934 *subject to minimum margin requirements under paragraph (e)(2)(A) below;*
(2)Any member of a national futures exchange to the extent that listed index options hedge the member's index futures *subject to minimum margin requirements under paragraph (e)(2)A) below,* and
(3)*(i)* Any [other ]person or entity not included in (b)(1) or (b)(2) above that has or establishes, and maintains, equity of at least 5 million dollars subject to minimum margin requirements under paragraph (e)(2)(A) below. For purposes of this equity requirement, all securities and futures accounts carried by the member for the same customer may be combined provided ownership across the accounts is identical. A guarantee by any other account for purposes of the minimum equity requirement is not to be permitted. *(ii) Any other person or entity not included in (b)(1), (b)(2) or (b)(3)(i) above that is approved under paragraph
(c)below, provided that no unlisted derivative as defined in paragraph (a)(4) above is carried, and the minimum margin requirements under paragraph (e)(2)(B) below are applied.*
(c)Opening of Accounts.
(1)Only customers that, pursuant to Rule 9.7, have been approved [for options transactions, and specifically approved] to engage in uncovered short option contracts, are permitted to utilize a portfolio margin account.
(2)On or before the date of the initial transaction in a portfolio margin account, a member shall: A. Furnish the customer with a special written disclosure statement describing the nature and risks of portfolio margining and cross-margining which includes an acknowledgement for all portfolio margin account owners to sign, and an additional acknowledgement for owners that also engage in cross-margining to sign, attesting that they have read and understood the disclosure statement, and agree to the terms under which a portfolio margin account and the cross-margin account, respectively, are provided, and B. Obtain a signed acknowledgement(s) from the customer, both of which are required for cross-margining customers, and record the date of receipt.
(d)Establishing Account and Eligible Positions.
(1)Portfolio Margin Account. For purposes of applying the portfolio margin requirements provided in this Rule 12.4, members are to establish and utilize a dedicated securities margin account, or sub-account of a margin account, clearly identified as a portfolio margin account that is separate from any other securities account carried for a customer.
(2)Cross-Margin Account. For purposes of combining related instruments *and unlisted derivatives,* and listed [broad-based U.S.] index options, index warrants and underlying instruments and applying the portfolio margin requirements provided in this Rule 12.4, members are to establish and utilize a portfolio margin account, clearly identified as a cross-margin account, that is separate from any other securities account or portfolio margin account carried for a customer. A margin deficit in either the portfolio margin account or the cross-margin account of a customer may not be considered as satisfied by excess equity in the other account. Funds and/or securities must be transferred to the deficient account and a written record created and maintained.
(3)Portfolio Margin Account—Eligible Positions
(i)A transaction in, or transfer of, a listed[, broad-based U.S.] index *or equity* option, *security futures product,* [or] index warrant *, or unlisted derivative (except for an account approved under paragraph (b)(3)(ii))* may be effected in the portfolio margin account.
(ii)*With the exception of eligible participants operating pursuant to paragraphs (b)(1), (b)(2) or (b)(3)(i) above, a* [A] transaction in, or transfer of, an underlying instrument may *not* be effected in the portfolio margin account *unless* [provided] a position in an offsetting listed[, broad-based U.S.] index *or equity* option *, security futures product,* [ or] index warrant *or unlisted derivative* is in the account or is established in the account on the same day.
(iii)*With the exception of eligible participants operating pursuant to paragraphs (b)(1), (b)(2) or (b)(3)(i) above,* [If, in the portfolio margin account,] *if* the listed[, broad-based U.S.] index *or equity* option *, security futures product,* [or] index warrant *, or unlisted derivative* position offsetting an underlying instrument position ceases to exist and is not replaced within 10 business days, the underlying instrument position must be transferred to a regular margin account, subject to [Regulation T initial margin and] the margin required pursuant to the other provisions of this chapter. Members will be expected to monitor portfolio margin accounts for possible abuse of this provision.
(iv)In the event that fully paid for long options and/or index warrants are the only positions contained within a portfolio margin account, such long positions must be transferred to a securities account other than a portfolio margin account or cross-margin account within 10 business days, subject to the margin required pursuant to the other provisions of this chapter, unless the status of the account changes such that it is no longer composed solely of fully paid for long options and/or index warrants.
(4)Cross-Margin Account—Eligible Positions
(i)A transaction in, or transfer of, a related instrument may be effected in the cross margin account provided a position in an offsetting listed[, U.S. broad-based] index option, index warrant *,* [or ]underlying instrument *or unlisted derivative* is in the account or is established in the account on the same day.
(ii)If the listed[, U.S. broad-based] index option, index warrant *,* [ or] underlying instrument or *unlisted derivative* position offsetting a related instrument ceases to exist and is not replaced within 10 business days, the related instrument position must be transferred to a futures account. Members will be expected to monitor cross-margin accounts for possible abuse of this provision. *(iii) With the exception of eligible participants operating pursuant to paragraphs (b)(1), (b)(2) or (b)(3)(i) above, if the related instrument position offsetting an underlying instrument position ceases to exist and is not replaced within 10 business days, the underlying instrument position must be transferred to a regular margin account, subject to the margin required pursuant to the other provisions of this chapter. Members will be expected to monitor portfolio margin accounts for possible abuse of this provision.* (iii *i* ) In the event that fully paid for long *index* options and/or index warrants (securities) are the only positions contained within a cross-margin account, such long positions must be transferred to a securities account other than a portfolio margin account or cross-margin account within 10 business days, subject to the margin required pursuant to the other provisions of this chapter, unless the status of the account changes such that it is no longer composed solely of fully paid for long options and/or index warrants.
(e)Initial and Maintenance Margin Required. The amount of margin required under this Rule 12.4 for each portfolio shall be the greater of:
(1)The amount for any of the 10 equidistant valuation points representing the largest theoretical loss as calculated pursuant to paragraph
(f)below or
(2)*(A) In the case of an account operating under paragraph (b)(1), (b)(2) or (b)(3) of this Rule 12.4,* $.375 for each listed [index ]option *, security futures product,* [and] related instrument *and unlisted derivative,* multiplied by the contract or instrument's multiplier, not to exceed the market value in the case of long positions in listed options *, including options on security futures,* and options on futures contracts. *(B) In the case of an account operating under paragraph (b)(3)(ii) of this Rule 12.4, for any portfolio that holds a position in the underlying instrument, $.75 for each listed option (excluding broad-based index options and options on broad-based exchange traded funds), security futures product and related instrument multiplied by the contract or instrument's multiplier, not to exceed the market value in the case of long options, including options on security futures, and options on futures contracts. In the case of a portfolio not holding a position in the underlying instrument, or a broad-based index portfolio, $.375 shall be applied instead of $.75.*
(f)Method of Calculation.
(1)Long and short positions in listed options, *security futures products,* underlying instruments *,* [ and] related instruments *and unlisted derivatives* are to be grouped by option class; each option class group being a “portfolio”. Each portfolio is categorized as one of the portfolio types specified in paragraph (a)([9] *11* ) above.
(2)For each portfolio, theoretical gains and losses are calculated for each position as specified in paragraph (a)([9] *11* ) above. For purposes of determining the theoretical gains and losses at each valuation point, members shall obtain and utilize the theoretical value of a listed [index]option, *security futures product,* underlying instrument, [or]related instrument *and unlisted derivative,* rendered by a theoretical pricing model that, in accordance with paragraph (b)(1)(i)(B) of Rule 15c3-1a under the Securities Exchange Act of 1934, qualifies for purposes of determining the amount to be deducted in computing net capital under a portfolio based methodology.
(3)Offsets. Within each portfolio, theoretical gains and losses may be netted fully at each valuation point. Offsets between portfolios within the High Capitalization, Broad-Based Index Option, [product group and the]Non-High Capitalization, Broad-Based Index Option [product group] *and Narrow-Based Index Option product groups* may then be applied as permitted by Rule 15c3-1a under the Securities Exchange Act of 1934.
(4)After applying paragraph
(3)above, the sum of the greatest loss from each portfolio is computed to arrive at the total margin required for the account (subject to the per contract minimum). *If a security that is exchangeable or convertible into the underlying security requires the payment of money or results in a loss upon conversion at the time when the security is deemed an underlying instrument, the full amount of the conversion loss will be required.*
(g)Equity Deficiency. If, at any time, equity declines below the[ 5 million dollar] minimum required under Paragraph (b)[(4)] of this Rule 12.4 and is not brought back up to *the required level* [at least 5 million dollars] within three
(3)business days (T+3) by a deposit of funds or securities, or through favorable market action; members are prohibited from accepting opening orders starting on T+4, except that opening orders entered for the purpose of hedging existing positions may be accepted if the result would be to lower margin requirements. This prohibition shall remain in effect until such time as *the* [an] *required minimum account* equity [of 5 million dollars] is *re-* established. *A deduction in computing net capital in the amount of a customer's equity deficiency may not serve in lieu of complying with the above requirements.*
(h)Determination of Value for Margin Purposes. For the purposes of this Rule 12.4, all [listed index options and related instruments] *eligible* positions shall be valued at current market prices. Account equity for the purposes of this Rule 12.4 shall be calculated separately for each portfolio margin account by adding the current market value of all long positions, subtracting the current market value of all short positions, and adding the credit (or subtracting the debit) balance in the account.
(i)Additional Margin.
(1)If at any time, the equity in any portfolio margin account, including a cross-margin account, is less than the margin required, additional margin must be obtained within [one] *three* business day *s* (T+[1] *3* ). *During the three business day period, member organizations are prohibited from accepting opening or closing orders that would increase the margin requirement until the additional margin is obtained.* In the event a customer fails to deposit additional margin within [one] *three* business days, the member must liquidate positions in an amount sufficient to, at a minimum, lower the total margin required to an amount less than or equal to account equity. Exchange Rule 12.9—Meeting Margin Calls by Liquidation shall not apply to portfolio margin accounts. However, members will be expected to monitor the risk of portfolio margin accounts pursuant to the risk monitoring procedures required by Rule 15.8A. Guarantees by any other account for purposes of margin requirements is not to be permitted. *(2) Pursuant to Chapter XIII—Net Capital and Rule 13.5—Customer Portfolio Margin Accounts—thereunder, if additional margin required is not obtained by the close of business on T+1, member organizations must deduct in computing net capital any amount of the additional margin that is still outstanding until such time as the additional margin is obtained or positions are liquidated pursuant to (i)(1) above.* *(3) A deduction in computing net capital in the amount of a customer's margin deficiency may not serve in lieu of complying with the requirements of (i)(1) above.* *(4) A member organization may request from its Designated Examining Authority an extension of time for a customer to deposit additional margin. Such request must be in writing and will be granted only in extraordinary circumstances.* ( *5* [2]) The day trading requirements of Exchange Rule 12.3(j) shall not apply to portfolio margin accounts, including cross-margin accounts.
(j)Cross-Margin Accounts—Requirement to Liquidate.
(1)A member is required immediately either to liquidate, or transfer to another broker-dealer eligible to carry cross-margin accounts, all customer cross-margin accounts that contain positions in futures and/or options on futures if the member is:
(i)Insolvent as defined in section 101 of title 11 of the United States Code, or is unable to meet its obligations as they mature;
(ii)The subject of a proceeding pending in any court or before any agency of the United States or any State in which a receiver, trustee, or liquidator for such debtor has been appointed;
(iii)Not in compliance with applicable requirements under the Securities Exchange Act of 1934 or rules of the Securities and Exchange Commission or any self-regulatory organization with respect to financial responsibility or hypothecation of customers' securities; or
(iv)Unable to make such computations as may be necessary to establish compliance with such financial responsibility or hypothecation rules.
(2)Nothing in this paragraph
(j)shall be construed as limiting or restricting in any way the exercise of any right of a registered clearing agency to liquidate or cause the liquidation of positions in accordance with its by-laws and rules. Chapter 9 Doing Business with the Public Rule 9.15. Delivery of Current Options Disclosure Documents and Prospectus
(a)no change.
(b)no change.
(c)The special written disclosure statement describing the nature and risks of portfolio margining and cross-margining, and acknowledgement for customer signature, required by Rule 12.4(c)(2) shall be in a format prescribed by the Exchange or in a format developed by the member organization, provided it contains substantially similar information as the prescribed Exchange format and has received prior written approval of the Exchange. Sample Risk Description for Use by Firms To Satisfy Requirements of Exchange Rule 9.15(d) Portfolio Margining and Cross-Margining Disclosure Statement and Acknowledgement For a Description of the Special Risks Applicable to a Portfolio Margin Account and its Cross-Margining Features, See the Material Under Those Headings Below. Overview of Portfolio Margining 1. Portfolio margining is a margin methodology that sets margin requirements for an account based on the greatest projected net loss of all positions in a “ *portfolio* [product class]” or “product group” as determined by an options pricing model using multiple pricing scenarios. These pricing scenarios are designed to measure the theoretical loss of the positions given changes in both the underlying price and implied volatility inputs to the model. Portfolio margining is currently limited to *equity and equity index products* [product classes and groups of index products relating to broad-based market indexes]. 2. The goal of portfolio margining is to set levels of margin that more precisely reflect actual net risk. The customer benefits from portfolio margining in that margin requirements calculated on net risk are generally lower than alternative “position” or “strategy” based methodologies for determining margin requirements. Lower margin requirements allow the customer more leverage in an account. Customers Eligible for Portfolio Margining 3. To be eligible for portfolio margining, customers [(other than broker-dealers)] must meet the basic standards for having an options account that is approved for uncovered writing. *If a customer wishes to utilize unlisted derivatives,* [and] *the customer* must have and maintain at all times account net equity of not less than $5 million, aggregated across all accounts under identical ownership at the clearing broker. The identical ownership requirement excludes accounts held by the same customer in different capacities (e.g., as a trustee and as an individual) and accounts where ownership is overlapping but not identical (e.g., individual accounts and joint accounts). *Carrying broker-dealers will have their own minimum account equity requirement, and possibly other eligibility requirements. Also, pursuant to exchange rules, a higher per contract minimum margin requirement will apply to portfolios holding the underlying instrument whenever account net equity is less than $5 million and no position in an unlisted derivative is held.* *Neither the $5 million minimum account equity requirement nor the higher per contract minimum is applicable to portfolio margining of customers that are broker-dealers or futures locals.* Positions Eligible for a Portfolio Margin Account 4. All positions in [broad-based U.S. market]index *and equity* options, *security futures products,* and index warrants listed on a national securities exchange, *underlying instruments (including* [and] exchange traded funds and other fund products registered under the Investment Company Act of 1940 that are managed to track the same index that underlies permitted index options), are eligible for a portfolio margin account. *Additionally, an account that elects to operate with account net equity of not less than $5 million may carry positions in unlisted derivatives (e.g., OTC swaps, options) that have the same underlying instrument as an index or equity option and can be priced by an approved vendor of theoretical values.* Special Rules for Portfolio Margin Accounts 5. A portfolio margin account may be either a separate account or a subaccount of a customer's regular margin account. In the case of a subaccount, equity in the regular account will be available to satisfy any margin requirement in the portfolio margin subaccount without transfer to the subaccount. 6. A portfolio margin account or subaccount *that elects to operate with account equity of not less than $5 million* will be subject to a minimum margin requirement of $.375 multiplied by the index multiplier for every options contract, *security futures product,* [or ]index warrant, *unlisted derivative and related instrument* carried long or short in the account. No minimum margin is required in the case of *underlying instruments,* eligible exchange traded funds or other eligible fund products. *A portfolio margin account that elects to operate with account equity of less than $5 million will be subject to a minimum margin requirement of $.75 multiplied by the index multiplier for every options contract, security futures product, index warrant, unlisted derivative and related instrument carried long or short in any portfolio that contains a position in the underlying instrument. For portfolios that do not contain a position in the underlying security, a $.375 minimum will apply.* 7. Margin calls in the portfolio margin account or subaccount, regardless of whether due to new commitments or the effect of adverse market moves on existing positions, must be met within [one]three business days. Any shortfall in aggregate net equity across accounts must be met within three business days. *Once a margin call is incurred, the entry of an opening or closing order that would increase the margin requirement is prohibited until the margin call is met.* Failure to meet a margin call when due will result in immediate liquidation of positions to the extent necessary to reduce the margin requirement. Failure to meet an equity call prior to the end of the third business day will result in a prohibition on entering any *new orders that would increase the margin requirement* [opening orders, with the exception of opening orders that hedge existing positions], beginning on the fourth business day and continuing until such time as the minimum equity requirement is satisfied. 8. *Except for accounts that maintain account net equity of $5 million, a* [A] position in an underlying instrument[exchange traded fund or other eligible fund product] may not be established in a portfolio margin account unless there exists, or there is established on the same day, an offsetting position in securities options or other eligible securities. *Underlying instruments* [Exchange traded index funds and/or other eligible funds] will be transferred out of the portfolio margin account and into a regular securities account subject to strategy based margin if, for more than 10 business days and for any reason, the offsetting securities options or other eligible securities no longer remain in the account. 9. When a broker-dealer carries a regular cash account or margin account for a customer, the broker-dealer is limited by rules of the Securities and Exchange Commission and of The Options Clearing Corporation (“OCC”) in the extent to which the broker-dealer may permit OCC to have a lien against long option positions in those accounts. In contrast, OCC will have a lien against all long option positions that are carried by a broker-dealer in a portfolio margin account, and this could, under certain circumstances, result in greater losses to a customer having long option positions in such an account in the event of the insolvency of the customer's broker. *Furthermore, the carrying broker-dealer has a lien on all long securities in a portfolio margin account, including underlying instruments, even if fully paid.* Accordingly, to the extent that a customer does not borrow against long option *and underlying instrument* positions in a portfolio margin account or have margin requirements in the account against which the long option *or underlying instruments* can be credited, there is no advantage to carrying the long options *and underlying instruments* in a portfolio margin account and the customer should consider carrying them in an account other than a portfolio margin account. Special Risks of Portfolio Margin Accounts 10. Portfolio margining generally permits greater leverage in an account, and greater leverage creates greater losses in the event of adverse market movements. 11. Because the time limit for meeting margin calls is shorter than in a regular margin account, there is increased risk that a customer's portfolio margin account will be liquidated involuntarily, possibly causing losses to the customer. 12. Because portfolio margin requirements are determined using sophisticated mathematical calculations and theoretical values that must be calculated from market data, it may be more difficult for customers to predict the size of future margin calls in a portfolio margin account. This is particularly true in the case of customers who do not have access to specialized software necessary to make such calculations or who do not receive theoretical values calculated and distributed periodically by OCC. 13. For the reasons noted above, a customer that carries long options *and underlying instrument* positions in a portfolio margin account could, under certain circumstances, be less likely to recover the full value of those positions in the event of the insolvency of the carrying broker. 14. Trading of securities index *and equity* products in a portfolio margin account is generally subject to all the risks of trading those same products in a regular securities margin account. Customers should be thoroughly familiar with the risk disclosure materials applicable to those products, including the booklet entitled Characteristics and Risks of Standardized Options. 15. Customers should consult with their tax advisers to be certain that they are familiar with the tax treatment of transactions in securities index *and equity* products. 16. The descriptions in this disclosure statement relating to eligibility requirements for portfolio margin accounts, and minimum equity and margin requirements for those accounts, are minimums imposed under exchange rules. Time frames within which margin and equity calls must be met are maximums imposed under exchange rules. Broker-dealers may impose their own more stringent requirements. Overview of Cross-Margining 17. With cross-margining, index futures and options on index futures are combined with offsetting positions in securities index options and underlying instruments, for the purpose of computing a margin requirement based on the net risk. This generally produces lower margin requirements than if the futures products and securities products are viewed separately, thus providing more leverage in the account. 18. Cross-margining must be done in a portfolio margin account type. A separate portfolio margin account must be established exclusively for cross-margining. 