[Federal Register Volume 60, Number 239 (Wednesday, December 13, 1995)] [Notices] [Pages 64086-64088] From the Federal Register Online via the Government Publishing Office [www.gpo.gov] [FR Doc No: 95-30299] ----------------------------------------------------------------------- [[Page 64087]] SECURITIES AND EXCHANGE COMMISSION [Release No. 34-36558; File No. SR-OCC-95-13] Self-Regulatory Organizations; the Options Clearing Corporation; Notice of Filing of Proposed Rule Change Relating to Adjustments of Options for Ordinary Stock Dividends December 6, 1995. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (``Act''),\1\ notice is hereby given that on September 19, 1995, The Options Clearing Corporation (``OCC'') 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 primarily by OCC. On October 16, 1995, OCC filed an amendment to the proposed rule change.\2\ The Commission is publishing this notice to solicit comments from interested persons. \1\ 15 U.S.C. 78s(b)(1) (1988). \2\ The original filing required that dividends or distributions (i) not exceed ten percent of the market value of the underlying security and (ii) be paid on a regular basis in order to be deemed ``ordinary.'' OCC amended its proposal with respect to cash dividends by eliminating the requirement that cash dividends of less than ten percent be paid on a regular basis in order to be deemed ordinary for purposes of determining whether to adjust the option. OCC also amended the proposal to require that stock dividends of less than ten percent of the market value of the underlying security be paid on a quarterly basis, as opposed to regularly, in order to be deemed ordinary. Letter from Jacqueline R. Luthringshausen, OCC, to Jerry W. Carpenter, Associate Director, Division of Market Regulation, Commission (October 11, 1995). --------------------------------------------------------------------------- I. Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change The proposed rule change will revise OCC's By-Laws to adopt a general rule of not adjusting options for ordinary stock dividends or distributions on the underlying security and will delete references to the review by the Commission of options adjustment decisions made by an OCC adjustment panel. II. Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, OCC included statements concerning the purpose of and basis for the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. OCC has prepared summaries, set forth in sections (A), (B), and (C) below, of the most significant aspects of such statements.\3\ \3\ The Commission has modified the text of the summaries prepared by OCC. --------------------------------------------------------------------------- (A) Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change Under the proposed rule change, OCC will amend Article VI, Section 11 of its By-Laws governing adjustments on options for ordinary stock dividends declared on the underlying security. Article VI, Section 11 sets forth general rules concerning adjustment that OCC may make to the standardized terms of option contracts when certain events occur. A specific adjustment is determined by the vote of an adjustment panel comprised of two designated representatives of each exchange that lists such option and the designee of OCC's Chairman. OCC's designee only votes in the case of a tie. Currently, Article VI, Section 11(d) contains a general rule requiring that equity option contracts be adjusted in the case of a stock dividend, stock distribution, or stock split where one or more whole shares of the underlying security is issued with respect to each outstanding share. The adjustment is made by reducing the strike price and increasing each option contract by the same number of additional option contracts as the number of shares issued with respect to each outstanding share. The unit of trading stays the same. However, Section 11(c) states that there will be no adjustment for ordinary cash dividends. This is because ordinary cash dividends generally are paid on a quarterly basis and adjusting outstanding options each time a dividend is paid could create a massive proliferation of option series that would dilute market liquidity and would overtax price reporting and other systems. Article VI, Section 11(j) grants authority to the adjustment panel to make such exceptions to any of the general adjustment rules as it deems to be appropriate. Recently, two adjustment panels exercised their exception authority and determined not to adjust outstanding option contracts to reflect a stock dividend. In both instances, the issuer evidenced a pattern of declaring a small stock dividend in conjunction with a quarterly cash dividend. In determining not to adjust the options, each adjustment panel considered the provision in the Options Disclosure Document that states a stock dividend may be treated as an ordinary cash dividend by an adjustment panel if the issuer of the underlying security announces or exhibits a policy of declaring regular stock dividends that do not individually exceed 10% of the market value of the underlying security. The adjustment panels involved in making the two recent adjustments have requested that OCC amend its By-Laws to provide for a general rule that no adjustment will be made to reflect ordinary stock dividends. As a result, OCC is proposing to define in its By-Laws ordinary stock dividends as dividends that are paid on a quarterly basis by the issuer of the underlying security and that do not individually exceed ten percent of the market value of the underlying security. Because the proposed change only will apply to recurrent stock dividends, OCC anticipates that it will apply only in a small number of cases. OCC believes that formalizing a policy of not adjusting for recurrent stock dividends will eliminate potential problems associated with the creation of an undesirable proliferation of options series as well as eliminate the need to convene adjustment panels to make discretionary determinations for such dividends on a case-by-case basis. OCC also proposes to amend its By-Laws to clarify when cash dividends will be considered ordinary. Under the proposal, cash dividends that do not exceed ten percent of the market value of the underlying security will be deemed to be ordinary whether or not they are paid on an ordinary basis. Finally, pursuant to a request from Commission staff, OCC proposes to delete language from Article VI, Section 11 that provides for Commission review of the determinations made by an OCC adjustment panel. OCC believes the proposed rule change is consistent with the requirements of Section 17A of the Act \4\ and the rules and regulations thereunder because the proposal will provide for the prompt and accurate settlement of options transactions and will provide for the safeguarding of related securities and funds. \4\ 15 U.S.C. 78.q-1 (1988). --------------------------------------------------------------------------- (B) Self-Regulatory Organization's Statement on Burden on Competition OCC does not believe that the proposed rule change will impose any burden on competition. (C) Self-Regulatory Organization's Statement on Comments on the Proposed Rule Change Received From Members Participants or Others Written comments were not and are not intended to be solicited with respect [[Page 64088]] to the proposed rule change and none were received. III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action Within thirty-five 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 ninety 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 OCC consents, the Commission will: (a) By order approve such proposed rule change or (b) Institute proceedings to determine whether the proposed rule change should be disapproved. IV. Solicitation of Comments Interested persons are invited to submit written data, views, and arguments concerning the foregoing. Persons making written submission should file six copies thereof with the Secretary, Securities and Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549. Copies of the submissions, 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. Sec. 552, will be available for inspection and copying in the Commission's Public Reference Room, 450 Fifth Street, N.W., Washington, D.C. 20549. Copies of such filings will also be available for inspection and copying at the principal office of OCC. All submissions should refer to the file number SR-OCC-95-13 and should be submitted by January 3, 1996. For the Commission by the Division of Market Regulation, pursuant to delegated authority.\5\ \5\ 17 CFR 200.30-3(a)(12) (1994). --------------------------------------------------------------------------- Margaret H. McFarland, Deputy Secretary. [FR Doc. 95-30299 Filed 12-12-95; 8:45 am] BILLING CODE 8010-01-M