19. When index futures and options *on index* futures are combined with offsetting positions in index options and underlying instruments in a dedicated account, and a portfolio margining methodology is applied to them, cross-margining is achieved. Customers Eligible for Cross-Margining 20. The eligibility requirements for cross-margining are generally the same as for portfolio margining, and any customer eligible for portfolio margining is eligible for cross-margining. 21. Members of futures exchanges on which cross-margining eligible index contracts are traded are also permitted to carry positions in cross-margin accounts without regard to the minimum aggregate account equity. Positions Eligible for Cross-Margining 22. All securities *index option* products eligible for portfolio margining are also eligible for cross-margining. *Additionally, accounts that elect to maintain equity of not less than $5 million may carry positions in unlisted derivatives (e.g., OTC index swaps, options).* 23. All [broad-based U.S. market ]index futures and options on index futures [traded on a designated contract market ] *that have the same underlying index as a securities index option permitted in paragraph 22 above and that are traded on a designated contract market* subject to the jurisdiction of the Commodity Futures Trading Commission are eligible for cross-margining. Special Rules for Cross-Margining 24. Cross-margining must be conducted in a portfolio margin account type. A separate portfolio margin account must be established exclusively for cross-margining. A cross-margin account is a securities account, and must be maintained separate from all other securities accounts. 25. Cross-margining is automatically accomplished with the portfolio margining methodology. Cross-margin positions are subject to the same minimum margin requirement for every contract, including futures contracts. 26. Margin calls arising in the cross-margin account, and any shortfall in aggregate net equity across accounts, must be satisfied within the same time frames [(10 business days),] and subject to the same consequences, as in a portfolio margin account ( *see paragraph 7 above* ). 27. A position in a futures product may not be established in a cross-margin account unless there exists, or there is established on the same day, an offsetting position in securities options and/or other eligible securities. Futures products will be transferred out of the cross-margin account and into a futures account if, for more than 10 business days and for any reason, the offsetting securities options and/or other eligible securities no longer remain in the account. If the transfer of futures products to a futures account causes the futures account to be undermargined, a margin call will be issued or positions will be liquidated to the extent necessary to eliminate the deficit. *28. Except for accounts maintain account net equity of $5 million, a[A] position in an underlying instrument may not be established in a cross-margin account unless there exists, or there is established on the same day, an offsetting position in a related instrument. Underlying instrument positions will be transferred out of the cross-margin account and into a regular securities account if, for more than 10 business days and for any reason, the offsetting related instrument or other eligible instrument no longer remains in the account.* [28] *29.* According to the rules of the exchanges, a broker-dealer is required to immediately liquidate, or, if feasible, transfer to another broker-dealer eligible to carry cross-margin accounts, all customer cross-margin accounts that contain positions in futures and/or options on futures in the event that the carrying broker-dealer becomes insolvent. [29] *30.* Customers participating in cross-margining will be required to sign an agreement acknowledging that their positions and property in the cross-margin account will be subject to the customer protection provisions of Rule 15c3-3 under the Securities Exchange Act of 1934 and the Securities Investor Protection Act, and will not be subject to the provisions of the Commodity Exchange Act, including segregation of funds. [30] *31.* In signing the agreement referred to in paragraph 29 above, a customer also acknowledges that a cross-margin account that contains positions in futures and/or options on futures will be immediately liquidated, or, if feasible, transferred to another broker-dealer eligible to carry cross-margin accounts, in the event that the carrying broker-dealer becomes insolvent. Special Risks of Cross-Margining [31] *32.* Cross-margining must be conducted in a portfolio margin account type. Generally, cross-margining and the portfolio margining methodology both contribute to provide greater leverage than a regular margin account, and greater leverage creates greater losses in the event of adverse market movements. [32] *33.* As cross-margining must be conducted in a portfolio margin account type, the time required for meeting margin calls is shorter than in a regular securities margin account and may be shorter than the time ordinarily required by a futures commission merchant for meeting margin calls in a futures account. As a result, there is increased risk that a customer's cross-margin positions will be liquidated involuntarily, causing possible loss to the customer. [33] *34.* As noted above, cross-margin accounts are securities accounts and are subject to the customer protections set-forth in Rule 15c3-3 under the Securities Exchange Act of 1934 and the Securities Investor Protection Act. Cross-margin positions are not subject to the customer protection rules under the segregation provisions of the Commodity Exchange Act and the rules of the Commodity Futures Trading Commission (“CFTC”) adopted pursuant to the Commodity Exchange Act. [34] *35.* Trading of index options and futures contracts in a cross-margin account is generally subject to all the risks of trading those same products in a futures account or a regular securities margin account, as the case may be. Customers should be thoroughly familiar with the risk disclosure materials applicable to those products, including the booklet entitled Characteristics and Risks of Standardized Options and the risk disclosure document required by the CFTC to be delivered to futures customers. Because this disclosure statement does not disclose the risks and other significant aspects of trading in futures and options, customers should review those materials carefully before trading in a cross-margin account. [35] *36.* Customers should bear in mind that the discrepancies in the cash flow characteristics of futures and certain options are still present even when those products are carried together in a cross-margin account. Both futures and options contracts are generally marked to the market at least once each business day, but the marks may take place with different frequency and at different times within the day. When a futures contract is marked to the market, the gain or loss is immediately credited to or debited from, respectively, the customer's account in cash. While *a change* [an increase] in *the* value of [a long] *an* option contract may increase *or decrease* the equity in the account, the gain *or loss* is not realized until the option is *liquidated,* [sold or ]exercised *or assigned* . Accordingly, a customer may be required to deposit cash in the account in order to meet a variation payment on a futures contract even though the customer is in a hedged position and has experienced a corresponding (but as yet unrealized) gain on an [long ]option. On the other hand, a customer who is in a hedged position and would otherwise be entitled to receive a variation payment on a futures contract may find that the cash is required to be held in the account as margin collateral on an offsetting option position. [36] *37.* Customers should consult with their tax advisers to be certain that they are familiar with the tax treatment of transactions in index products, including tax consequences of trading strategies involving both futures and option contracts. [37] *38.* The descriptions in this disclosure statement relating to eligibility requirements for cross-margining, [and] minimum equity and margin requirements for cross-margin accounts, are minimums imposed under exchange rules. Time frames within which margin and equity calls must be met are maximums imposed under exchange rules. The broker-dealer carrying a customer's portfolio margin account, including any cross-margin account, may impose its own more stringent requirements. Acknowledgement for Customers Utilizing a Portfolio Margin Account Cross-Margining and Non Cross-Margining Rule 15c3-3 under the Securities Exchange Act of 1934 requires that a broker or dealer promptly obtain and maintain physical possession or control of all fully-paid securities and excess margin securities of a customer. Fully-paid securities are securities carried in a cash account and margin equity securities carried in a margin or special account (other than a cash account) that have been fully paid for. Excess margin securities are a customer's margin securities having a market value in excess of 140% of the total of the debit balances in the customer's non-cash accounts. For the purposes of Rule 15c3-3, securities held subject to a lien to secure obligations of the broker-dealer are not within the broker-dealer's physical possession or control. The Securities and Exchange Commission has taken the position that all long option positions in a customer's portfolio-margining account (including any cross-margining account) may be subject to such a lien by OCC and will not be deemed fully-paid or excess margin securities under Rule 15c3-3. *Furthermore, long positions, including underlying instruments, in a portfolio margin account (including any cross-margin account) are held subject to a lien by the carrying broker-dealer, even if fully paid.* The hypothecation rules under the Securities Exchange Act of 1934 (Rules 8c-1 and 15c2-1), prohibit broker-dealers from permitting the hypothecation of customer securities in a manner that allows those securities to be subject to any lien or liens in an amount that exceeds the customer's aggregate indebtedness. However, all long option positions in a portfolio-margining account (including any cross-margining account) will be subject to OCC's lien, including any positions that exceed the customer's aggregate indebtedness. *Furthermore, long positions, including underlying instruments, in a portfolio margin account (including any cross-margin account) are held subject to a lien by the carrying broker-dealer, even if fully paid.* The Securities and Exchange Commission has granted an exemption from the hypothecation rules to allow customers to carry positions in portfolio-margining accounts (including any cross-margining account), even when those positions exceed the customer's aggregate indebtedness. Accordingly, within a portfolio margin account or cross-margin account, to the extent that you have long option or *underlying instrument* positions that do not operate to offset your aggregate indebtedness and thereby reduce your margin requirement, you receive no benefit from carrying those positions in your portfolio margin account or cross-margin account and incur the additional risk of OCC's lien on your long option position(s) *and the carrying broker-dealer's lien on your long underlying instrument position(s).* By signing below, the customer affirms that the customer has read and understood the foregoing disclosure statement and acknowledges and agrees that long option positions in portfolio-margining accounts, and cross-margining accounts will be exempted from certain customer protection rules of the Securities and Exchange Commission as described above and will be subject to a lien by the Options Clearing Corporation without regard to such rules. Customer Name: ____ By: ____ Date: ____ (signature/title) Acknowledgement for Customers Engaged in Cross-Margining As disclosed above, futures contracts and other property carried in customer accounts with Futures Commission Merchants (“FCM”) are normally subject to special protection afforded under the customer segregation provisions of the Commodity Exchange Act (“CEA”) and the rules of the CFTC adopted pursuant to the CEA. These rules require that customer funds be segregated from the accounts of financial intermediaries and be separately accounted for, however, they do not provide for, and regular futures accounts do not enjoy the benefit of, insurance protecting customer accounts against loss in the event of the insolvency of the intermediary carrying the accounts. As also has been discussed above, cross-margining must be conducted in a portfolio margin account dedicated exclusively to cross-margining, and cross-margin accounts are not treated as a futures account with an FCM. Instead, cross-margin accounts are treated as securities accounts carried with broker-dealers. As such, cross-margin accounts are covered by Rule 15c3-3 under the Securities Exchange Act of 1934, which protects customer accounts. Rule 15c3-3, among other things, requires a broker-dealer to maintain physical possession or control of all fully-paid and excess margin securities and maintain a special reserve account for the benefit of their customers. However, in respect of cross-margin accounts, there is an exception to the possession or control requirement of Rule 15c3-3 that permits The Options Clearing Corporation to have a lien on long *option* positions *, and the carrying broker-dealer to have a lien on any long securities. These* [This] aspect *s are* [is] outlined in a separate acknowledgement form that must be signed prior to or concurrent with this form. Additionally, the Securities Investor Protection Corporation (“SIPC”) insures customer accounts against the financial insolvency of a broker-dealer in the amount of up to $500,000 to protect against the loss of registered securities and cash maintained in the account for purchasing securities or as proceeds from selling securities (although the limit on cash claims is $100,000). According to the rules of the exchanges, a broker-dealer is required to immediately liquidate, or, if feasible, transfer to another broker-dealer eligible to carry cross-margin accounts, all customer cross-margin accounts that contain positions in futures and/or options on futures in the event that the carrying broker-dealer becomes insolvent. By signing below, the customer affirms that the customer has read and understood the foregoing disclosure statement and acknowledges and agrees that: 1) positions and property in cross-margining accounts, will not be subject to the customer protection rules under the customer segregation provisions of the Commodity Exchange Act (“CEA”) and the rules of the Commodity Futures Trading Commission adopted pursuant to the CEA, and 2) cross-margining accounts that contain positions in futures and/or options on futures will be immediately liquidated, or, if feasible, transferred to another broker-dealer eligible to carry cross-margin accounts in the event that the carrying broker-dealer becomes insolvent. Customer Name: ____ By: ____ Date: ____ (signature/title) Chapter XIII Net Capital Rule 13.5. Customer Portfolio Margin Accounts
(a)No member organization that requires margin in any customer accounts pursuant to Rule 12.4—Portfolio *Margin for Index and Equity Options* , and Cross-Margin for Index Options, shall permit gross customer portfolio margin requirements to exceed 1,000 percent of its net capital for any period exceeding three business days. The member organization shall, beginning on the fourth business day of any non-compliance, cease opening new portfolio margin accounts, *including cross-margin accounts* until compliance is achieved.
(b)If, at any time, a member organization's gross customer portfolio margin requirements exceed 1,000 percent of its net capital, the member organization shall immediately transmit telegraphic or facsimile notice of such deficiency to the Office of Market Supervision, Division of Market Regulation, Securities and Exchange Commission, *100 F Street, NE* [450 Fifth Street NW], Washington, DC, 20549; to the district or regional office of the Securities and Exchange Commission for the district or region in which the member organization maintains its principal place of business; and to its Designated Examining Authority.
(c)*If any customer portfolio margin account becomes subject to a call for additional margin, and all of the additional margin is not obtained by the close of business on T+1, member organizations must deduct in computing net capital any amount of the additional margin that is still outstanding until such time as it is obtained or positions are liquidated pursuant to Rule 12.4(i)(1).* Chapter XV Records, Reports and Audits Rule 15.8A. Risk Analysis of Portfolio Margin Accounts
(a)Each member organization that maintains any portfolio margin accounts for customers shall establish and maintain *a sophisticated* written risk analysis methodology[procedures] for assessing and monitoring the potential risk to the member organization's capital over a specified range of possible market movements of positions maintained in such accounts. [Current procedures shall be filed and maintained with the Department of Financial and Sales Practice Compliance.] The *risk analysis methodology* [procedures] shall specify the computations to be made, the frequency of computations, the records to be reviewed and maintained, and the *person(s)* [position(s)] within the organization responsible for the risk function. *This risk analysis methodology must be approved by the member organization's Designated Examining Authority and then submitted to the SEC prior to the implementation of portfolio margining and cross-margining.*
(b)Upon direction by the Department of *Member Firm Regulation* [Financial and Sales Practice Compliance], each affected member organization shall provide to the Department such information as the Department may reasonably require with respect to the member organization's risk analysis for any or all of the portfolio margin accounts it maintains for customers.
(c)In conducting the risk analysis of portfolio margin accounts required by this Rule 15.8A, each affected member organization is required to follow the Interpretations and Policies set forth under Rule 15.8—Risk Analysis of Market-Maker Accounts. In addition, each affected member organization shall include in *the* written *risk analysis methodology* [procedures] required pursuant to paragraph
(a)above *procedures and guidelines for* [the following: *(1) Obtaining and reviewing the appropriate customer account documentation and financial information necessary for assessing the amount of credit extended to customers,* ( *2* [1]) [Procedures and guidelines for ]the determination, review and approval of credit limits to each customer, and across all customers, utilizing a portfolio margin account[.] *,* ( *3* [2]) [Procedures and guidelines ]for monitoring credit risk exposure to the member organization, including intra-day credit risk, related to portfolio margin accounts[.] *,* ( *4* [3]) [Procedures and guidelines for ]the use of stress testing of portfolio margin accounts in order to monitor market risk exposure from individual accounts and in the aggregate[.] *,* ( *5* [4]) [Procedures providing for ]the regular review and testing of these risk analysis procedures by an independent unit such as internal audit or other comparable group[.] *,* *(6) The type, scope and frequency of reporting by management on credit extension exposure,* *(7) Managing the impact of credit extension on the member organization's overall risk exposure,* *(8) The appropriate response by management when limits on credit extensions have been exceeded, and* *(9) Determining the need to collect margin from a particular eligible participant, including whether that determination was based upon the creditworthiness of the participant and/or the risk of the eligible position(s).* *Moreover, management must periodically review, in accordance with written procedures, the member organization's credit extension activities for consistency with these guidelines. Management must determine if the data necessary to apply this Rule 15.8A is accessible on a timely basis and information systems are available to capture, monitor, analyze and report relevant data.* II. Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, CBOE 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. CBOE 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 CBOE Rule 12.4— *Portfolio Margin and Cross-Margin for Index Options* —permits member organizations to compute a margin requirement for broad-based index option positions carried for customers using a portfolio (or risk-based) margin approach. The CBOE is proposing to broaden this rule by enabling portfolio margining of listed equity options, narrow-based index options, and security futures. The inclusion of offsetting (underlying) equity securities and related instruments (i.e., futures, options on futures) in a portfolio margin account is also proposed. The CBOE is also proposing to allow portfolio margining of certain unlisted options, forward contracts and swaps (or unlisted derivatives). Under the proposed amendments, a $5 million minimum account equity requirement would apply only to portfolio margin accounts that contain unlisted derivatives. The Exchange is proposing amendments to current Rule 12.4, as necessary, to accommodate portfolio margining of listed equity options, 3 narrow-based index options, and security futures, as well as underlying securities, related instruments and unlisted derivatives that offset risk. 4 In proposing these changes, the Exchange, in large part, is adopting the recommendations of a portfolio margining working group of the Securities Industry Association (“SIA”). 5 The New York Stock Exchange's (“NYSE”) Rule 431 Committee endorsed the SIA working group's proposal, and the CBOE understands that the NYSE has, or will be, filing a substantively similar rule change proposal. 3 Including options on exchange traded funds. 4 It should be noted that the Chairman of the Commission, Christopher Cox, in a letter, dated September 27, 2005, to William J. Brodsky and John A. Thain, the Chief Executive Officers of CBOE and NYSE, respectively, encouraged each exchange to file a rule proposal to make portfolio margining available to equity options and security futures with the Commission by year-end 2005. 5 Goldman, Sachs & Co., Morgan Stanley & Co., Inc., Merrill Lynch, Pierce, Fenner and Smith, Inc., Bear Stearns Securities Corp. and Credit Suisse First Boston Corp comprise the working group. For portfolios of equity options, narrow-based index options, and/or security futures, the Exchange is proposing that the risk array for computing the portfolio margin requirement be set at up/down market moves of +15%/−15%. A portfolio of only broad-based index options and futures would continue to be stress tested as specified under the current rule: +6%/-8% for highly capitalized broad-based indices and +/−10% for non-highly capitalized broad-based indices. Computation of the portfolio margin requirement would otherwise follow the same process prescribed by Rule 12.4. All equity options having the same underlying security, the underlying security itself, and any related futures, options on futures or security futures could be combined as a portfolio for purposes of computing a portfolio margin requirement. The +/−15% price range for computing a portfolio margin requirement is the same parameter required under Appendix A of the Commission's net capital rule (Exchange Act Rule 15c3-1) for computing deductions to a firm's net capital for proprietary positions. Rule 12.4 currently requires a person or entity that wishes to open a portfolio margin account to have and maintain $5 million dollars in account equity. All of a customer's accounts in the same name, at the same broker-dealer, including any futures accounts, may be combined for purposes of meeting this equity requirement. CBOE proposes to eliminate the requirement of a $5 million account equity requirement except for accounts that carry unlisted derivatives. The Exchange believes that there are a large number of market participants for which portfolio margining would be an appropriate and more practical methodology, but that do not qualify for portfolio margining only because they are unable to meet the $5 million minimum account equity requirement. The Exchange believes that portfolio margining provides an efficient and prudent margin methodology and that it should be available to as broad a population of market participants as possible. Portfolio margining as designed in this proposal would provide for an adequate level of margin for portfolios of options and any related, offsetting instruments (futures, options on futures). By testing the portfolio against assumed up and down market moves that reflect historical moves in the underlying security with a high level of confidence, and thereby assessing potential loss in a portfolio taken as a whole, portfolio margining provides an accurate and efficient means for deriving a reasonable margin requirement. A minimum account equity requirement is unnecessary to provide adequate margin coverage, particularly with the higher minimum contract charges contained in this proposal for accounts with less than $5 million equity that hold stock positions. 6 The Exchange is proposing an amendment of Rule 12.4 that would permit customers that do not have $5 million in account equity to open a portfolio margin account, but under more stringent controls. Under the proposed amendments, a portfolio margin account could be opened for a customer that does not meet the $5 million minimum account equity, but such account would be subject to the following requirements: 6 CBOE notes that the proposal would continue to equire that an account must be approved for uncovered options writing to be eligible for portfolio margining. As the equity requirement for uncovered accounts imposed by firms is generally at least $100,000, this will result in a minimum account equity requirement of at least $100,000. 1. Only *listed* derivatives and underlying securities are permitted (no OTC instruments), 2. A $75.00 per contract minimum charge for portfolios that contain underlying stock positions ($37.50 per contract minimum charge for portfolios that do not contain underlying stock positions). Additionally, Rule 12.4 is being amended to require that margin calls in a portfolio margin account be met by T+ 3, instead of on T+1 (the current requirement). This is being done based on the SIA Working Group's proposal. Based on its input, the T+1 requirement is onerous in that, from an operational and customer service standpoint, it is not practical, and risk is not viewed as significantly increased by going from a T+1 to a T+3 requirement. For added safety and soundness, the Exchange is also proposing a change to Rule 12.4 that would require carrying firms to deduct the amount of any outstanding customer margin call in a portfolio margining customer's account from net capital on T+1. Additionally, an amendment is proposed that would prohibit entry of new orders that would increase the margin requirement once a margin call is made, and continuing until the margin call is met. Additionally, amendments to Rule 15.8A—Risk Analysis of Portfolio Margin Accounts—are proposed under which the currently required risk analysis procedures for assessing and monitoring the risk of portfolio margin accounts to the carrying firm's capital would have to be sophisticated and be approved in advance by the firm's Designated Examining Authority. Also, several procedures/guidelines have also been added to Rule 15.8A. Lastly, Rule 13.5—Customer Portfolio Margin Accounts—will continue to require that a carrying firm limit its aggregate customer portfolio margin requirements (including cross-margin requirements) to not more than 1,000% of its net capital. As with the current rule for broad-based index options, only the theoretical option values provided by The Options Clearing Corporation (the “OCC”) may be used for computing gain or loss on portfolio positions. Additionally, it is being proposed that an unlisted derivative be allowed in a portfolio margin account only if the OCC can provide theoretical values. The Exchange proposes to amend Rule 12.4 to add a requirement that a firm be approved in advance by its Designated Examining Authority (“DEA”) to offer portfolio margining to customers. Exchange Rule 15.8A— *Risk Analysis of Portfolio Margin Accounts* —currently requires firms to file and maintain procedures with the Exchange for assessing and monitoring the potential risk to the firm's capital of carrying customer portfolio margin accounts. The Exchange is proposing to delete this requirement given the proposed amendment of Rule 15.8A that would require prior DEA approval of written risk monitoring procedures. A further revision of Rule 12.4 is proposed that would allow control and restricted stock to be held in a portfolio margin account, provided the option (or other derivative) to which the stock relates is established in a manner that is consistent with SEC Rule 144, or any applicable Commission guidelines or no-action letters. Additionally, it is proposed that foreign equity securities be permitted in a portfolio margin account provided that they have a ready market. The term ready market in respect of a foreign equity security would be defined the same as in the Commission's net capital rule—i.e., a security included in the FT Actuaries World Index. The requirement under current Rule 12.4 that an account must be approved for writing uncovered option contracts in order to receive portfolio margin treatment will continue to apply. The current rules of the exchanges and NASD pertaining to approval of accounts for writing uncovered option contracts require the account to have a minimum level of account equity, which is set by the firm. Finally, the requirement to furnish a special disclosure document concerning portfolio margining to each customer on or before the date of an initial transaction in a portfolio margin account will continue to apply. The disclosure document is being amended as necessary to incorporate references to equity options, narrow-based index options and security futures, and hedging positions in underlying equity securities. 2. Statutory Basis The proposed portfolio margin rules are intended to promote greater reasonableness, accuracy and efficiency in respect of Exchange margin requirements for complex, multiple position listed option strategies, and offer a cross-margin capability with related index futures positions, in eligible accounts. As such, the proposed rule change is consistent with and furthers the objectives of section 6(b)(5) 7 of the Act, in that it is designed to perfect the mechanisms of a free and open market and to protect investors and the public interest. 7 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 that is not necessary or appropriate in furtherance of purposes of the Act. C. Self-Regulatory Organization's Statement on Comments on the Proposed Rule Change Received From Members, Participants or Others No written comments were solicited or received with respect to the proposed rule change. III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action Within 35 days of the date of publication of this notice in the **Federal Register** or within such longer period
(i)as the Commission may designate up to 90 days of such date if it finds such longer period to be appropriate and publishes its reasons for so finding, or
(ii)as to which the Exchange 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 Exchange 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 e-mail to rule-comments@sec.gov. Please include File Number SR-CBOE-2006-14 on the subject line. Paper Comments • Send paper comments in triplicate to Nancy M. Morris, Secretary, Securities and Exchange Commission, 100 F Street, NE., Washington, DC 20549-1090. All submissions should refer to File Number SR-CBOE-2006-14. 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 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 submission should refer to File Number SR-CBOE-2006-14 and should be submitted on or before April 27, 2006. For the Commission, by the Division of Market Regulation, pursuant to delegated authority. 8 8 17 CFR 200.30-3(a)(12). Nancy M. Morris, Secretary. [FR Doc. E6-4989 Filed 4-5-06; 8:45 am] BILLING CODE 8010-01-P SECURITIES AND EXCHANGE COMMISSION [Release No. 34-53567; File No. SR-CBOE-2006-09] Self-Regulatory Organizations; Chicago Board Options Exchange, Incorporated; Order Approving Proposed Rule Change Relating to the Exposure Period for Crossing Orders in the Hybrid Trading System March 29, 2006. On January 30, 2006, the Chicago Board Options Exchange, Incorporated (“CBOE” or “Exchange”), 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 Rule 19b-4 thereunder, 2 to decrease the exposure period for crossing orders in its Hybrid Trading System (“Hybrid”) from 10 seconds to 3 seconds. The proposed rule change was published for comment in the **Federal Register** on February 22, 2006. 3 The Commission received no comments on the proposal. 1 15 U.S.C. 78s(b)(1). 2 17 CFR 240.19b-4. 3 * See* Securities Exchange Act Release No. 53278 (February 13, 2006), 71 FR 9184. After careful consideration, the Commission finds that the proposed rule change is consistent with the requirements of Section 6(b) of the Act 4 and the rules and regulations thereunder applicable to a national securities exchange, 5 and in particular with Section 6(b)(5) of the Act. 6 The Commission believes that, in the electronic environment of Hybrid, reducing the exposure period to 3 seconds could facilitate the prompt execution of orders, while providing participants in Hybrid with an adequate opportunity to compete for exposed bids and offers. 4 15 U.S.C. 78f(b). 5 In approving this proposal, the Commission has considered the proposed rule's impact on efficiency, competition, and capital formation. *See* 15 U.S.C. 78c(f). 6 15 U.S.C. 78f(b)(5). *It is therefore ordered,* pursuant to Section 19(b)(2) of the Act, 7 that the proposed rule change (SR-CBOE-2006-09) is hereby approved. 7 15 U.S.C. 78s(b)(2). For the Commission, by the Division of Market Regulation, pursuant to delegated authority. 8 8 17 CFR 200.30-3(a)(12). Nancy M. Morris, Secretary. [FR Doc. E6-5034 Filed 4-5-06; 8:45 am] BILLING CODE 8010-01-P SECURITIES AND EXCHANGE COMMISSION [Release No. 34-53580; File No. SR-NASD-2006-040] Self-Regulatory Organizations; National Association of Securities Dealers, Inc.; Notice of Filing and Order Granting Accelerated Approval of Proposed Rule Change To Expand NASD's Order Audit Trail System Exemptive Authority To Include Recording Requirements March 30, 2006. 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 March 28, 2006, the National Association of Securities Dealers, Inc. (“NASD”) 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 NASD. The Commission is publishing this notice and order 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 NASD is proposing to expand NASD's current Order Audit Trail System
(OATS)exemptive authority to include recording requirements. Below is the text of the proposed rule change. Proposed new language is in *italics* ; proposed deletions are in [brackets]. 3 3 The proposed changes indicated herein are based on rule text approved by the SEC on September 28, 2005, which become effective on May 8, 2006. *See* Securities Exchange Act Release No. 52521 (September 28, 2005), 70 FR 57909 (October 4, 2005) (File No. SR-NASD-00-23). 6950. Order Audit Trail System 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 May 8, 2011.] 6958. Exemption to the Order Recording and Data Transmission Requirements *
(a)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 recording and order data transmission requirements of Rules 6954 and 6955, respectively, for manual orders, if such exemption is consistent with the protection of investors and the public interest, and the member meets the following criteria: * *(1) 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;* *(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 exception for principal transactions executed pursuant to error corrections); and* *(5) The member does not conduct clearing or carrying activities for other firms.* *(b) An exemption provided pursuant to this Rule shall not exceed a period of two years. At or prior to the expiration of a grant of exemptive relief under this Rule, a member meeting the criteria set forth in paragraph
(a)above 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.* *(c) This Rule shall be in effect until May 8, 2011.* 9600. Procedures for Exemptions 9610. Application
(a)Where to File A member seeking exemptive relief as permitted under Rules 1021, 1050, 1070, 2210, 2315, 2320, 2340, 2520, 2710, 2720, 2790, 2810, 2850, 2851, 2860, Interpretive Material 2860-1, 3010(b)(2), 3020, 3150, 3210, 3230, 3350, 695[5] *8* , 8211, 8212, 8213, 11870, or 11900, 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 III 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 On September 28, 2005, the SEC approved amendments to the OATS Rules (NASD Rules 6950 through 6957) which, among other things, implement the final phase of OATS (OATS Phase III) relating to manual orders and permit NASD to grant exemptive relief from the OATS reporting requirements for manual orders. 4 The amendments become effective on May 8, 2006. The new exemptive authority permits NASD to grant exemptive relief only to those members that meet specified criteria. 5 The narrow scope is generally intended to permit NASD to grant relief only to smaller member firms where the reporting of such information would be unduly burdensome 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. 4 *Id* . 5 At a minimum, members must meet the following criteria to 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 final 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. NASD's exemptive authority is further limited in that it only permits NASD to relieve members of their obligations to report OATS information to NASD on a daily basis. Thus, while members that are granted an exemption are exempt from reporting or submitting information required under the OATS Rules to NASD, such members must still record and electronically maintain all information required under the OATS Rules. Certain smaller member firms that meet the criteria to request an exemption from the reporting requirements have raised concerns about having to comply with the OATS recording requirements. Specifically, such firms have indicated that even if they ultimately are granted an exemption from the reporting requirements, complying with the OATS recording requirements will impose significant burdens and costs on their firms. NASD understands the concerns raised by these firms and believes that expanding its current exemptive authority to include recording requirements will greatly assist these smaller member firms by providing such firms more time to determine the best mechanism for complying with the OATS requirements. At the same time, NASD does not believe that such an exemption will have a material impact on NASD's regulatory program because members currently are required to capture and maintain much of the data via other NASD and SEC rules ( *e.g.* , NASD Rule 3110 and Rule 17a-3 under the Act 6 ), and any exemption granted will be for a limited time period. 6 17 CFR 240.17a-3. NASD intends to grant exemptions from the OATS recording and reporting requirements for manual orders for a period of six months to those members that meet the minimum required criteria. This exemptive relief is intended to provide such members additional time to determine and implement an effective mechanism for recording and reporting OATS information to NASD. In this regard, NASD has developed several new enhancements to NASD's OATS Web interface, which are designed to significantly reduce the OATS recording and reporting burdens for manual firms with limited order volume. 7 Specifically, the upgrades to the OATS Web interface, which is available at no cost to members, will greatly improve usability and reduce the number of fields users are required to enter when recording an OATS event. The enhanced Web interface will enable a user to submit the data to OATS, as well as download the data to its own system prior to submission, to allow the user to maintain on its own system a record of events submitted to OATS. 8 7 While the enhanced OATS Web interface is designed to reduce significantly the OATS recording and reporting burdens for manual firms with limited order volume, the enhanced Web interface is available as a mechanism for recording and reporting OATS information to all eligible member firms, including member firms already required to report to NASD during OATS Phase I and Phase II. 8 The testing environment for the Web interface enhancements will be available on April 24, 2006, and the production environment will be available on May 8, 2006. During the six-month exemption period, NASD will be evaluating the enhanced Web interface functionality to determine whether it reduces significantly the reporting burdens for smaller member firms. The availability of an effective OATS Web interface will be a major factor in NASD's decision to grant further exemptions after the initial six-month exemptive period expires. For this reason, NASD strongly recommends that members granted an exemption contact NASD immediately to begin testing usage of the Web interface enhancements. As NASD and member firms gain experience with the Web interface, NASD will be in a better position to evaluate and consider the effectiveness of Web interface for OATS requirements and whether any future exemptive relief beyond the initial six-month time frame is appropriate. Notwithstanding the effectiveness of Web interface, NASD may decide to grant further exemptions to certain smaller member firms where complying with the OATS recording and reporting requirements for manual orders would impose significant burdens and costs on their firms. The effective date of the proposed rule change would be May 8, 2006, if approved prior to that date; otherwise, the effective date would be the date of SEC approval. 2. Statutory Basis NASD believes that the proposed rule change is consistent with the provisions of Section 15A(b)(6) of the Act, 9 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 expanding NASD's OATS exemptive authority would provide smaller member firms additional time to determine an appropriate mechanism for complying with the OATS requirements, while not materially impacting NASD's regulatory oversight. 9 15 U.S.C. 78 *o* -3(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 While NASD did not specifically solicit comment on the proposed rule change, NASD received one written comment letter regarding the scope of the exemptive authority set forth in Rule 6955(d). 10 The commenter requests that NASD broaden its current exemptive authority to include recording requirements. Specifically, the commenter argues that NASD's exemptive authority was intended to include the requirement to record information required under the OATS Rules and maintain such information in an electronic format. The commenter contends that its firm, as well as other firms, were confused that the current exemption from the OATS reporting requirements included only the narrow exemption from the requirement to transmit OATS data to NASD. The commenter further contends that the distinction between the transmission requirement and the electronic retention and collection of information was not highlighted nor discussed. As noted above, NASD proposes to expand its OATS exemptive authority to include recording requirements. 10 *See* Letter to Paul J. McKenney, Assistant Director—OATS, NASD, from Bonnie K. Wachtel, CEO, and Wendie L. Wachtel, COO, Wachtel & Co., Inc. dated February 1, 2006. 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 Comments • Use the Commission's Internet comment form ( *http://www.sec.gov/rules/sro.shtml* ); or • Send an e-mail to *rule-comments@sec.gov* . Please include File Number SR-NASD-2006-040 on the subject line. Paper Comments • Send paper comments in triplicate to Nancy M. Morris, Secretary, Securities and Exchange Commission, 100 F Street, NE., Washington, DC 20549-1090. All submissions should refer to File Number SR-NASD-2006-040. 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 NASD. All comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR-NASD-2006-040 and should be submitted on or before April 27, 2006. 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 self-regulatory organization. 11 In particular, the Commission believes that the proposal is consistent with Section 15A(b)(6) of the Act, 12 which requires that the rules of an association 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. 11 In approving this proposal, the Commission has considered its impact on efficiency, competition, and capital formation. *See* 15 U.S.C. 78c(f). 12 15 U.S.C. 78 *o* -3(b)(6). The NASD's view that the benefits afforded to smaller member firms by the proposed rule change seem to be significant, without materially impacting the regulatory oversight, seems reasonable. Importantly, the Commission notes that smaller firms may be exempt under NASD's current exemptive authority from daily reporting requirements with respect to OATS information under current rules, so the proposed change would not affect the information received by the NASD on a daily basis. Additionally, the NASD notes that member firms that may be eligible for the proposed expanded exemption are required to capture and maintain certain information required by the OATS Rules pursuant to other NASD and Commission rules. 13 13 *See e.g.* , NASD Rule 3110 and 17 CFR 240.17a-3 and page 6, *supra* . The Commission also notes that the NASD initially plans to limit an exemption available under this proposal to six months and re-evaluate whether to grant further exemptions after the expiration of the six-month period. The Commission believes that by initially limiting the exemption to qualifying member firms to six months, firms may have sufficient time to become familiar with NASD's enhanced Web interface and to discuss with NASD any problems encountered. Finally, the Commission believes that the NASD's proposed requirement that a firm receiving an exemption under the proposed rule change re-apply after six months and at least every two years should help to ensure that firms applying for the exemption are continuing to meet the exemption requirements. The Commission understands that the NASD wants to provide members eligible for an exemption adequate notice as to whether they will be required to comply with the OATS recording requirement on May 8, 2006. The Commission believes that allowing accelerated approval of this proposed rule change would give members eligible for the exemption more time to evaluate their options with respect to the OATS Rules and hopefully prevent unnecessary hardships or expense that may otherwise occur without accelerated approval. The Commission, therefore, finds good cause for approving this proposal before the thirtieth day after the publication of notice thereof in the **Federal Register** . V. Conclusion *It is therefore ordered,* pursuant to Section 19(b)(2) of the Act, 14 that the proposed rule change, as amended (SR-NASD-2006-040), is hereby approved. 14 15 U.S.C. 78s(b)(2). For the Commission, by the Division of Market Regulation, pursuant to delegated authority. 15 15 17 CFR 200.30-3(a)(12). Nancy M. Morris, Secretary. [FR Doc. E6-4986 Filed 4-5-06; 8:45 am] BILLING CODE 8010-01-P SECURITIES AND EXCHANGE COMMISSION [Release No. 34-53578; File No. SR-NASD-2005-073] Self-Regulatory Organizations; National Association of Securities Dealers, Inc.; Order Granting Approval of a Proposed Rule Change and Amendment Nos. 1 and 2 Thereto and Notice of Filing and Order Granting Accelerated Approval of Amendment No. 3 Thereto Relating to Rule 4350(e) To Amend the Annual Shareholder Meeting Requirement March 30, 2006. On June 6, 2005, 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 amend NASD Rule 4350 in order to change its annual shareholder meeting requirement. On December 5, 2005, Nasdaq filed Amendment No. 1 to the proposed rule change. 3 On December 9, 2005, Nasdaq filed Amendment No. 2 to the proposed rule change. 4 The proposed rule change, as amended, was published for comment in the **Federal Register** on December 28, 2005. 5 No comments were received regarding the proposal. On March 16, 2006, Nasdaq filed Amendment No. 3 to the proposed rule change. 6 This order approves the proposed rule change, as amended, publishes notice of Amendment No. 3 to the proposed rule change, and grants accelerated approval to Amendment No. 3. 1 15 U.S.C. 78s(b)(1). 2 17 CFR 240.19b-4. 3 3 In Amendment No. 1, Nasdaq revised the proposed rule text and corresponding description of the proposal in its Form 19b-4. Amendment No. 1 replaced Nasdaq's original filing in its entirety. 4 In Amendment No. 2, Nasdaq made clarifying changes to the proposed rule text of IM-4350-8 with respect to certain issuers still subject to the annual shareholder meeting requirement under NASD Rule 4350(e). 5 *See* Securities Exchange Act Release No. 52985 (December 20, 2005), 70 FR 76895. 6 In Amendment No. 3, Nasdaq made further clarifying changes to the proposed rule text of IM-4350-8 to state that at the annual shareholder meeting, shareholders must be afforded the opportunity to discuss company affairs with management and, if required by the issuer's governing documents, to elect directors. I. Description of the Proposed Rule Change NASD Rule 4350(e) currently requires all Nasdaq issuers to hold an annual meeting of shareholders and to provide notice of such meeting to Nasdaq. Nasdaq recognizes the significance of annual shareholder meetings because they allow the equity owners of a company—typically its common stockholders—the opportunity to elect directors and meet with management to discuss company affairs. Nasdaq, however, believes that the annual shareholder meeting requirement is not necessary for, or applicable to, an issuer with respect to certain types of its listed securities because the holders of those securities do not directly participate as equity holders and do not vote in the election of directors. Specifically, Nasdaq makes reference to securities listed pursuant to NASD Rule 4420(f) (Quantitative Designation Criteria, Other Securities), which allows for the listing of securities that possess attributes or features of more than one category of security. 7 Nasdaq believes that these securities typically are not an issuer's primary equity security, and their holders have only limited economic interests and other rights. Nasdaq also believes that Portfolio Depository Receipts (listed pursuant to NASD Rule 4420(i)) and Index Fund Shares (listed pursuant to NASD Rule 4420(j)), which are securities issued by unit investment trusts and open-end management investment companies, respectively, that are organized as exchange-traded funds, should not be required to hold an annual shareholder meeting. According to Nasdaq, these exchange-traded funds are generally passive investment vehicles that seek to match the performance of an index and must obtain an exemptive order from the Commission before they offer securities. As a result, Nasdaq notes that the operations of the issuers of these securities are circumscribed by numerous representations and conditions of the applicable orders, and that the issuers of these securities do not typically experience the need for operational or other changes requiring a shareholder vote, and, by extension, a shareholder meeting. 7 Securities currently listed under Rule 4420(f) include:
(i)Trust Preferred Securities, the payments on which are linked to the performance of another security;
(ii)Index Linked Notes, the payments on which are linked to the performance of an underlying index; and
(iii)Contingent Value Rights, the performance of which are tied to the performance of another security, a particular division of the company, or the occurrence of a certain event. Finally, Nasdaq would exclude from its annual shareholder meeting requirement those issuers listing Trust Issued Receipts (listed pursuant to NASD Rule 4420(l)), which are securities issued by a trust that holds, but does not manage, specific securities on behalf of the investors in the trust. Nasdaq notes that these trusts do not hold shareholder (or unitholder) meetings because the trusts have no boards of directors and essentially serve only as conduits for the investors' indirect investments in the underlying securities of the trusts. For the foregoing reasons, Nasdaq proposes to amend NASD Rule 4350(e) such that the requirement to hold an annual shareholder meeting would be applicable only to those Nasdaq issuers as a result of listing voting and non-voting common stock and voting preferred stock, and their respective equivalents. Under the proposal, issuers of securities listed under NASD Rules 4420(f), 4420(i), 4420(j), and 4420(l) would specifically be excluded from the annual meeting requirement in proposed IM-4350-8. The proposal makes clear, however, that issuers of such securities are still required to hold an annual shareholder meeting with respect to the listing of common stock or voting preferred stock, or their equivalents. 8 By clearly identifying those issuers that will be subject to the annual shareholder meeting requirement, Nasdaq believes that NASD Rule 4350(e) will be more transparent. 8 Proposed IM-4350-8 provides that the requirement to hold an annual shareholder meeting would not be applicable as a result of an issuer listing the following types of securities: “securities listed pursuant to Rule 4420(f) (such as Trust Preferred Securities and Contingent Value Rights), unless the listed security is a common stock or voting preferred stock equivalent (e.g., a callable common stock); Portfolio Depository Receipts listed pursuant to Rule 4420(i); Index Fund Shares listed pursuant to Rule 4420(j); and Trust Issued Receipts listed pursuant to Rule 4420(l). Notwithstanding, if the issuer also lists common stock or voting preferred stock, or their equivalent, the issuer must still hold an annual meeting for the holders of that common stock or voting preferred stock, or their equivalent.” *See* Securities Exchange Act Release No. 52985 (December 20, 2005), 70 FR 76895, 76896. In addition, NASD Rule 4350(e) currently requires all Nasdaq issuers to provide notice of their annual shareholder meetings to Nasdaq. In practice, however, Nasdaq states that it does not rely on this notification to monitor compliance with the annual shareholder meeting requirement. Instead, Nasdaq represents that its staff reviews proxy statements (and, in the case of issuers that do not file proxy statements, other Commission filings) to determine compliance. For these reasons, Nasdaq proposes to further amend NASD Rule 4350(e) to eliminate the notification requirement. Finally, while NASD Rule 4350(e) currently does not provide a deadline for holding the annual shareholder meeting, Nasdaq proposes that the annual shareholder meeting must be held within one year of the end of the issuer's fiscal year. 9 At each such meeting, shareholders must be afforded the opportunity to discuss company affairs with management and, if required by the issuer's governing documents, to elect directors. Nasdaq believes that codifying this time frame would provide additional transparency to the annual shareholder meeting requirement. 9 *See infra* note 14. II. Discussion and Commission Findings 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 association 10 and, in particular, the requirements of Section 15A(b)(6) of the Act 11 and the rules and regulations thereunder. Specifically, the Commission finds that the proposal to amend the annual shareholder meeting requirement is consistent with Section 15A(b)(6) of the Act because it is designed to promote just and equitable principles of trade, to remove impediments to a free and open market and a national market system, and, in general, to protect investors and the public interest, and is not designed to permit unfair discrimination between issuers. 10 In approving this proposal, the Commission has considered the proposed rule's impact on efficiency, competition, and capital formation. *See* 15 U.S.C. 78c(f). 11 15 U.S.C. 78 *o* -3(b)(6). A. Applicability of the Annual Shareholder Meeting Requirement The proposal sets forth which Nasdaq issuers are required to hold annual shareholder meetings and excludes from the annual shareholder meeting requirement issuers listing certain types of securities with respect to which the shareholders typically have a limited interest. 12 The Commission notes that Nasdaq's proposed annual shareholder meeting requirement remains subject to any applicable state and federal securities laws that relate to such annual meetings; as a result, an issuer that lists one or more of the types of securities set forth in proposed IM-4350-8 may still be required to hold annual shareholder meetings in accordance with such state and federal securities laws. In addition, the Commission notes that issuers of Nasdaq-listed securities, including the types of securities set forth in proposed IM-4350-8, remain subject to state and federal securities laws that may require other types of shareholder meetings, such as special meetings of shareholders. For example, exchange-traded funds are registered under, and remain subject to, the Investment Company Act of 1940 (“Investment Company Act”), which imposes various shareholder-voting requirements that may be applicable to such funds. 13 12 For example, as noted above, shareholders of some of these securities have a limited economic interest in the issuer and do not even vote for a board of directors. 13 *See e.g.* , Section 16 of the Investment Company Act, which requires, among others, an investment company's initial board of directors to be elected by the shareholders at an annual or special meeting. 15 U.S.C. 80a-16(a). The proposal also clarifies that, under the NASD rules, the right not to hold an annual shareholder meeting, as set forth in proposed IM-4350-8, applies only with respect to the particular securities specified in proposed IM-4350-8. Thus, although the proposed rule change excludes a particular Nasdaq issuer from holding an annual shareholder meeting with respect to, and as a result of listing, the specific type of security specified in proposed IM-4350-8, if such issuer also lists other common stock or voting preferred-stock, or their equivalent, such issuer must nevertheless hold an annual meeting for the holders of that common stock or voting preferred-stock, or their equivalent, under the proposal. In addition, proposed IM-4350-8 makes clear that issuers listing securities under NASD Rule 4420(f) (Other Securities), which allows for the listing of Trust Preferred Securities, Index Linked Notes, and Contingent Value Rights, among others, will still be subject to the annual shareholder meeting requirement, irrespective of whether such securities are listed under NASD Rule 4420(f), if such securities have the attributes of common stock or voting preferred stock, or their equivalents. Given the limited rights and other interests of the holders of those securities specified in proposed IM-4350-8 and the applicability of federal and state securities laws that govern shareholder meetings, the Commission believes that the proposed rule change reasonably sets forth the scope of the annual shareholder meeting requirement and will ensure that the appropriate Nasdaq-listed companies are required to hold annual shareholder meetings under NASD rules, for the benefit of investors and the public interest. B. Notification of the Annual Shareholder Meeting With respect to Nasdaq's proposal to eliminate the notice requirement in NASD Rule 4350(e), the Commission believes that, because Nasdaq's practice to monitor the annual shareholder meeting requirement involves the review of proxy statements and other Commission filings, the current notification requirement is redundant and its elimination from NASD Rule 4350(e) would be reasonable. Of course, Nasdaq will still be required to ensure compliance with the annual shareholder meeting requirement and is simply eliminating a notification requirement which Nasdaq claims is not necessary. The proposed change would be consistent with Section 15A(b)(6) of the Act because the elimination of a redundancy and an unnecessary obligation of Nasdaq issuers removes impediments to the mechanism of a free and open market and a national market system, while continuing to ensure the protection of investors and the public interest. C. Timing of the Annual Shareholder Meeting Finally, the provision concerning the holding of an annual meeting is being amended to require that the annual meeting must be held within one year after the end of the fiscal year. The Commission believes that such proposed change reasonably establishes a time frame to the annual shareholder meeting requirement that is consistent with the Act, and in particular, Section 15A(b)(6) thereof. The Commission notes that this change makes explicit that the annual meeting must be held within a year of the fiscal year-end of the company. 14 In addition, the Commission notes that the date a company holds its annual meeting must be consistent with state law. The Commission also notes that the provision requires those issuers that must hold an annual shareholder meeting under NASD Rule 4350(e) to hold such meetings within a certain time frame, for the benefit of the security holders, the investors, and the public interest, consistent with Section 15A(b)(6) of the Act. 15 14 The proposed rule text of IM-4350-8 also states that for a new listing that was not previously subject to a requirement to hold an annual meeting, the company is required to hold its first meeting within one year after its first fiscal year-end following such listing. 15 15 U.S.C. 78 *o* -3(b)(6). III. Solicitation of Comments Interested persons are invited to submit written data, views, and arguments concerning Amendment No. 3, including whether Amendment No. 3 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 No. SR-NASD-2005-073 on the subject line. Paper Comments • Send paper comments in triplicate to Nancy M. Morris, Secretary, Securities and Exchange Commission, Station Place, 100 F Street, NE., Washington, DC 20549-1090. All submissions should refer to File Number SR-NASD-2005-073. This file number should be included on the subject line if e-mail is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission's Internet Web site ( *http://www.sec.gov/rules/sro.shtml* ). Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for inspection and copying in the Commission's Public Reference Room. Copies of such filing also will be available for inspection and copying at the principal office of the NASD. All comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR-NASD-2005-073 and should be submitted on or before April 27, 2006. IV. Accelerated Approval of Amendment No. 3 Pursuant to Section 19(b)(2) of the Act, 16 the Commission may not approve any proposed rule change, or amendment thereto, prior to the 30th day after the date of publication of notice of the filing thereof, unless the Commission finds good cause for so doing and publishes its reasons for so finding. The Commission hereby finds good cause for approving Amendment No. 3 to the proposal, prior to the 30th day after publishing notice of Amendment No. 3 in the **Federal Register** . The revisions made to the proposal in Amendment No. 3 are typographical changes intended to clarify that at the annual shareholder meeting shareholders must be afforded the opportunity to discuss company affairs with management. In addition, if required by the issuer's governing documents, shareholders must be afforded the opportunity to elect directors. This was the intent of the provision as originally proposed. The Commission believes that accelerating Amendment No. 3 is appropriate because these revisions are clarifying and do not raise new regulatory issues. Accordingly, pursuant to Section 19(b)(2) of the Act, 17 the Commission finds good cause to approve Amendment No. 3 prior to the thirtieth day after notice of the Amendment is published in the **Federal Register** . 16 15 U.S.C. 78s(b)(2). 17 *Id.* V. Conclusion *It is therefore ordered* , pursuant to Section 19(b)(2) of the Act, 18 that the proposed rule change (File No. SR-NASD-2005-073), as amended, is approved, and Amendment No. 3 to the proposed rule change is hereby granted accelerated approval. 18 *Id.* For the Commission, by the Division of Market Regulation, pursuant to delegated authority. 19 19 17 CFR 200.30-3(a)(12). Nancy M. Morris, Secretary. [FR Doc. E6-5033 Filed 4-5-06; 8:45 am] BILLING CODE 8010-01-P SECURITIES AND EXCHANGE COMMISSION [Release No. 34-53579; File No. SR-NYSE-2006-12] Self-Regulatory Organizations; New York Stock Exchange LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change and Amendment No. 1 Thereto Relating to NYSE Rule 103.12 Regarding Time Tracking Requirements of Specialists and Clerks March 30, 2006. 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 February 28, 2006, the New York Stock Exchange LLC (“NYSE” 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 has designated the proposed rule change as constituting a “non-controversial” rule change under Section 19(b)(3)(A)(iii) of the Act, 3 and paragraph (f)(6) of Rule 19b-4 under the Act, 4 which renders the proposal effective upon receipt of this filing by the Commission. 5 On March 30, 2006, NYSE filed Amendment No. 1 to the proposed rule change. 6 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 15 U.S.C. 78s(b)(3)(A)(iii). 4 17 CFR 240.19b-4(f)(6). 5 NYSE has requested that the Commission waive both the five-day pre-filing notification requirement and the 30-day operative delay, as specified in Rule 19b-4(f)(6)(iii). 17 CFR 240.19b-4(f)(6)(iii). 6 Amendment No. 1 replaces and supersedes the original filing in its entirety. In Amendment No. 1, the Exchange:
(i)Revised the purpose section of the filing to provide additional details regarding how the IDTrack reports and electronic signature component will work;
(ii)removed unnecessary language from the rule text; and
(iii)withdrew the proposed addition of subparagraph
(C)of NYSE Rule 103.12 to the “List of Exchange Rule Violations and Fines Applicable Thereto Pursuant to Rule 476A,” which the Exchange represents it will file separately at a later date. I. Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change The Exchange is proposing to amend NYSE Rule 103.12 (Registration of Specialists) by requiring specialists and specialist clerks to electronically sign and certify as accurate the end-of-day IDTrack SM reports identifying:
(1)The time they spent on the Floor of the Exchange working in those capacities; and
(2)the identity of the specialty stocks in which they worked during the trading day. IDTrack is an electronic touch screen application that electronically records the login and logout time of specialists and specialist clerks during the trading day and the names of the specialty stock in which they work during a particular trading day. The text of the proposed rule change is available on the NYSE's Web site ( *http://www.nyse.com* ), at the NYSE's Office of the Secretary, 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. 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 As part of the settlement with the Commission, 7 the Exchange agreed to undertake certain initiatives concerning the oversight of the Floor. In one of these undertakings, the Exchange is required to develop systems to track the identity of specialists and their clerks and the times when each specialist and clerk act as such while on the Floor. 7 *See* Securities Exchange Act Release No. 51524 (April 12, 2005) announcing Administrative Proceeding File No. 3-11892 (the “Administrative Proceeding”). NYSE Rule 103.12, adopted in 2005, 8 requires specialist firms to track the identity of specialists and their clerks, the times when each specialist and clerk acts as such while on the Floor, and the identity of the specialty stocks in which the specialist and the clerk worked on any given trading day. The rule also requires that specialist firms independently make and keep, in the regular course of business, records of the times that each of the firm's specialists and clerks work in these capacities on the Floor. The specialist firms must be able to provide these records to the Exchange within the time frame and in a format determined by the Exchange. 8 *See* Securities Exchange Act Release No. 52251 (August 12, 2005), 70 FR 48790 (August 19, 2005) (SR-NYSE-2005-47). To facilitate the Exchange's ability to monitor specialist and clerk activity, in November 2005 the Exchange installed a system to capture this information electronically. This system, known as IDTrack, requires specialists and clerks to log in to the IDTrack system and register their presence with respect to specialty stocks in which they worked. IDTrack is an electronic touch screen application that electronically records the login and logout times of specialists and specialist clerks during the trading day, and the names of the specialty stocks in which they are working. The IDTrack system also provides electronic reports and information to the Exchange's Division of Market Surveillance and to specialist firms with respect to this information. The IDTrack reports do not replace the specialist firms' obligations under NYSE Rule 103.12 to make and keep their own records regarding specialist and specialist clerk activity during the trading day. The Exchange is proposing to enhance the IDTrack application and improve accountability by developing supplemental components to the end-of-day report. The end-of-day report will continue to detail the login and logout times and the specialty stocks of specialists and clerks throughout the trading day. However, the Exchange will further require that each specialist and clerk provide their electronically written signature to certify as accurate the daily IDTrack report at the end of the trading day, thereby improving the reliability of the information in the reports. The electronic signature will be written using an optical pen attached to the touch screen terminal. In the event a specialist or clerk disagrees with the information in the end-of-day report, a “comment” section is available on the electronic screen to enter a comment regarding a disputed fact, *i.e.* , a disputed login/logout time or stock name. Comments added by the specialists and specialist clerks on the actual trading day of the report in question will become part of the end-of-day report. If the specialists and clerks do not make entries in the comment section on that day, then they forfeit their ability to directly enter such comments in their IDTrack end-of-day report. 9 9 Comments may be entered in a separate electronic screen by a firm's “administrative user” when the administrative user reviews the “pending report” list, but the original end-of-day report cannot be altered by any user after the trade date in question. The proposed rule requires each specialist and specialist clerk to electronically sign and certify as accurate each end-of-day report, even if they disagree or have comments regarding information in the report. In the event that a specialist or clerk has a question or concern about the information in the end-of-day report, the IDTrack system directs them to contact Exchange personnel as soon as the issue arises. Specialists and clerks are also directed to inform their firms' compliance officers with concerns or questions about their end-of-day report. Despite any questions, concerns or comments about the information in the end-of-day report, the specialists and clerks are required to electronically sign the report at the end of each trading day. IDTrack includes an “administrative user” screen to administer certain aspects of the system. The administrative user may be the firm's compliance office or a designee of the compliance officer. The administrative user may view a list of unsigned “pending” reports of their firm's specialists and clerks. Through the use of this screen, administrative users may file an end-of-day report for their firm's specialists or clerks without the required signatures, but the administrative user must enter a comment into their electronic screen explaining this action. To ensure the integrity of IDTrack electronic reports, IDTrack users, including specialists, clerks and administrative personnel, will not be able to override the information in IDTrack reports. Thus, under the proposed rule change, the Exchange will have an electronically signed record of the times that specialists and their clerks spend on the Floor of the Exchange working in those capacities, and the identity of specialty stocks in which the specialists and clerks worked on any given trading day. As with other Exchange rules, failure by a specialist or specialist clerk to sign the end-of-day report at the end of the trading day or comply with IDTrack obligations may result in disciplinary action. 10 10 *See* Securities Exchange Act Release No. 52768 (November 10, 2005), 70 FR 70014 (November 18, 2005) (SR-NYSE-2005-64) (adding NYSE Rule 103.12 to the NYSE List of Exchange Rule Violations and Fines under Rule 476A). The Exchange intends to propose, in a separate rule filing, an amendment to Rule 476A that will apply to all requirements under Rule 103.12, including this proposed rule change, Rule 103.12(C). 2. Statutory Basis The Exchange believes that the basis under the Act for this proposed rule change is the requirement under Section 6(b)(5) 11 that an Exchange have rules that are 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. 11 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 The Exchange has 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 Because the proposed rule change:
(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 for 30 days after the date of the filing, or such shorter time as the Commission may designate if consistent with the protection of investors and the public interest, the proposed rule change has become effective pursuant to Section 19(b)(3)(A) of the Act 12 and Rule 19b-4(f)(6) thereunder. 13 12 15 U.S.C. 78s(b)(3)(A). 13 17 CFR 240.19b-4(f)(6). A proposed rule change filed under Rule 19b-4(f)(6) normally does not become operative for 30 days after the date of filing. However, Rule 19b-4(f)(6)(iii) permits the Commission to designate a shorter time if such action is consistent with the protection of investors and the public interest. In addition, Rule 19b-4(f)(6)(iii) requires a self-regulatory organization to provide the Commission with written 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. The Exchange has asked the Commission to waive the five-day pre-filing requirement and the 30-day operative delay to allow NYSE to immediately enhance its IDTrack system, so that the tracking of the time specialists and clerks spend on the Floor, and the signing and certification of the daily IDTrack reports comply with the requirements of the Administrative Proceeding. The Commission has decided, consistent with the protection of investors and the public interest, to waive the five-day pre-filing notice and 30-day operative delay so that the NYSE may meet the requirement in the Administrative Proceeding. 14 14 For purposes only of waiving the 30-day operative delay, 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 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. 15 15 For purposes of calculating the 60-day abrogation period, the Commission considers the proposed rule change to have been filed on March 30, 2006, the date the NYSE filed Amendment No. 1. 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-NYSE-2006-12 on the subject line. Paper Comments • Send paper comments in triplicate to Nancy M. Morris, Secretary, Securities and Exchange Commission, 100 F Street, NE., Washington, DC 20549-1090. All submissions should refer to File No. SR-NYSE-2006-12. 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 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 No. SR-NYSE-2006-12 and should be submitted on or before April 27, 2006. For the Commission, by the Division of Market Regulation, pursuant to delegated authority. 16 16 17 CFR 200.30-3(a)(12). Nancy M. Morris, Secretary. [FR Doc. E6-4987 Filed 4-5-06; 8:45 am] BILLING CODE 8010-01-P SECURITIES AND EXCHANGE COMMISSION [Release No. 34-53575; File No. SR-NYSE-2006-23] Self-Regulatory Organizations; New York Stock Exchange LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change Relating to Amendments to Exchange Rules 475 and 476 March 30, 2006. Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 (the “Act”), 1 and Rule 19b-4 thereunder, 2 notice is hereby given that on March 27, 2006, the New York Stock Exchange LLC (“NYSE” 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 proposed rule change pursuant to Section 19(b)(3)(A) of the Act 3 and Rule 19b-4(f)(6) thereunder, 4 which renders the proposed rule change 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 Exchange Rules 475 and 476 in order to reconcile amendments to the text of Exchange Rules 475 and 476 as previously approved by the Commission. 5 The proposed amendments further seek to remove inadvertently inserted text from the approved changes in Exchange Rule 476(l) 6 and incorporate the corrected text of Rule 476(l) into Rule 476(k). In addition, the proposed amendments make technical changes and render the rules gender neutral. 5 *See* Securities Exchange Act Release Nos. 53124 (January 13, 2006), 71 FR 3595 (January 23, 2006) (SR-NYSE-2005-37) (which will become operative on April 1, 2006), and 53382 (February 27, 2006), 71 FR 11251 (March 6, 2006) (SR-NYSE-2005-77). 6 *See* Securities Exchange Act Release No. 53382, *supra* note 5. The text of the proposed rule change is available on the Exchange's Web site ( *http://www.nyse.com* ), at the Exchange's Office of the Secretary, 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 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 On May 23, 2005, the New York Stock Exchange, Inc. (“NYSE Inc.”) filed SR-NYSE-2005-37 (“Filing 2005-37”) with the Commission to amend Article IX of its Constitution and Rules 475 and 476 to modify certain aspects of its disciplinary procedures and to provide a structure for a summary suspension hearing and a “call-up” procedure for review by members of the board of directors, certain members of the Board of Executives listed in Rule 476(f), any member of the Regulation, Enforcement and Listing Standards Committee and either the division of the Exchange that initiated the proceedings or the respondent. On January 13, 2006, the Commission approved Filing 2005-37 and its subsequent amendments, to be operative on April 1, 2006. 7 7 *See* Securities Exchange Act Release No. 53124, * supra* note 5. On November 3, 2005, NYSE Inc. filed SR-NYSE-2005-77 (“Filing 2005-77”) with the Commission concerning a proposed rule change relating to its business combination with Archipelago Holdings, Inc. (“Merger”). Contained in Filing 2005-77, among other proposed amendments, were modifications to Rules 475 and 476. On February 27, 2006, the Commission approved Filing 2005-77 and its subsequent amendments to be operative upon the date of the closing of the Merger, which occurred on March 7, 2006. 8 Pursuant to the terms of the Merger, the Exchange became the successor entity to NYSE Inc. 8 *See* Securities Exchange Act Release No. 53382, *supra* note 5. Filing 2005-37 references certain committees and boards that are no longer part of the corporate structure of the Exchange as approved in Filing 2005-77. The Exchange seeks to amend Exchange Rules 475 and 476 to remove these references to conform the rules to the current corporate structure of the Exchange. The proposed rule change seeks to revise paragraph lettering to reconcile rule text; to use consistent references to current Exchange entities; and to correct minor typographical errors. In addition, Filing 2005-37 modified sections of the NYSE Inc. Constitution as it related to its disciplinary process. However, Filing 2005-77, among other things, rescinded the NYSE Inc. Constitution and incorporated certain of its provisions into Rule 476. The provisions incorporated into Rule 476 by Filing 2005-77 are reconciled in this filing with the modifications made in Filing 2005-37. Additionally, certain corrections are made to the text of Rule 476(l) as approved in Filing 2005-77. The Exchange further seeks to incorporate the amended text of Rule 476(l) into Rule 476(k) as the second paragraph of Rule 476(k). Specifically, Filing 2005-77 incorporated the provisions from Article X, Section 6 of the NYSE Inc. Constitution into Rule 476 as section (l). Those provisions govern penalties imposed upon members, allied members and member organizations for failure to pay fines or other sums due the exchange. Rule 476(l) as approved in Filing 2005-77 reads as follows:
(l)Any member, member organization, allied member, approved person or registered or non-registered employee of a member organization who shall not pay a fine, or any other sums due to the Exchange, within forty-five days after the same shall become payable, shall be reported by the Exchange Treasurer to the Chairman of the Exchange Board and, after written notice mailed to such member, member organization, allied member, approved person or registered or non-registered employee of a member organization of such arrearages, may be suspended by the Exchange Board until payment is made. In Filing 2005-77, NYSE Inc. proposed to amend Rule 476(l) above and inadvertently included references to approved persons, registered and non-registered employees. However, penalties for approved persons, registered and non-registered employees that fail to pay fines were already covered in the first paragraph of Rule 476(k) and continued to be covered in that rule. Thus, the Exchange seeks to remove the phrase “approved person or registered and non-registered employee” from Rule 476(l) as approved in Filing 2005-77 and then incorporate the amended text of Rule 476(l) into Rule 476(k) as the second paragraph of Rule 476(k). In this filing, the Exchange further seeks to remove references to “he” and “his” in order to render the rules gender neutral. 2. Statutory Basis The Exchange believes that the proposed rule change is consistent with the requirement under section 6(b)(5) of the Act 9 that an exchange have rules that are designed 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. 9 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 were neither solicited nor received. III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action Because the foregoing proposed rule change does not:
(1)Significantly affect the protection of investors or the public interest;
(2)impose any significant burden on competition; and
(3)by its terms, become operative for 30 days from the date on which it was filed, or such shorter time as the Commission may designate if consistent with the protection of investors and the public interest, the proposed rule change has become effective pursuant to section 19(b)(3)(A) 10 of the Act and Rule 19b-4(f)(6) thereunder. 11 10 15 U.S.C. 78s(b)(3)(A). 11 17 CFR 240.19-4(f)(6). Rule 19b-4(f)(6) also requires that the Exchange give the Commission written notice of the Exchange's intention 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 the filing of the proposed rule change. The Commission notes that the Exchange has satisfied the pre-filing five-day notice requirement. A proposed rule change filed under Rule 19b-4(f)(6) 12 normally may not become operative prior to 30 days after the date of filing. However, Rule 19b-4(f)(6)(iii) 13 permits the Commission to designate a shorter time if such action is consistent with the protection of investors and the public interest. The Exchange has requested that the Commission waive the 30-day operative delay and designate the proposed rule change to become operative on April 1, 2006. The Commission believes that waiving the 30-day operative delay is consistent with the protection of investors and the public interest. 14 The Commission notes that such waiver would allow the Exchange to reconcile rule changes previously approved by the Commission that are due to become operative on April 1, 2006. Accordingly, the Commission designates that the proposed rule change become operative on April 1, 2006. 12 17 CFR 240.19b-4(f)(6). 13 17 CFR 240.19b-4(f)(6)(iii). 14 14 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. *See* 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 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 No. SR-NYSE-2006-23 on the subject line. Paper Comments • Send paper comments in triplicate to Nancy M. Morris, Secretary, Securities and Exchange Commission, Station Place, 100 F Street, NE., Washington, DC 20549-1090. All submissions should refer to File Number SR-NYSE-2006-23. 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. 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-NYSE-2006-23 and should be submitted on or before April 27, 2006. For the Commission, by the Division of Market Regulation, pursuant to delegated authority. 15 15 17 CFR 200.30-3(a)(12). Nancy M. Morris, Secretary. [FR Doc. E6-4990 Filed 4-5-06; 8:45 am] BILLING CODE 8010-01-P SECURITIES AND EXCHANGE COMMISSION [Release No. 34-53577; File No. SR-NYSE-2006-13] Self-Regulatory Organizations; New York Stock Exchange LLC; Notice of Filing of Proposed Rule Change to Rule 431 (“Margin Requirements”) and Rule 726 (“Delivery of Options Disclosure Document and Prospectus”) To Expand the Products Eligible for Customer Portfolio Margining and Cross-Margining and Eliminate Separate Cross-Margin Accounts March 30, 2006. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (“Exchange Act”), 1 and Rule 19b-4 thereunder, 2 notice is hereby given that on March 2, 2006, the New York Stock Exchange LLC (“NYSE” 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 Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. 1 15 U.S.C. 78s(b)(1). 2 17 CFR 240.19b-4. I. Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change The NYSE is filing with the Commission proposed amendments to NYSE Rule 431 (“Margin Requirements”) that would further expand the scope of products that are eligible for treatment as part of the Commission approved Portfolio Margin Pilot Program 3 (“Pilot”) and eliminate the requirement for a separate cross-margin account for margining eligible security products with eligible commodity products. Amendments to Rule 726 (“Delivery of Options Disclosure Document and Prospectus”) also are proposed to include the Commission approved products on the disclosure document required to be furnished to customers pursuant to this rule. The text of the proposed rule change is below. Additions are in italics. Deletions are in brackets. 3 *See* Exchange Act Release No. 52031 (July 14, 2005), 70 FR 42130 (July 21, 2005) (SR-NYSE-2002-19). On July 14, 2005, the Commission approved on a pilot basis expiring July 31, 2007, amendments to Exchange Rule 431 to permit the use of a prescribed risk-based margin requirement (“portfolio margin”), for certain specified products ( *e.g.* , listed, broad-based U.S. index options and warrants, along with any underlying instruments), as an alternative to the strategy based margin requirements currently required by Rule 431. Amendments to Rule 726 were also approved to require disclosure to, and written acknowledgment from, customers in connection with the use of portfolio margin. *See* NYSE Information Memo 05-56 for additional information; *see also* SR-NYSE-2005-93 in which the Exchange filed with the Commission amendments to Rule 431 which would expand the approved products for certain customers that are eligible for treatment under portfolio margin requirements to include U.S. security futures and single stock options. *See* Exchange Act Release No. 53126 (Jan.13, 2006), 71 FR 3586 (Jan. 23, 2006) (SR-NYSE-2005-93). Margin Requirements Rule 431.
(a)through
(f)unchanged. Portfolio Margin [and Cross-Margin]
(g)As an alternative to the “strategy” based margin requirements set forth in sections
(a)through
(f)of this Rule, member organizations may elect to apply the portfolio margin requirements set forth in this section
(g)to [1) listed, broad-based U.S. index options, index warrants and underlying instruments and 2) listed security futures contracts and listed single stock options] * all margin eligible securities 4 , listed options, OTC derivatives, and U.S. security futures 5 , provided certain requirements are met. (See section (g)(6)(C)(1)) * 4 *For purposes of this section
(g)of the Rule, the term “margin eligible security” utilizes the definition at section 220.2 of Regulation T of the Board of Governors of the Federal Reserve System, excluding a nonequity security.* 5 For purposes of this section *(g)* of the Rule, the term “security future” utilizes the definition at section 3(a)(55) of the Exchange Act *.* [, excluding narrow-based indices.] In addition, member organizations, provided they are a Futures Commission Merchant (“FCM”) and are either a clearing member of a futures clearing organization or have an affiliate that is a clearing member of a futures clearing organization, are permitted under this section
(g)to combine an eligible participant's related instruments as defined in section (g)(2) *(D)* [(C)], with listed, [broad-based] U.S. index options, *options on exchange traded funds (“ETF”),* index warrants and underlying instruments and compute a margin requirement for such combined products on a portfolio margin basis *.* [(”cross-margin”). Member organizations must confine cross-margin positions to a portfolio margin account dedicated exclusively to cross-margining.] The portfolio margin [and cross-margining] provisions of this Rule shall not apply to Individual Retirement Accounts (“IRAs”).
(1)Member organizations must monitor the risk of portfolio margin accounts and maintain a *comprehensive* written risk analysis methodology for assessing the potential risk to the member organization's capital over a specified range of possible market movements of positions maintained in such accounts. The risk analysis methodology shall specify the computations to be made, the frequency of computations, the records to be reviewed and maintained, and the person(s) within the organization responsible for the risk function. This risk analysis methodology [shall be made available to] *must be approved by* the *New York Stock* Exchange *(“Exchange”)* [upon request.] *and submitted to the Securities and Exchange Commission (“SEC”) prior to the implementation of portfolio margining.* In performing the risk analysis of portfolio margin accounts required by this Rule, each member organization shall include [the following] in the written risk analysis methodology *procedures and guidelines for* :
(A)*obtaining and reviewing the appropriate account documentation and financial information necessary for assessing the amount of credit to be extended to eligible participants.* *(B)* [(A) Procedures and guidelines for] the determination, review and approval of credit limits to each eligible participant, and across all eligible participants, utilizing a portfolio margin account[.] *,* *(C)* [(B) Procedures and guidelines for] monitoring credit risk exposure to the member organization *from portfolio margin accounts* , *on both an* [including] intra-day and *end of day basis* [credit risk], *including the type, scope and frequency of reporting to senior management* [related to portfolio margin accounts.] *,* *(D)* [(C) Procedures and guidelines for] the use of stress testing of portfolio margin accounts in order to monitor market risk exposure from individual accounts and in the aggregate[.] *,* *(E)* [(D) Procedures providing for] the regular review and testing of these risk analysis procedures by an independent unit such as internal audit or other comparable group[.] *,* *(F) Managing the impact of credit extension related to portfolio margin accounts on the member organization's overall risk exposure,* *(G) The appropriate response by management when limits on credit extensions related to portfolio margin accounts have been exceeded, and* *
(H)Determining the need to collect additional margin from a particular eligible participant, including whether that determination was based upon the creditworthiness of the participant and/or the risk of the eligible product. * *Moreover, management must periodically review, in accordance with written procedures, the member organization's credit extension activities for consistency with these guidelines. Management must periodically determine if the data necessary to apply this section
(g)is accessible on a timely basis and information systems are available to adequately capture, monitor, analyze and report relevant data.*
(2)Definitions.—For purposes of this section (g), the following terms shall have the meanings specified below:
(A)The term “listed option” means any option traded on a registered national securities exchange or automated facility of a registered national securities association. *(B) The term “OTC derivative” means any equity-based or equity index-based unlisted option, forward contract, or security-based swap that can be valued by a theoretical pricing model approved by the Exchange and submitted to the SEC.* *(C)* [(B)] The term “underlying instrument” means *a security or security index upon which any listed option, OTC derivative, U.S. security future, or broad-based U.S index future is based.* [long and short positions in an exchange traded fund or other fund product registered under the Investment Company Act of 1940, that holds the same securities, and in the same proportion, as contained in a broad-based index on which options are listed. In the case of a listed security futures contract, “underlying instrument” means listed single stock option on the same security and in the same proportion. The term “underlying instrument” shall not be deemed to include options on futures contracts, or unlisted instruments.] *(D)* [(C)] The term “related instrument” within *a security* [an option] class or product group means *broad-based U.S. index* futures [contracts] and options on *broad-based U.S index* futures [contracts] covering the same underlying instrument. *The term “related instrument” does not include security futures or options on security futures.* *(E)* [(D)] The term “ *security* [options] class” refers to all *securities* [options] covering the same underlying instrument. *(F)* [(E)] The term “portfolio” means any eligible product, as defined in section (g)(6)(C)(1), grouped with their underlying instruments and related instruments. [(F) The term “option series” relates to listed options and means all option contracts of the same type (either a call or a put) and exercise style, covering the same underlying instrument with the same exercise price, expiration date, and number of underlying units.]
(G)The term “product group” means two or more portfolios of the same type (see table in section (g)(2)(I) below) for which it has been determined by Rule 15c3-1a under the Securities Exchange Act of 1934 *(“Exchange Act”)* that a percentage of offsetting profits may be applied to losses at the same valuation point.
(H)For purposes of portfolio margin [and cross-margin] *requirements* the term “equity”, as defined in section (a)(4) of this Rule, includes the market value of any long or short [option] positions held in *an eligible participant's* [a customer's] account.
(I)The term “theoretical gains and losses” means the gain and loss in the value of individual eligible products and related instruments at *ten* [10] equidistant intervals (valuation points) ranging from an assumed movement (both up and down) in the current market value of the underlying instrument. The magnitude of the valuation point range shall be as follows: Portfolio type Up/down market move (high & low valuation points) *High Capitalization Broad-based U.S. Market Index [Option]* 6 *+6%−8%* *Non-High Capitalization, Broad-based U.S. Market Index [Option]* 7 *+/−10%* *Margin Eligible Security,Listed Equity Option, Listed Narrow-based Index Option, [Listed]* *U.S. Security Future, and OTC Derivative [Instrument] (Including forward contracts and swaps)* [Listed Security Futures Contract and Listed Single Stock Option] *+/−15%*
(3)Approved Theoretical Pricing Models.—Theoretical pricing models must be approved by *the Exchange* [a Designated Examining Authority] and *submitted to* [reviewed by] the *SEC* [Securities and Exchange Commission (“The Commission”)] in order to qualify. 8 [Currently, the theoretical model utilized by the Options Clearing Corporation (“The OCC”) is the only model qualified pursuant to the Commission's Net Capital Rule. All member organizations shall obtain their theoretical values from the OCC.] 6 In accordance with section (b)(1)(i)(B) of Rule 15c3-1a (Appendix A to Rule 15c3-1) under the Securities Exchange Act of 1934, 17 CFR 240.15c3-1a(b)(1)(i)(B). 7 See footnote above. 8 Currently, the theoretical model utilized by the Options Clearing Corporation (“OCC”) is the only model qualified.
(4)Eligible Participants.—The application of the portfolio margin provisions of this section (g)[, including cross-margining, is limited to] *include* the following:
(A)Any broker or dealer registered pursuant to Section 15 of the [Securities] Exchange Act; [of 1934;]
(B)Any member of a national futures exchange to the extent that listed index options hedge the member's index futures; and *(C) Any person or entity not included in sections (g)(4)(A) and (g)(4)(B) above approved for options or U.S. security futures transactions. However, an eligible participant under this section (g)(4)(C) may not establish or maintain positions in OTC derivatives unless minimum equity of at least five million dollars is established and maintained with the member organization.* [any other person or entity not included in sections (g)(4)(A) and (g)(4)(B) above that has or establishes, and maintains, equity of at least five million dollars.] For purposes of this *minimum* equity requirement, all securities and futures accounts carried by the member organization for the same eligible participant may be combined provided ownership across the accounts is identical. A guarantee pursuant to section (f)(4) of this Rule is not permitted for purposes of the minimum equity requirement. [For those accounts that are solely limited to listed security futures contracts and listed single stock options, the five million dollar equity requirement shall be waived.]
(5)Opening of Accounts.
(A)Member organizations must notify and receive approval from the Exchange prior to establishing a portfolio margin [or cross-margin] methodology for eligible participants.
(B)Only eligible participants that have been [approved for options transactions and] approved to engage in uncovered short option contracts pursuant to Exchange Rule 721, are permitted to utilize a portfolio margin account.
(C)On or before the date of the initial transaction in a portfolio margin account, a member organization shall:
(1)Furnish the eligible participant with a special written disclosure statement describing the nature and risks of portfolio margining [and cross-margining] which includes an acknowledgement for all portfolio margin account owners to sign, [and an additional acknowledgement for owners that also engage in cross-margining to sign,] attesting that they have read and understood the disclosure statement, and agree to the terms under which a portfolio margin account [and the cross-margin account respectively, are] *is* provided (see Exchange Rule 726 (d)), and
(2)Obtain the signed acknowledgement[(s)] noted above from the eligible participant [(both of which are required for cross-margining eligible participants)] and record the date of receipt.
(6)Establishing Account and Eligible Positions
(A)[Portfolio Margin Account.] For purposes of applying the portfolio margin requirements prescribed in this section (g), *and combining related instruments with listed, U.S. index options, options on exchange traded funds (“ETF”), index warrants, and underlying instruments,* member organizations are to establish and utilize a specific securities margin account, or sub-account of a margin account, clearly identified as a portfolio margin account that is separate from any other securities account carried for an eligible participant. [(B) Cross-Margin Account. For purposes of combining related instruments with listed, broad-based U.S. index options, index warrants, and underlying instruments, and applying the portfolio margin requirements, member organizations are to establish a cross-margin account that is separate from any other securities account or portfolio margin account carried for an eligible participant.] A margin deficit in [either] the portfolio margin account [or the cross-margin account] of an eligible participant may not be considered as satisfied by excess equity in [the other] *another* account. Funds and/or securities must be transferred to the deficient account and a written record created and maintained. ( *B* ) [(C)] [Portfolio Margin Account—] Eligible Products
(1)For eligible participants as described in sections (g)(4)(A) through (g)(4)(C), a transaction in, or transfer of, an eligible product may be effected in the portfolio margin account. Eligible products under this section *(g)* consist of: [(i) A listed, broad-based U.S. index option or index warrant and underlying instrument.
(ii)A listed security futures contract or listed single stock option.] *(i) A margin eligible security, a listed option, a security future, an option on a security future, or OTC derivative.* *(ii) A foreign equity security and option on a foreign equity security, provided the foreign equity security is deemed to have a “ready market” under SEC Rule 15c3-1 or a “no-action” position issued thereunder.* *(iii) A margin eligible control or restricted security, provided the security has met the requirements in a manner consistent with SEC Rule 144 or an SEC “no-action” position issued thereunder, sufficient enough to permit the sale of the security, upon exercise of any listed option or OTC derivative written against it, without restriction.* *(iv) related instruments as defined in section (2)(D)* [(2) A transaction in, or transfer of, an underlying instrument may be effected in the portfolio margin account provided a position in an offsetting eligible product is in the account or is established in the account on the same day.
(3)A transaction in, or transfer of, a listed security futures contract or listed single stock option may also be effected in the portfolio margin account.] *(2)* [(4)] *For eligible participants as described in section (g)(4)(C) that do not maintain five million dollars in equity, any* [Any] long position or any short position in any *OTC derivative* [eligible product] that is no longer part of a hedge strategy must be transferred from the portfolio margin account to the appropriate securities account within ten business days, subject to any applicable margin requirement, unless the position becomes part of a hedge strategy again. Member organizations will be expected to monitor portfolio margin accounts for possible abuse of this provision. [(D) Cross-Margin Account—Eligible Products
(1)For eligible participants as described in sections (g)(4)(A) through (g)(4)(C), a transaction in, or transfer of, an eligible product may be effected in the cross-margin account.
(2)A transaction in, or transfer of, a related instrument may be effected in the cross-margin account provided a position in an offsetting eligible product is in the account or is established in the account on the same day.
(3)Any long position or any short position in any eligible product that is no longer part of a hedge strategy must be transferred from the cross-margin account to the appropriate securities account or futures account within ten business days, subject to any applicable margin requirement, unless the position becomes part of a hedge strategy again. Member organizations will be expected to monitor cross-margin accounts for possible abuse of this provision.]
(7)[Initial and Maintenance] Margin Required.—The amount of margin required under this section
(g)for each portfolio shall be the greater of:
(A)the amount for any of the *ten* 10 equidistant valuation points representing the largest theoretical loss as calculated pursuant to section (g)(8) below, or
(B)*for eligible participants as described in section (g)(4)(A) through (g)(4)(C)* , $.375 for each *listed option, OTC derivative, U.S. security future* , [contract] and related instrument, multiplied by the contract's or instrument's multiplier, not to exceed the market value in the case of long *contracts* [positions] in eligible products.
(C)Account guarantees pursuant to section (f)(4) of this Rule are not permitted for purposes of meeting [initial and maintenance] margin requirements.
(8)Method of Calculation
(A)Long and short contracts, including underlying instruments and related instruments, are to be grouped *by security class; each security class group being* [as] a “portfolio”. Each portfolio is categorized as one of the portfolio types specified in section (g)(2)(I) above.
(B)For each portfolio, theoretical gains and losses are calculated for each position as specified in section (g)(2)(I) above. For purposes of determining the theoretical gains and losses at each valuation point, member organizations shall obtain and utilize the theoretical values of eligible products as described in this section *(g)* rendered by an approved theoretical pricing model.
(C)Offsets. Within each portfolio, theoretical gains and losses may be netted fully at each valuation point. Offsets between portfolios within the eligible product groups, as described in section (g)(2)(I), may then be applied as permitted by Rule 15c3-1a under the [Securities] Exchange Act [of 1934].
(D)After applying the offsets above, the sum of the greatest loss from each portfolio is computed to arrive at the total margin required for the account (subject to the per contract minimum).
(9)Portfolio Margin Minimum Equity *Deficiency* [Call]
(A)If, *as of the close of business* , [at any time,] the equity in the portfolio margin [or cross-margin] account of an eligible participant as described in section (g)(4)(C), declines below the five million dollar minimum equity required, and is not restored to at least five million dollars within three business days [(T+3)] by a deposit of funds and/or securities, member organizations are prohibited from accepting [opening] *new* orders *beginning on the fourth business day,* [starting on T+4,] except that [opening] *new* orders entered for the purpose of hedging existing positions may be accepted if the result would be to lower margin requirements. This prohibition shall remain in effect until,
(1)Equity of five million dollars is established[.] *or* , *(2) any OTC derivative is liquidated or transferred from the portfolio margin account to the appropriate securities account.* [For those accounts that are solely limited to security futures contracts and single stock options, the five million dollar equity requirement shall be waived.]
(B)Member organizations will not be permitted to deduct any portfolio margin minimum equity *deficiency* [call] amount from Net Capital in lieu of collecting the minimum equity required.
(10)Portfolio Margin [Maintenance] *Deficiency* [Call]
(A)If, *as of the close of business,* [at any time,] the equity in the portfolio margin [or cross-margin] account of an eligible participant, as described in section (g)(4)(A) through (g)(4)(C), is less than the margin required, the eligible participant may deposit additional margin or establish a hedge to meet the margin requirement within three business days [(T+3)]. *After* [During] the three business day period, member organizations are prohibited from accepting [opening] *new* orders, except that [opening] *new* orders entered for the purpose of hedging existing positions may be accepted if the result would be to lower margin requirements. In the event an eligible participant fails to hedge existing positions or deposit additional margin *in an amount sufficient to eliminate any margin deficiency after* [within] three business days, the member organization must liquidate positions in an amount sufficient to, at a minimum, lower the total margin required to an amount less than or equal to the account equity.
(B)If the portfolio margin [maintenance] *deficiency* [call] is not met by the close of business *on the next business* day after the business day on which such deficiency arises, [T+1,] member organizations will be required to deduct *the amount of the deficiency* from Net Capital [the amount of the call] until such time the *deficiency* [call] is satisfied.
(C)Member organizations will not be permitted to deduct any portfolio margin [maintenance] *deficiency* [call] amount from Net Capital in lieu of collecting the margin required. *(D) The Exchange may grant additional time for an eligible participant to meet a portfolio margin deficiency upon written request, which is expected to be granted in unique circumstances only.* *(E) Member organizations should not permit an eligible participant to make a practice of meeting a portfolio margin deficiency by liquidation.*
(11)Determination of Value for Margin Purposes.—For the purposes of this section (g), all eligible products and related instrument positions shall be valued at current market prices. Account equity for the purposes of [this] section *s (g)(9)(A) and* *(g)(10)(A)* shall be calculated separately for each portfolio margin [or cross-margin] account.
(12)Net Capital Treatment of Portfolio Margin [and Cross-Margin] Accounts.
(A)No member organization that requires margin in any *portfolio margin* [eligible participant] account pursuant to section
(g)of this Rule shall permit the aggregate [eligible participant] portfolio margin [and cross-margin initial and maintenance] requirements to exceed ten times its *Net Capital* [net capital] for any period exceeding three business days. The member organization shall, beginning on the fourth business day, cease opening new portfolio margin [and cross-margin] accounts until compliance is achieved.
(B)If, at any time, a member organization's aggregate [eligible participant] portfolio margin [and cross-margin] requirements exceed ten times its net capital, the member organization shall immediately transmit telegraphic or facsimile notice of such deficiency to the principal office of the Securities and Exchange Commission in Washington, DC, the district or regional office of the Securities and Exchange Commission for the district or region in which the member organization maintains its principal place of business; and to the [New York Stock] Exchange.
(13)Day Trading Requirements.—[The requirements of sub-paragraph (f)(8)(B) of this Rule—Day-Trading shall not apply to portfolio margin accounts including cross-margin accounts.] Day trading is not permitted in portfolio margin accounts. Member organizations are expected to monitor portfolio margin accounts to detect and prevent circumvention of the day trading requirements.
(14)[Cross-Margin Accounts—] Requirements to Liquidate
(A)A member *organization* is required immediately either to liquidate, or transfer to another broker-dealer eligible to carry *portfolio* [cross-] margin accounts, all [eligible participant] *portfolio* [cross-] margin accounts that contain positions eligible for *portfolio* [cross-] margining if the member *organization* is:
(1)Insolvent as defined in section 101 of title 11 of the United States Code, or is unable to meet its obligations as they mature;
(2)The subject of a proceeding pending in any court or before any agency of the United States or any State in which a receiver, trustee, or liquidator for such debtor has been appointed;
(3)Not in compliance with applicable requirements under the [Securities] Exchange Act [of 1934] or rules of the Securities and Exchange Commission or any self-regulatory organization with respect to financial responsibility or hypothecation of eligible participant's securities; or
(4)Unable to make such computations as may be necessary to establish compliance with such financial responsibility or hypothecation rules.
(B)Nothing in this section
(14)shall be construed as limiting or restricting in any way the exercise of any right of a registered clearing agency to liquidate or cause the liquidation of positions in accordance with its by-laws and rules. *(15) Member organizations must ensure that portfolio margin accounts are in compliance with all other applicable Exchange rules promulgated in Rules 700 through 795.* Delivery of Options Disclosure Document and Prospectus Rule 726
(a)through
(c)unchanged. Portfolio Margining [and Cross-Margining] Disclosure Statement and Acknowledgement
(d)The special written disclosure statement describing the nature and risks of portfolio margining [and cross-margining], and acknowledgement for an eligible participant signature, required by Rule 431(g)(5)(B) shall be in a format prescribed by the Exchange or in a format developed by the member organization, provided it contains substantially similar information as in the prescribed Exchange format and has received the prior written approval of the Exchange. Sample Portfolio Margining [and Cross-Margining] Risk Disclosure Statement To Satisfy Requirements of Exchange Rule 431(g) Overview of Portfolio Margining 1. Portfolio margining is a margin methodology that sets margin requirements for an account based on the greatest projected net loss of all positions in a “ *security* [product] class” or “product group” as determined by [an options] *a theoretical* pricing model using multiple pricing scenarios. These pricing scenarios are designed to measure the theoretical loss of the positions given changes in both the underlying price and implied volatility inputs to the model. [Portfolio margining is currently limited to product classes and groups of index products relating to listed, broad-based market indexes, listed security futures contracts and listed single stock options.] 2. The goal of portfolio margining is to set levels of margin that more precisely reflect[s] actual net risk. The eligible participant benefits from portfolio margining in that margin requirements calculated on net risk are generally lower than alternative “position” or “strategy” based methodologies for determining margin requirements. Lower margin requirements allow the customer more leverage in an account. Customers Eligible for Portfolio Margining 3. To be eligible for portfolio margining, eligible participants (other than broker-dealers) must meet the basic standards for having an options account that is approved for uncovered writing. *In addition, eligible participants holding positions in over-the-counter (“OTC”) derivatives* [and] must have and maintain at all times account net equity of not less than five million dollars, aggregated across all accounts under identical ownership at the clearing broker. The identical ownership requirement excludes accounts held by the same customer in different capacities ( *e.g.* , as a trustee and as an individual) and accounts where ownership is overlapping but not identical ( *e.g.* , individual accounts and joint accounts). [For those accounts that are solely limited to security futures contracts and single stock options, the five million dollar equity requirement shall be waived.] 4. Members of futures exchanges on which portfolio margining eligible index contracts are traded are also permitted to carry positions in portfolio margin accounts without regard to the minimum aggregate account equity. Positions Eligible for a Portfolio Margin Account 5. [4.] All positions in [listed] margin eligible securities, listed options, OTC * derivatives, and U.S. security futures [contracts, listed single stock options, listed, broad-based U.S. index options or index warrants, exchange traded funds and other products registered under the Investment Company Act of 1940 that are managed to track the same index that underlies permitted index options], are eligible for a portfolio margin account. In addition, listed, U.S index options, options on exchange traded funds (“ETF”), index warrants and underlying instruments can be combined with offsetting positions in related instruments, for the purpose of computing a margin requirement based on the net risk. This generally produces lower margin requirements than if the related instruments 9 and securities products are viewed separately, thus providing more leverage in the account. * 9 *For purposes of this Rule, the term “related instruments,” within a security class or product group means broad-based U.S. index futures and options on broad-based U.S. index futures covering the same underlying instrument.* *6. All broad-based U.S. listed market index futures and options on index futures traded on a designated contract market subject to the jurisdiction of the Commodity Futures Trading Commission (“CFTC”) are eligible for portfolio margining.* Special Rules for Portfolio Margin Accounts *7.* [5.] A portfolio margin account may be either a separate account or a sub-account of a customer's standard margin account. In the case of a sub-account, equity in the standard account will be available to satisfy any margin requirement in the portfolio margin sub-account without transfer to the sub-account. *8.* [6.] A portfolio margin account or sub-account will be subject to a minimum margin requirement of $.375 *,* multiplied by the contract's multiplier *,* for [every] *each listed option, OTC derivative, U.S. security future, and related instrument* [contract] carried long or short in the account. [No minimum margin is required in the case of eligible exchange traded funds or other eligible fund products.] *9.* [7.] *A margin* [Margin] *deficiency* [calls] in the portfolio margin account or sub-account, regardless of whether due to new commitments or the effect of adverse market movements on existing positions, must be met within three business days. Any shortfall in aggregate net equity across accounts must be met within three business days. Failure to meet a portfolio margin [maintenance] *deficiency* [call] when due will result in immediate liquidation of positions to the extent necessary to reduce the margin requirement. Failure to meet a minimum equity *deficiency* [call] prior to the end of the third business day will result in a prohibition on entering any [opening] *new* orders, with the exception of [opening] *new* orders that hedge existing positions, beginning on the fourth business day and continuing until such time as the minimum equity requirement is satisfied[.] *or until any OTC derivative is liquidated or transferred from the portfolio margin account to the appropriate securities account* . [8. A position in an exchange traded index fund or other eligible fund product may not be established in a portfolio margin account unless there exists, or there is established on the same day, an offsetting position in a related or underlying security, or other eligible securities. The position(s) will be transferred out of the portfolio margin account and into a standard securities account subject to any applicable margin requirement if the offsetting securities options, other eligible securities and/or related instruments no longer remain in the account for ten business days.] *10.* [9.] When a broker-dealer carries a standard cash account or margin account for a customer, the broker-dealer is limited by rules of the Securities and Exchange Commission and of *the* [The] Options Clearing Corporation (“OCC”) to the extent to which the broker-dealer may permit *the* OCC to have a lien against long option positions in those accounts. In contrast, *the* OCC will have a lien against all long option positions that are carried by a broker-dealer in a portfolio margin account, and this could, under certain circumstances, result in greater losses to a customer having long option positions in such an account in the event of the insolvency of the customer's broker. Accordingly, to the extent that a customer does not borrow against long option positions in a portfolio margin account or have margin requirements in the account against which the long option can be credited, there is no advantage to carrying the long options in a portfolio margin account and the customer should consider carrying them in an account other than a portfolio margin account. *11. Customers participating in portfolio margining will be required to sign an agreement acknowledging that their positions and property in the portfolio margin account will be subject to the customer protection provisions of Rule 15c3-3 under the Securities Exchange Act of 1934 and the Securities Investor Protection Act.* Special Risks of Portfolio Margin Accounts *12.* [10.] Portfolio margining generally permits greater leverage in an account, and greater leverage creates greater losses in the event of adverse market movements. *13.* [11.] Because the time limit for meeting *a* margin *deficiency* [calls]is shorter than in a standard margin account, *and may be shorter than the time ordinarily required by a Futures Commission Merchant for meeting a margin deficiency in a futures account,* there is increased risk that a customer's portfolio margin account will be liquidated involuntarily, possibly causing losses to the customer. *14.* [12.] Because portfolio margin requirements are determined using sophisticated mathematical calculations and theoretical values that must be calculated from market data, it may be more difficult for customers to predict the size of *any* future margin *deficiency* [calls] in a portfolio margin account. This is particularly true in the case of customers who do not have access to specialized software necessary to make such calculations or who do not receive theoretical values calculated and distributed periodically by [The] *the* Options Clearing Corporation. *15.* [13.] For the reasons noted above, a customer that carries long options positions in a portfolio margin account could, under certain circumstances, be less likely to recover the full value of those positions in the event of the insolvency of the carrying broker. *16.* [14.] Trading of [securities index] *eligible* products in a portfolio margin account is generally subject to all the risks of trading those same products in a standard securities margin account. Customers should be thoroughly familiar with the risk disclosure materials applicable to those products, including the booklet entitled “Characteristics and Risks of Standardized Options”[.] *and the risk disclosure document required by the CFTC to be delivered to futures customers. Customers should review these materials carefully before trading in a portfolio margin account.* *17.* [15.] Customers should consult with their tax advisers to be certain that they are familiar with the tax treatment of transactions in *these products,* [securities options and futures products] *including tax consequences of trading strategies involving these eligible products* . *18.* [16.] The descriptions in this disclosure statement relating to eligibility requirements for portfolio margin accounts, and minimum equity and margin requirements for those accounts, are minimums imposed under Exchange rules. Time frames within which *a* margin *or* [and] equity *deficiency* [calls] must be met are maximums imposed under Exchange rules. Broker-dealers may impose [their own] more stringent requirements. *19. According to the rules of the exchanges, a broker dealer is required to immediately liquidate, or, if feasible, transfer to another broker-dealer eligible to carry portfolio margin accounts, all customer portfolio margin accounts that contain positions in futures in the event that the carrying broker-dealer becomes insolvent.* *20. In signing the agreement referred to above, a customer also acknowledges that a portfolio margin account that contains positions in futures will be immediately liquidated, or, if feasible, transferred to another broker-dealer eligible to carry portfolio margin accounts, in the event that the carrying broker-dealer becomes insolvent.* *21. As noted above, portfolio margin accounts are securities accounts and are subject to the customer protections set-forth in Rule 15c3-3 under the Securities Exchange Act of 1934 and the Securities Investor Protection Act.* *22. Customers should bear in mind that the discrepancies in the cash flow characteristics of futures and certain options are still present even when those products are carried together in a portfolio margin account. Both futures and options contracts are generally marked to the market at least once each business day, but the marks may take place with different frequency and at different times within the day. When a futures contract is marked to the market, the gain or loss is immediately credited to or debited from the customer's account in cash. While an increase in the value of a long option contract may increase the equity in the account, the gain is not realized until the option is sold or exercised. Accordingly, a customer may be required to deposit cash in the account in order to meet a variation payment on a futures contract even though the customer is in a hedged position and has experienced a corresponding (but yet unrealized) gain on a long option. Alternatively, a customer who is in a hedged position and would otherwise be entitled to receive a variation payment on a futures contract may find that the cash is required to be held in the account as margin collateral on an offsetting option position.* [Overview of Cross-Margining 17. In a cross-margin account, index futures, security futures and options on index and security futures are combined with offsetting positions in listed securities and underlying instruments, for the purpose of computing a margin requirement based on the net risk. This generally produces lower margin requirements than if the related instruments 10 and securities products are viewed separately, thus providing more leverage in the account. 10 [For purposes of this Rule, the term “related instruments,” within an option class or product group means futures contracts and options on futures contracts covering the same underlying instrument.] 18. Cross-margining must be effected in a portfolio margin account type. A separate portfolio margin account must be established exclusively for cross-margining. 19. Cross-margining is achieved when index futures are combined with offsetting positions in index options and underlying instruments in a dedicated account, and a portfolio margining methodology is applied to them. Customers Eligible for Cross-Margining 20. The eligibility requirements for cross-margining are generally the same as for portfolio margining. Accordingly, any customer eligible for portfolio margining is eligible for cross-margining. 21. Members of futures exchanges on which cross-margining eligible index contracts are traded are also permitted to carry positions in cross-margin accounts without regard to the minimum aggregate account equity. Positions Eligible for Cross-Margining 22. All securities products eligible for portfolio margining are also eligible for cross-margining. 23. All broad-based U.S. listed market index futures and options on index futures traded on a designated contract market subject to the jurisdiction of the Commodity Futures Trading Commission (“CFTC”) are eligible for cross-margining. Special Rules for Cross-Margining 24. Cross-margining must be conducted in a portfolio margin account type. A separate portfolio margin account must be established exclusively for cross-margining. A cross margin account is a securities account, and must be maintained separately from all other securities account. 25. Cross-margining is automatically accomplished with the portfolio margining methodology. Cross-margin positions are subject to the same minimum margin requirement for every contract, including futures contracts. 26. Margin calls arising in a cross-margin account, and any shortfall in aggregate net equity across accounts, must be satisfied within the same timeframe, and subject to the same consequences, as in a portfolio margin account. 27. A position in a futures product may not be established in a cross-margin account unless there exists, or there is established on the same day, an offsetting position in securities options and/or other eligible securities. Related instruments will be transferred out of the cross-margin account and into a futures account if, for more than ten business days and for any reason, the offsetting securities options and/or other eligible securities no longer remain in the account. If the transfer of related instruments to a futures account causes the futures account to be undermargined, a margin call will be issued or positions will be liquidated to the extent necessary to eliminate the deficit. 28. Customers participating in cross-margining will be required to sign an agreement acknowledging that their positions and property in the cross-margin account will be subject to the customer protection provisions of Rule 15c3-3 under the Securities Exchange Act of 1934 and the Securities Investor Protection Act, and will not be subject to the provisions of the Commodity Exchange Act, including segregation of funds. 29. According to the rules of the exchanges, a broker dealer is required to immediately liquidate, or, if feasible, transfer to another broker-dealer eligible to carry cross-margin accounts, all customer cross-margin accounts that contain positions in futures in the event that the carrying broker-dealer becomes insolvent. 30. In signing the agreement referred to in paragraph 28 above, a customer also acknowledges that a cross-margin account that contains positions in futures will be immediately liquidated, or, if feasible, transferred to another broker-dealer eligible to carry cross-margin accounts, in the event that the carrying broker-dealer becomes insolvent. Special Risks of Cross-Margining 31. Cross-margining must be conducted in a portfolio margin account type. Generally, cross-margining and the portfolio margining methodology both contribute to provide greater leverage than a standard margin account, and greater leverage creates greater losses in the event of adverse market movements. 32. Since cross-margining must be conducted in a portfolio margin account type, the time required for meeting *a* margin *deficiency* [calls] is shorter than in a standard securities margin account and may be shorter than the time ordinarily required by a futures commission merchant for meeting *a* margin *deficiency* [calls] in a futures account. Consequently, there is increased risk that a customer's cross-margin positions will be liquidated involuntarily, causing possible loss to the customer. 33. As noted above, cross-margin accounts are securities accounts and are subject to the customer protections set-forth in Rule 15c3-3 under the Securities Exchange Act of 1934 and the Securities Investor Protection Act. Cross-margin positions are not subject to the customer protection rules under the segregation provisions of the Commodity Exchange Act and the rules of the CFTC adopted pursuant to the Commodity Exchange Act. 34. Trading of index options and futures contracts in a cross-margin account is generally subject to all the risks of trading those same products in a futures account or a standard securities margin account. Customers should be thoroughly familiar with the risk disclosure materials applicable to those products, including the booklet entitled Characteristics and Risks of Standardized Options and the risk disclosure document required by the CFTC to be delivered to futures customers. Because this disclosure statement does not disclose the risks and other significant aspects of trading in futures and options, customers should review those materials carefully before trading in a cross-margin account. 35. Customers should bear in mind that the discrepancies in the cash flow characteristics of futures and certain options are still present even when those products are carried together in a cross margin account. Both futures and options contracts are generally marked to the market at least once each business day, but the marks may take place with different frequency and at different times within the day. When a futures contract is marked to the market, the gain or loss is immediately credited to or debited from the customer's account in cash. While an increase in the value of a long option contract may increase the equity in the account, the gain is not realized until the option is sold or exercised. Accordingly, a customer may be required to deposit cash in the account in order to meet a variation payment on a futures contract even though the customer is in a hedged position and has experienced a corresponding (but yet unrealized) gain on a long option. Alternatively, a customer who is in a hedged position and would otherwise be entitled to receive a variation payment on a futures contract may find that the cash is required to be held in the account as margin collateral on an offsetting option position. 36. Customers should consult with their tax advisers to be certain that they are familiar with the tax treatment of transactions in these products, including tax consequences of trading strategies involving both futures and option contracts] 37. The descriptions in this disclosure statement relating to eligibility requirements for cross-margining, and minimum equity and margin requirements for cross margin accounts, are minimums imposed under Exchange rules. Time frames within which margin and equity calls must be met are maximums imposed under Exchange rules. The broker-dealer carrying a customer's portfolio margin account, including any cross-margin account, may impose more stringent requirements.] Sample Portfolio Margining [and Cross-Margining] Acknowledgement[s] Acknowledgement for Customers Utilizing a Portfolio Margin Account [—Cross-Margining and Non-Cross-Margining—] Rule 15c3-3 under the Securities Exchange Act of 1934 requires that a broker or dealer promptly obtain and maintain physical possession or control of all fully-paid securities and excess margin securities of a customer. Fully-paid securities are securities carried in a cash account and margin equity securities carried in a margin or special account (other than a cash account) that have been fully paid for. Excess margin securities are a customer's margin securities having a market value in excess of 140% of the total of the debit balances in the customer's non-cash accounts. For the purposes of Rule 15c3-3, securities held subject to a lien to secure obligations of the broker-dealer are not within the broker-dealer's physical possession or control. The Commission staff has taken the position that all long option positions in a customer's portfolio margining account [(including any cross-margin account)] may be subject to such a lien by *the* OCC and will not be deemed fully-paid or excess margin securities under Rule 15c3-3. The hypothecation rules under the Securities Exchange Act of 1934 (Rules 8c-1 and 15c2-1), prohibit broker-dealers from permitting the hypothecation of customer securities in a manner that allows those securities to be subject to any lien or liens in an amount that exceeds the customer's aggregate indebtedness. However, all long option positions in a portfolio margining account [(including any cross-margining account)] will be subject to *the* OCC's lien, including any positions that exceed the customer's aggregate indebtedness. The Commission staff has taken a position that would allow customers to carry positions in portfolio margining accounts, [(including any cross-margining account)] even when those positions exceed the customer's aggregate indebtedness. Accordingly, within a portfolio margin account [or cross-margin account], to the extent that you have long option positions that do not operate to offset your aggregate indebtedness and thereby reduce your margin requirement you receive no benefit from carrying those positions in your portfolio margin account [or cross-margin account] and incur the additional risk of *the* OCC's lien on your long option position(s). [By signing below the customer affirms that the customer has read and understood the foregoing disclosure statement and acknowledges and agrees that long option positions in portfolio margining accounts, and cross-margining accounts, will be exempted from certain customer protection rules of the Securities and Exchange Commission as described above and will be subject to a lien by the Options Clearing Corporation without regard to such rules. Customer name: ____ By: ____ (Signature/title) Date ____ Acknowledgement for Customers Engaged in Cross-Margining As disclosed above, futures contracts and other property carried in customer accounts with Futures Commission Merchants (“FCM”) are normally subject to special protection afforded under the customer segregation provisions of the Commodity Exchange Act (“CEA”) and the rules of the Commodity Futures Trading Commission *(“CFTC”)* adopted pursuant to the CEA. These rules require that customer funds be segregated from the accounts of financial intermediaries and be accounted for separately. However, they do not provide for, and standard futures accounts do not enjoy the benefit of, insurance protecting customer accounts against loss in the event of the insolvency of the intermediary carrying the accounts.] As discussed above, *portfolio* [cross-] margining must be conducted in [a portfolio margin] *an* account[,] dedicated exclusively to *portfolio* [cross-] margining and *portfolio* [cross-] margin accounts are not treated as a futures account with an FCM. Instead, *portfolio* [cross-] margin accounts are treated as securities accounts carried with broker-dealers. As such, *portfolio* [cross-] margin accounts are covered by Rule 15c3-3 under the Securities Exchange Act of 1934, which protects customer accounts. Rule 15c3-3, among other things, requires a broker-dealer to maintain physical possession or control of all fully-paid and excess margin securities and maintain a special reserve account for the benefit of their customers. However, with regard to portfolio [cross] margin accounts, there is an exception to the possession or control requirement of Rule 15c3-3 that permits [The] *the* Options Clearing Corporation to have a lien on long positions. This exception is outlined in a separate acknowledgement form that must be signed prior to or concurrent with this form. Additionally, the Securities Investor Protection Corporation (“SIPC”) insures customer accounts against the financial insolvency of a broker-dealer in the amount of up to $500,000 to protect against the loss of registered securities and cash maintained in the account for purchasing securities or as proceeds from selling securities (although the limit on cash claims is $100,000). According to the rules of the exchanges, a broker-dealer is required to immediately liquidate, or, if feasible, transfer to another broker-dealer eligible to carry *portfolio* [cross-] margin accounts, all customer portfolio [cross] margin accounts that contain positions in futures and/or options on futures in the event that the carrying broker-dealer becomes insolvent. By signing below the customer affirms that the customer has read and understood the foregoing disclosure statement and acknowledges and agrees that:
(1)*long option positions in portfolio margining accounts will be exempted from certain customer protection rules of the Securities and Exchange Commission as described above and will be subject to a lien by the Options Clearing Corporation without regard to such rules, and* [positions and property in cross-margining accounts, will not be subject to the customer protection rules under the customer segregation provisions of the Commodity Exchange Act and the rules of the Commodity Futures Trading Commission adopted pursuant to the CEA and]
(2)*portfolio* [cross-] margining accounts that contain positions in futures and/or options on futures will be immediately liquidated, or if feasible, transferred to another broker-dealer eligible to carry *portfolio* [cross-] margin accounts in the event that the carrying broker-dealer becomes insolvent. Customer name: ____ By:____ (Signature/title) Date: ____ 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. 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. 11 11 The Commission has modified the text of the summaries prepared by the NYSE. Telephone conversation between William Jannace, Director—Rule & Interpretive Standards, Member Firm Regulation, NYSE and Randall Roy, Branch Chief, and Sheila Swartz, Special Counsel, Division of Market Regulations, Commission, on March 29, 2006. A. Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change 1. Purpose Proposed amendments to NYSE Rule 431 would further expand the recently Commission approved and NYSE proposed products that are eligible for treatment under portfolio margin requirements to include: All margin eligible securities, 12 listed options, OTC derivatives, and U.S. security futures provided certain requirements are met. Amendments to Rule 726 are also proposed to include the Commission approved products on the disclosure document required to be furnished to options customers pursuant to this rule. 12 The term all “margin eligible security” utilizes the definition at Section 220.2 of Regulation T of the Board of Governors of the Federal Reserve System. a. Background Section 7(a) 13 of the Exchange Act 14 empowers the Board of Governors of the Federal Reserve System to prescribe the rules and regulations regarding credit that may be extended by broker-dealers on securities (Regulation T) to their customers. NYSE Rule 431 prescribes specific margin requirements that must be maintained in all customers accounts, based on the type of securities products held in such accounts. In April 1996, the Exchange established a Rule 431 Committee (the “Committee”) to assess the adequacy of Rule 431 on an ongoing basis, review margin requirements, and make recommendations for change. The Committee has endorsed the proposed amendments discussed below. 15 13 15 U.S.C. 78g. 14 15 U.S.C. 78a *et seq.* 15 The Committee is currently composed of several member organizations, including Goldman, Sachs & Co., Morgan Stanley & Co., Inc., Merrill Lynch, Pierce, Fenner and Smith, Inc., Bear Stearns Corp, Credit Suisse First Boston Corp, and several self-regulatory organizations (“SROs”) including: the NYSE, the Chicago Board Options Exchange (“CBOE”), NASD as well as representatives from the Securities Industry Association's Ad Hoc Committee on Portfolio Margining. b. The Pilot The Board of Governors of the Federal Reserve System in its amendments to Regulation T in 1998 permitted SROs to implement portfolio margin rules, subject to Commission approval. 16 16 *See* Federal Reserve System, “Securities Credit Transactions; Borrowing by Broker and Dealers”; Regulations G, T, U and X; Docket Nos. R-0905, R-0923 and R-0944, 63 FR 2806 (January 16, 1998). As noted above, on July 14, 2005 the Commission approved amendments to Exchange Rules 431 and 726 to permit, on a two-year pilot basis, the use of a prescribed risk-based methodology (“portfolio margin”) 17 for certain products, as an alternative to the strategy or position based margin requirements 18 currently required in Rule 431(a) through (f). Exchange member organizations may utilize portfolio margin for listed, broad-based U.S. index options and index warrants, along with any underlying instruments. 19 These positions are to be margined (either for initial or maintenance) in a separate portfolio margin account dedicated exclusively for such margin computation. 17 As a pre-condition to permitting portfolio margining, member organization are required to establish procedures and guidelines to monitor credit risk to the member organization's capital, including intra-day credit risk and stress testing of portfolio margin accounts. Further, member organizations must establish procedures for regular review and testing of these required risk analysis procedures (see Rule 431(g)(1)). 18 Prior to the Pilot, member organizations were solely subject, pursuant to NYSE Rule 431, to strategy or positioned-based margin requirements. This methodology applied specific margin percentage requirements as prescribed in Rule 431 to each security position and/or strategy, either long or short, held in customer's account, irrespective of the fact that all security ( *e.g.,* options) prices do not change equally (in percentage terms) with a change in the price of the underlying security. When utilizing a portfolio margin methodology, offsets are fully realized, whereas under strategy or position-based methodology, positions and or groups of positions comprising a single strategy are margined independently of each other and offsets between them do not efficiently impact the total margin requirement. 19 For purposes of the Pilot and SR-NYSE-2005-93, the term “underlying instrument,” means long and short positions in an exchange traded fund or other fund product registered under the Investment Company Act of 1940, that holds the same securities, and in the same proportion, as contained in a broad-based index on which options are listed. The term “underlying instrument” shall not be deemed to include futures contracts, options on futures contracts, underlying stock baskets, or unlisted instruments. In addition, as noted above, the Exchange on December 29, 2005, filed with the Commission amendments to Rule 431 which would expand the approved products for certain customers that are eligible for treatment under portfolio margin requirements to include security futures and single stock options. 20 The filing was noticed for comment in the **Federal Register** on January 23, 2006 21 and resulted in the Commission receiving three comment letters. 22 20 Commission Chairman Christopher Cox, in a letter dated September 27, 2005 to William J. Brodsky and John A. Thain, the Chief Executive Officers of CBOE and NYSE, respectively, encouraged each SRO to file a rule proposal to expand portfolio margining to a broader universe of products. 21 *See supra* note 3. 22 Comment letters were received from:
(1)The Futures Industry Associations;
(2)the Securities Industry Association; and
(3)Citigroup Global Markets Inc. The Exchange will be filing a separate response to comments with the Commission. Some of the major comments, however, have been addressed by the amendments the Exchange is proposing herein. c. Portfolio Margin Requirements Portfolio margining is a margin methodology that sets margin requirements for an account based on the greatest projected net loss of all positions in a product class or group. The Pilot utilizes a Commission approved theoretical options pricing model using multiple pricing scenarios to set or determine the risk level. 23 These scenarios are designed to measure the theoretical loss of the positions given changes in both the underlying price and implied volatility inputs to the model. Accordingly, the margin required is based on the greatest loss that would be incurred in a portfolio if the value of its components move up or down by a predetermined amount. In permitting a margin computation based on actual net risk, member organizations are no longer required to compute a margin requirement for each individual position or strategy in a customer's account. 24 23 The theoretical options pricing model is used to derive position values at each valuation point for the purpose of determining the gain or loss. For purposes of the Pilot and SR-NYSE-2005-93 the amount of initial and maintenance margin required with respect to a portfolio was the larger of:
(1)The greatest loss amount among the valuation calculations; or
(2)the sum of $.375 for each option and security future in the portfolio multiplied by the contract's ( *e.g.,* 100 shares per contract) or instrument's multiplier. 24 *See* NYSE Rule 431. As discussed in more detail below, utilizing portfolio margin for the above noted products and any underlying instruments enables the portfolio to be subjected to certain preset market volatility parameters that reflect historical moves in the underlying security thereby assessing potential loss in the portfolio in the aggregate. Accordingly, such a methodology provides an accurate and realistic assessment of reasonable margin requirements. d. Proposed Amendments Eligible Products The proposed amendments to Rule 431 seek to expand the scope of eligible products 25 previously approved, provided all such products can be priced within a prescribed risk-based theoretical pricing methodology that has been approved by the Exchange and submitted to the Commission. Specifically, the proposed amendments noted above will expand the eligible products to further include all margin eligible securities, listed options, OTC derivatives and U.S. security futures, provided certain requirements are met. 25 Under the current Pilot, eligible products consist of listed broad-based U.S. index options, index warrants along with any underlying instruments. On December 29, 2005, the Exchange filed with the Commission amendments to Rule 431, which would expand the approved products that are eligible for treatment under portfolio margin requirements to include security futures and single stock options. *See* SR-NYSE-2005-93. Risk Analysis Methodology Rule 431(g)(1) requires member organizations to monitor the risk of portfolio margin accounts and maintain a written risk analysis methodology for assessing potential risk to the firm's capital. Such methodology must specify the computations to be made, the frequency of the computations, the records to be reviewed and maintained and the person responsible for such risk function. Under the approved pilot, this risk analysis methodology shall be made available to the Exchange upon request. As proposed, the risk analysis methodology must now be comprehensive, approved by the Exchange and submitted to the Commission prior to implementation. Minimum Equity Requirements The proposed amendments also will permit eligible participants (as defined in proposed Rule 431(g)(4)) effecting transactions in eligible products to do so without maintaining $5.0 million in equity, which is currently required for eligible products under the Pilot. 26 As proposed, however, eligible participants may not establish or maintain positions in OTC derivatives unless equity of at least $5.0 million is established and maintained in a portfolio margin account. 26 Under the approved pilot, eligible participants are any broker-dealer registered pursuant to Section 15 of the Exchange Act, any member of a national futures exchange to the extent that listed index options hedge the member's index futures, and any other person or entity not included above that has or establishes, and maintains, equity of at least $5.0 million dollars. In SY-NYSE-2005-93, the Exchange proposed amendments that would permit customers effecting transactions in listed security futures and listed single stock options to do so without maintaining the $5.0 million equity requirement, which is currently required under the Pilot for all other eligible products. However, as proposed herein, only customer transactions in OTC derivatives (including forwards and swaps) with require an minimum equity $5 million dollars. For transactions in all other eligible products (including all listed products), this minimum requirements would not apply. Portfolio Margin Minimum Equity Deficiency Proposed Rule 431(g)(9)(A) provides that in the event the equity of an eligible participant, subject to the $5.0 million equity requirement, declines below such minimum requirement, it must be restored within three business days and prohibits member organizations from accepting new orders beginning on the fourth business day, except for new orders effected solely for the purpose of hedging existing positions and lowering margin requirements. Valuation Points The Pilot established ten equidistant valuation points for the following eligible products: Non-High Capitalization/Broad-based U.S. Market Index Options (+/−10%) and High Capitalization/Broad-based U.S. Market Index Option (+6%/−8%). In SR-NYSE-2005-93, the Exchange proposed amendments that would establish theoretical valuation points within a range consisting of an increase or a decrease of +/−15% ( *i.e.,* +/−3%, 6%, 9%, 12%, and 15%) for security futures and single stock options. Similarly, the proposed amendments also would establish theoretical valuation points of +/−15% for margin eligible securities, listed equity options, listed narrow-based index options, and OTC derivatives (including forward contracts and swaps). Cross-Margin Account The proposed amendments will remove the provisions approved in the Pilot pertaining to the use of a cross-margin account for margining eligible securities products with eligible commodity products. Under the proposed rule change, a single portfolio margin account would be used for margining all eligible products. Maintaining and monitoring two separate accounts for a customer's trading activities would be operationally difficult for both broker-dealers and customers. In this regard, the SIA and FIA comment letters received to the Exchange's recent portfolio margin filing, 27 stated that the industry has legal, regulatory and operational concerns regarding the maintenance of a separate cross margin account for customers who maintain both securities and commodity positions. 28 Both the SIA and the FIA urged the Commission to work with the CFTC, the exchanges and the clearing corporations to resolve the legal and regulatory issues that may create a barrier to comprehensive cross-margining at both the broker-dealer and clearing organization level. 29 27 *See supra* note 3. 28 *See* letter from Gerard J. Quinn, Vice President and Associate General Counsel, Securities Industry Association, to Nancy M. Morris, Secretary, Commission, dated February 13, 2006 (“SIA Letter”); letter from Barbara Wierzynski, Executive Vice President and General Counsel, Futures Industry Association, to Nancy M. Morris, Secretary, Commission, dated February 13, 2006 (“FIA Letter”); and letter from Severino Renna, Director, Citigroup Global Markets, Inc., to Nancy M. Morris, Secretary, dated February 13, 2006 (“Citigroup Letter”). 29 *Id.* Definitions The proposed amendments change the definition of “underlying instrument” to mean a security or security index upon which any listed option, OTC derivative, U.S. security future, or broad-based U.S. Index future is based. In addition the term “related instrument” (as approved in the Pilot) is being changed to mean broad-based U.S. index futures, and options on broad-based index futures covering the same underlying instrument. In addition, a new definition of “OTC derivative” was added to the proposed rule change to include any equity-based or equity index-based unlisted option, forward contract or swap that can be valued by a theoretical pricing model approved by the Exchange and submitted to the Commission. Disclosure Document and Customer Attestation Exchange Rule 726 prescribes requirements for the delivery of options disclosure documents concerning the opening of customer accounts. As part of the Pilot, members and member organizations are required to provide every portfolio margin customer with a written risk disclosure statement 30 at or prior to the initial opening of a portfolio margin account. 30 The disclosure statement discloses the special risk and operation of portfolio margin accounts, and the differences between portfolio margin and strategy-based margin requirements. The disclosure statement also addresses who is eligible to open a portfolio margin account, the instruments that are allowed, and when deposits to meet margin and minimum equity are required. In addition, at or prior to the time a portfolio margin account is initially opened, members and member organizations are required to obtain a signed acknowledgement regarding certain implications of portfolio margining ( *e.g.* treatment under Exchange Act Rules 15c2-1 and 15c3-3) from the customer. As proposed, the disclosure document required by Rule 726 is being amended to incorporate the expanded list of eligible products. Finally, the filing includes several minor technical amendments to the rules for purposes of clarity and consistency. 2. Statutory Basis The statutory basis for this proposed rule change is Section 6(b)(5) 31 of the Exchange Act which requires, among other things, that the rules of the Exchange are 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 regulating, clearing, settling, processing information with respect to, and facilitating transactions in securities, to remove impediments to perfect the mechanism of a free and open market and national market system, and in general to protect investors and the public interest. The proposed amendments are consistent with this section in that they will better align margin requirements with the actual risk of hedged products, will also potentially alleviate excess margin calls and potentially reduce the risk of forced liquidations of positions in customer accounts. 31 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 Exchange Act. C. Self-Regulatory Organization's Statement on Comments on the Proposed Rule Change Received From Members, Participants or Others The Exchange has 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 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 Exchange 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 Exchange 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 e-mail to *rule-comments@sec.gov.* Please include File Number SR-NYSE-2006-13 on the subject line. Paper Comments • Send paper comments in triplicate to Nancy M. Morris, Secretary, Securities and Exchange Commission, 100 F Street, NE., Washington, DC 20549-1090. All submissions should refer to File Number SR-NYSE-2006-13. 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 NYSE. 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 submission should refer to File Number SR-NYSE-2006-13 and should be submitted on or before April 27, 2006. For the Commission, by the Division of Market Regulation, pursuant to delegated authority. 32 32 17 CFR 200.30-3(a)(12). Nancy M. Morris, Secretary. [FR Doc. E6-5019 Filed 4-5-06; 8:45 am] BILLING CODE 8010-01-P SMALL BUSINESS ADMINISTRATION Interest Rates The Small Business Administration publishes an interest rate called the optional “peg” rate (13 CFR 120.214) on a quarterly basis. This rate is a weighted average cost of money to the government for maturities similar to the average SBA direct loan. This rate may be used as a base rate for guaranteed fluctuating interest rate SBA loans. This rate will be 4.500 (4 1/2 ) percent for the April-June quarter of FY 2006. James E. Rivera, Associate Administrator for Financial Assistance. [FR Doc. E6-5022 Filed 4-5-06; 8:45 am] BILLING CODE 8025-01-P SOCIAL SECURITY ADMINISTRATION Agency Information Collection Activities: Proposed Request and Comment Request The Social Security Administration
(SSA)publishes a list of information collection packages that will require clearance by the Office of Management and Budget
(OMB)in compliance with Public Law 104-13, the Paperwork Reduction Act of 1995, effective October 1, 1995. The information collection packages that may be included in this notice are for new information collections, approval of existing information collections, revisions to OMB-approved information collections, and extensions (no change) of OMB-approved information collections. SSA is soliciting comments on the accuracy of the agency's burden estimate; the need for the information; its practical utility; ways to enhance its quality, utility, and clarity; and on ways to minimize burden on respondents, including the use of automated collection techniques or other forms of information technology. Written comments and recommendations regarding the information collection(s) should be submitted to the OMB Desk Officer and the SSA Reports Clearance Officer. The information can be mailed and/or faxed to the individuals at the addresses and fax numbers listed below: (OMB), Office of Management and Budget, Attn: Desk Officer for SSA, Fax: 202-395-6974.(SSA), Social Security Administration, DCFAM, Attn: Reports Clearance Officer, 1333 Annex Building, 6401 Security Blvd., Baltimore, MD 21235, Fax: 410-965-6400. I. The information collections listed below are pending at SSA and will be submitted to OMB within 60 days from the date of this notice. Therefore, your comments should be submitted to SSA within 60 days from the date of this publication. You can obtain copies of the collection instruments by calling the SSA Reports Clearance Officer at 410-965-0454 or by writing to the address listed above. 1. *Application for Special Age 72-or-Over Monthly Payments—20 CFR 404.380-404.384—0960-0096.* Form SSA-19-F6 collects the information needed to determine whether a claimant can qualify for Special Age 72 payments. Eligibility requirements will be evaluated based on the data collected on this form. The respondents are individuals who reached age 72 before 1972. *Type of Request:* Extension of an OMB-approved information collection. *Number of Respondents:* 10. *Frequency of Response:* 1. *Average Burden per Response:* 10 minutes. *Estimated Annual Burden:* 2 hours. 2. *Medical or Psychological Review of Childhood Disability Evaluation Form (SSA-538)—20 CFR 416.1040, 416.1043, 416.1045, 416.924(g)—0960-0675.* Form SSA-536 is used by SSA medical or psychological consultants to document their review and assessment of the Childhood Disability Evaluation Form, SSA-538, prepared by State DDS employees. A childhood disability evaluation is required in each SSI childhood disability case that is reviewed. The respondents are 256 SSA medical and psychological consultants. *Type of Request:* Extension of an OMB-approved information collection. *Number of Responses:* 17,000. *Frequency of Response:* 1. *Average Burden Per Response:* 12 minutes. *Estimated Annual Burden:* 3,400 hours. 3. *Claimant's Medication—20 CFR 404.1512, 416.912—0960-0289.* The HA-4632, completed by applicants for disability benefits, provides an updated list of medications used by the claimant. This enables the Administrative Law Judge hearing the case to fully inquire into the medical treatment the claimant is receiving and the effect of medications on the claimant's impairments and functional capacity. The respondents are applicants for Old Age, Survivors and Disability Insurance (OASDI) benefits, and/or Supplemental Security income
(SSI)payments. *Type of Request:* Extension of an OMB-approved information collection. *Number of Respondents:* 171,939. *Frequency of Response:* 1. *Average Burden Per Response:* 15 minutes. *Estimated Annual Burden:* 42,985 hours. 4. *Authorization for the Social Security Administration to Obtain Account Records from a Financial Institution and Request for Records (Medicare Low-Income Subsidy)—0960-NEW.* Under the aegis of the Medicare Modernization Act of 2003, Medicare beneficiaries can apply for a subsidy for the Medicare Prescription Drug Plan (Part D) program. In some cases, SSA will need to verify the details of applicants' accounts at financial institutions to determine if they are eligible for the subsidy. Form SSA-4640 will give SSA the authority to contact financial institutions about beneficiaries' accounts. It will also be used by financial institutions to verify the information requested by SSA. The respondents are applicants for the Medicare Part D program subsidy and financial institutions where applicants have accounts. *Type of Request:* New information request. Medicare Part D subsidy applicants Financial institutions Totals Number of Respondents 10,000 10,000 20,000. Frequency of Response 1 1 1. Average Burden Per Response (minutes) 1 4 5. Estimated Annual Burden (hours) 167 667 834. *Total Estimated Annual Burden:* 834 hours. II. The information collections listed below have been submitted to OMB for clearance. Your comments on the information collections would be most useful if received by OMB and SSA within 30 days from the date of this publication. You can obtain a copy of the OMB clearance packages by calling the SSA Reports Clearance Officer at 410-965-0454, or by writing to the address listed above. 1. *Claimant's Recent Medical Treatment—20 CFR 404.1512 & 416.912—0960-0292.* The information collected on Form HA-4631 is used to facilitate processing an applicant's OASDI (Title II) and/or SSI (Title XVI) claim. The form elicits from the claimant an updated list of medical treatment. This enables the Administrative Law Judge hearing the case to fully inquire into past and current medical treatment the claimant received/receives and the effect on the claimant's physical and mental status. The respondents are applicants for OASDI benefits and/or SSI payments. *Type of Request:* Extension of an OMB-approved information collection. *Number of Respondents:* 320,000. *Frequency of Response:* 1. *Average Burden per Response:* 10 minutes. *Estimated Annual Burden:* 53,333 hours. 2. *Statement of Funds You Provided to Another and Statement of Funds You Received—20 CFR 416.1103(f)—0960-0481.* Forms SSA-2854 and SSA-2855 collect information in situations where the SSI recipient alleges that he or she borrowed funds informally from a non-commercial lender, e.g., a relative or a friend. The statements are required to determine whether the proceeds from the transaction are income to the borrower. If the transaction constitutes a bona fide loan, then the proceeds are not income to the borrower. The respondents are the borrower/recipient and the lender of the funds. *Type of Request:* Extension of an OMB-approved information collection. *Number of Respondents:* 40,000. *Frequency of Response:* 1. *Average Burden Per Response:* 10 minutes. *Estimated Annual Burden:* 6,667 hours. 3. *Quickstart Enrollment—31 CFR 209 and 210—0960-0564.* Social Security beneficiaries and SSI recipients can enroll for direct deposit/electronic funds transfer through their financial institutions
(FIs)using an automated enrollment process. SSA uses the information to facilitate electronic transmission of data for direct deposit of funds to a payee's account. The respondents are Social Security beneficiaries and SSI recipients requesting direct deposit to their financial institutions. *Type of Request:* Extension of an OMB-approved information collection. *Number of Respondents:* 3,950,000. *Frequency of Response:* 1. *Average Burden Per Response:* 3 minutes. *Estimated Annual Burden:* 197,500 hours. 4. *Certificate of Election for Reduced Spouse's Benefits—20 CFR 404.421—0960-0398.* SSA uses the information collected on Form SSA-25 to pay a qualified spouse who elects to receive a reduced Social Security benefit. Reduced benefits are not payable to an already entitled spouse, at least age 62 but under full retirement age, who no longer has a child in care, unless the spouse elects to receive reduced benefits. The respondents are entitled spouses seeking reduced Social Security benefits. *Type of Request:* Revision of an OMB-approved information collection. *Number of Respondents:* 30,000. *Frequency of Response:* 1. *Average Burden Per Response:* 2 minutes. *Estimated Annual Burden:* 1,000 hours. 5. *Voluntary Customer Satisfaction Surveys in Accordance with E.O. 12862 for the Social Security Administration—0960-0526.* Under the auspices of E.O. 12862, Setting Customer Service Standards, SSA conducts multiple customer satisfaction surveys each year. These voluntary customer satisfaction assessments include paper, Internet, and telephone surveys; mailed questionnaires; focus groups; and customer comment cards. The purpose of these surveys is to assess customer satisfaction with the timeliness, appropriateness, access, and overall quality of the services SSA provides. The respondents are direct recipients of SSA services and professionals and other individuals who work on behalf of SSA beneficiaries. *Type of Request:* Revision of an OMB-approved information collection. Fiscal year 2006 Fiscal year 2007 Fiscal year 2008 Number of Respondents 1,352,181 1,356,001 1,357,851. Frequency of Response 1 1 1. Range of Response Times Varies (5 minutes to 1 1/2 hours) Varies (5 minutes to 1 1/2 hours) Varies (5 minutes to 1 1/2 hours). Estimated Annual Burden 119,646 120,993 121,191. Note: Please note that the figures above differ slightly from those published in the 60-day advance Notice. The reason for this difference is that SSA obtained updated burden data since publishing the 60-day **Federal Register** Notice. Dated: March 30, 2006. Elizabeth A. Davidson, Reports Clearance Officer, Social Security Administration. [FR Doc. E6-4913 Filed 4-5-06; 8:45 am] BILLING CODE 4191-02-P SOCIAL SECURITY ADMINISTRATION Social Security Acquiescence Ruling 06-1(2); Fowlkes v. Adamec, 432 F.3d 90 (2d Cir. 2005): Determining Whether an Individual Is a Fugitive Felon Under the Social Security Act (Act)—Titles II and XVI of the Act AGENCY: Social Security Administration. ACTION: Notice of Social Security Acquiescence Ruling. SUMMARY: In accordance with 20 CFR 402.35(b)(2), the Commission of Social Security gives notice of Social Security Acquiescence Ruling 06-1(2). DATES: *Effective Date:* April 6, 2006. FOR FURTHER INFORMATION CONTACT: Stephanie Fishkin Kiley, Office of the General Counsel, Social Security Administration, 6401 Security Boulevard, Baltimore, MD 21235-6401,
(410)965-3483, or TTY
(800)966-5609. SUPPLEMENTARY INFORMATION: We are publishing this acquiescence ruling in accordance with 20 CFR 402.35(b)(2). An acquiescence ruling explain how we will apply a holding in a decision of a United States Court of Appeals that we determine conflicts with our interpretation of a provision of the Social Security Act
(Act)or regulations when the Government has decided not to seek further review of that decision or is unsuccessful on further review. We will apply the holding of the court of appeals decision as explained in this acquiescence ruling to all determinations or decisions at all levels of the administrative review process that an individual is a fugitive felon pursuant to sections 202(x)(1)(A), 205(j)(2)(C), 1611(e)(4)(A), and 1631(a)(2)(B) of the Act. The ruling applies to all title II and title XVI applicants, title II beneficiaries, and title XVI recipients who live in Connecticut, New York, or Vermont. If we made a determination or decision that an individual was a fugitive felon under the relevant provisions of the Act, which affected an individual's application for title II benefits or title XVI payments, or resulted in nonpayment of title II benefits or suspension of title XVI payments, between December 6, 2005, the date of the court of appeals decision, and April 6, 2006, the effective date of this acquiescence ruling, the individual may request application of the acquiescence ruling to the prior determination or decision. The individual must demonstrate, pursuant to 20 CFR 404.985(b)(2), 416.1485(b)(2), that application of this acquiescence ruling could change our prior determination or decision. Additionally, when we received this precedential court of appeals decision and determined that an acquiescence ruling might be required, we began to identify those cases within the circuit that might be subject to readjudication if an acquiescence ruling was subsequently issued. Because we have determined that an acquiescence ruling is required, we will send a notice to individuals we have identified whose title II or title XVI application, title II benefits, or title XVI payments may be affected by the acquiescence ruling. The notice will provide information about this ruling and the right to request readjudication under it. It is not necessary for an individual to receive a notice in order to request relief based on this acquiescence ruling. If this acquiescence ruling is later rescinded as obsolete, we will publish a notice in the **Federal Register** to that effect as provided for in 20 CFR 404.985(e), 416.148(e). If we decide to relitigate the issue covered by this acquiescence ruling as provided for by 20 CFR 404.985(c), 416.1485(c), we will publish a notice in the **Federal Register** stating that we will apply our interpretation of the Act or regulations involved and explaining why we have decided to relitigate the issue. (Catalog of Federal Domestic Assistance, Program Nos. 96.001 Social Security—Disability Insurance; 96.002 Social Security—Retirement Insurance; 96.004 Social Security—Survivors Insurance; 96.006—Supplemental Security Insurance) Dated: March 29, 2006. Jo Anne B. Barnhart, Commissioner of Social Security. Acquiescence Ruling 06-1(2) *Fowlkes* v. *Adamec* , 432 F.3d 90 (2d Cir. 2005): Determining Whether an Individual is a Fugitive Felon Under the Social Security Act (Act)—Titles II and XVI of the Act. 1 1 Although *Fowlkes* was a title XVI case, the Act provides the same standard under title II for determining whether an individual is a fugitive felon. *Issue:* Whether an outstanding warrant or similar order for the arrest of an individual on a felony charge is, on its own, sufficient evidence for the Agency to determine that an individual is a fugitive felon under the Act and, therefore, not entitled to receive title II benefits or ineligible to receive title XVI payments. *Statute/Regulation/Ruling Citation:* Sections 202(x)(1)(A) and 1611(e)(4) of the Social Security Act (42 U.S.C. 402(x)(1)(A) and 1382(e)(4)); 20 CFR 416.202(f) and 416.1339. *Circuit:* Second (Connecticut, New York, Vermont). *Fowlkes* v. *Adamec* , 432 F.3d 90 (2nd Cir. 2005). *Applicability of Ruling:* This ruling applies to all determinations or decisions at all levels of the administrative review process that an individual is a fugitive felon within the meaning of sections 202(x)(1)(A) and 1611(e)(4) of the Act. This ruling applies to all title II and title XVI applicants, title II beneficiaries, and title XVI recipients who live in Connecticut, New York, or Vermont. *Description of Case:* In 1997, Felipe Fowlkes applied for and was found eligible to receive supplemental security income
(SSI)disability payments under title XVI of the Act. In September 1999, he was indicted in Virginia on two felony charges. On March 16, 2000, the Agency notified Mr. Fowlkes, who at that time resided in New York, that his eligibility for SSI payments would be suspended retroactively to September 1999 because of two outstanding felony warrants from Virginia. Mr. Fowlkes requested administrative review and, after a hearing, an ALJ issued a decision finding that because he had not satisfied the outstanding felony arrest warrants, Mr. Fowlkes was fleeing to avoid prosecution as described in section 1611(e)(4) of the Act, 42 U.S.C. 1382(e)(4). Accordingly, the ALJ found that suspension of Mr. Fowlkes' SSI payments was proper because he was a fugitive felon under the Act. Mr. Fowlkes sought judicial review, not under the Act, but based on a claim that the Agency violated his civil rights. The district court dismissed Mr. Fowlkes' civil rights claim, without reaching the issue of whether or not Mr. Fowlkes was a fugitive felon under the Act. On appeal, the Second Circuit converted the action into one seeking review, under section 1631(c)(3) of the Act, of the Agency's fleeing felon determination and remanded the case to the district court for further proceedings consistent with its opinion. *Holding:* The Second Circuit held that the Agency could not conclude that an individual is fleeing to avoid prosecution, custody, or confinement from the mere fact that an outstanding felony arrest warrant or similar order exists. Specifically, the court stated that “fleeing” is understood to mean the conscious evasion of arrest or prosecution. The court determined that for “flight” to result in a suspension of benefits, it must be undertaken with the specific intent to avoid prosecution. Accordingly, the court concluded that for the Agency to suspend benefits on the basis that an individual was “fleeing,” the Agency must have some evidence that the individual knows that his apprehension is sought. The court found the implementing regulation consistent with this construction of the Act. In addition, the court interpreted the implementing regulation to permit the Agency to suspend benefits only as of the date of a warrant or order issued by a court or other appropriate tribunal on the basis of a finding that an individual has fled or was fleeing from justice. *Statement as to How Fowlkes Differs from the Agency's Policy:* We interpret section 1611(e)(4) of the Act to mean that a person is “fleeing to avoid prosecution, custody, or confinement” when a person has an outstanding warrant for his or her arrest, even if that person is unaware of that warrant. The Second Circuit Court of Appeals rejected this interpretation. The Second Circuit held the term “fleeing” to mean “the conscious evasion of arrest or prosecution.” The court determined that for “flight” to result in a suspension of benefits, it must be undertaken with the specific intent to avoid prosecution. Thus, for the Agency to take adverse action against an individual described in the Act as “fleeing to avoid prosecution, custody, or confinement,” the Agency must have some evidence that the individual knew his apprehension was sought. *Explanation of How SSA Will Apply the Fowlkes Decision Within the Circuit:* This ruling applies to all determinations or decisions at all levels of the administrative review process that an individual is a fugitive felon within the meaning of sections 202(x)(1)(A) and 1611(e)(4) of the Act. This ruling applies to all title II and title XVI applicants, title II beneficiaries and title XVI recipients who live in Connecticut, New York, or Vermont. We will not use the existence of an outstanding felony arrest warrant or similar order as the sole basis for finding that an individual is fleeing to avoid prosecution, custody, or confinement and is, therefore, a fugitive felon subject to withholding of title II benefits or ineligibility to receive title XVI payments. Before we determine that a title II or title XVI applicant, title II beneficiary, or title XVI recipient is a fugitive felon, we must have evidence that the individual knows that there is an outstanding felony arrest warrant, and the outstanding arrest warrant must have been issued on the basis that the individual has fled or is fleeing from justice. *Cross References:* Program Operations Manual System, sections SI 00530.010 and GN 02613.010. [FR Doc. 06-3259 Filed 4-5-06; 8:45 am]
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Traces to 19 documents
9 references not yet in our index
  • 17 CFR 240.19
  • 17 CFR 240.17
  • 15 USC 78
  • 17 CFR 240.19-4(f)(6)
  • 17 CFR 240.15
  • Pub. L. 104-13
  • 20 CFR 404.380-404
  • 31 CFR 209
  • 432 F.3d 90
Citation graph
cites case law
Notices
Notice of an application for an order pursuant to Section 26(c) of the Investment Company Act of 1940 (“1940 Act”) approving a substitution of securities
U.S.C.§ 78s
U.S.C.§ 1
U.S.C.§ 78c
U.S.C.§ 78f
C.F.R.§ 200.30-3
U.S.C.§ 552
U.S.C.§ 80a–16
U.S.C.§ 78g
U.S.C.§ 78a
F. App'x432 F.3d 90
Cite17 CFR 240.19
Cite17 CFR 240.17
Cites 28 · showing 12Cited by 0 across 0 sources
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