[Federal Register: November 29, 2002 (Volume 67, Number 230)]
[Notices]
[Page 71216-71219]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr29no02-155]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-46883; File No. SR-Amex-2002-88]
Self-Regulatory Organizations; the American Stock Exchange LLC;
Notice of Filing and Order Granting Accelerated Approval of Proposed
Rule Change Relating to the Listing and Trading of Notes Linked to the
Performance of the Dow Jones Industrial Average (``DJIA'')
November 21, 2002.
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 November 1, 2002, the American Stock Exchange LLC
(``Amex'' or ``Exchange'') filed with the Securities and Exchange
Commission (``SEC'' or ``Commission'') the proposed rule change as
described in items I and II below, which items have been prepared by
the Exchange. The Commission is publishing this notice to solicit
comments on the proposed rule change from interested persons and is
approving the proposal on an accelerated basis.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to list and trade under section 107A of the
Amex Company Guide (``Company Guide''), notes linked to the performance
of the Dow Jones Industrial Average (the ``DJIA'' or the ``Market
Recovery Notes'' or ``Notes'').
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements
concerning the purpose of, and basis for, the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
item III below. The Exchange has prepared summaries, set forth in
sections A, B, and C below, of the most significant aspects of such
statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and the
Statutory Basis for, the Proposed Rule Change
1. Purpose
Under section 107A of the Amex Company Guide (``Company Guide''),
the Exchange may approve for listing and trading securities which
cannot be readily categorized under the listing criteria for common and
preferred stocks, bonds, debentures, or warrants.\3\ The Exchange
proposes to list for trading under section 107A of the Company Guide
notes, the performance which is linked to the DJIA (the ``Market
Recovery Notes'' or ``Notes'').\4\ The DJIA is determined, calculated
and maintained solely by Dow Jones.\5\ The Notes will provide for a
multiplier of any positive performance of the DJIA during such term
subject to a maximum payment amount or ceiling.
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\3\ See Securities Exchange Act Release No. 27753 (March 1,
1990), 55 FR 8626 (March 8, 1990) (order approving File No. SR-Amex-
89-29).
\4\ Merrill Lynch & Co., Inc. (``Merrill Lynch'') and Dow Jones
& Co., Inc. (``Dow Jones'') have entered into a non-exclusive
license agreement providing for the use of the DJIA by Merrill Lynch
and certain affiliates and subsidiaries in connection with certain
securities including these Notes. Dow Jones is not responsible and
will not participate in the issuance and creation of the Notes.
\5\ The DJIA is a price-weighted index comprised of 30 common
stocks chosen by the editors of the Wall Street Journal (``WSJ'') as
representative of the broad market of U.S. industry. A price-
weighted index refers to an index that assigns weights to component
stocks based on the price per share rather than total market
capitalization of such component stock. The corporations represented
in the DJIA tend to be leaders within their respective industries
and their stocks are typically widely held by individuals and
institutional investors. Changes in the composition of the DJIA are
made solely by the editors of the WSJ. In addition, changes to the
common stocks included in the DJIA tend to be made infrequently with
most substitutions the result of mergers and other extraordinary
corporate actions. However, over time, changes are made to more
accurately represent the broad market of U.S. industry. In choosing
a new corporation for the DJIA, the editors of the WSJ focus on the
leading industrial companies with a successful history of growth and
wide interest among investors. Dow Jones, publisher of the WSJ, is
not affiliated with Merrill Lynch and has not participated in any
way in the creation of the Notes. The number of common stocks in the
DJIA has remained at 30 since 1928, and, in an effort to maintain
continuity, the constituent corporations represented in the DJIA
have been changed on a relatively infrequent basis.
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The Notes will initially conform to the listing guidelines under
section 107A \6\ and continued listing guidelines under sections 1001-
1003 \7\ of the Company Guide. The Notes are senior non-convertible
debt securities of Merrill Lynch. The Notes will have a term of not
less than one, nor more, than
[[Page 71217]]
10 years. Merrill Lynch will issue the Notes in denominations of whole
units (a ``Unit''), with each Unit representing a single Note. The
original public offering price will be $10 per Unit. The Notes will
entitle the owner at maturity to receive an amount based upon the
percentage change of the DJIA. At maturity, if the value of the DJIA
has increased over the term of the Notes, a beneficial owner will be
entitled to receive a payment on the Notes equal to three times the
amount of that percentage increase, not to exceed a maximum payment
(the ``Capped Value'') to be determined at the time of issuance of the
Notes. The Notes will not have a minimum principal amount that will be
repaid, and accordingly, payment on the Notes prior to or at maturity
may be less than the original issue price of the Notes. The Notes are
also not callable by the Issuer.
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\6\ The initial listing standards for the Notes require: (1) A
minimum public distribution of one million units; (2) a minimum of
400 shareholders; (3) a market value of at least $4 million; and (4)
a term of at least one year. In addition, the listing guidelines
provide that the issuer have assets in excess of $100 million,
stockholder's equity of at least $10 million, and pre-tax income of
at least $750,000 in the last fiscal year or in two of the three
prior fiscal years. In the case of an issuer which is unable to
satisfy the earning criteria stated in section 101 of the Company
Guide, the Exchange will require the issuer to have the following:
(1) Assets in excess of $200 million and stockholders' equity of at
least $10 million; or (2) assets in excess of $100 million and
stockholders' equity of at least $20 million.
\7\ The Exchange's continued listing guidelines are set forth in
sections 1001 through 1003 of part 10 to the Exchange's Company
Guide. Section 1002(b) of the Company Guide states that the Exchange
will consider removing from listing any security where, in the
opinion of the Exchange, it appears that the extent of public
distribution or aggregate market value has become so reduced to make
further dealings on the Exchange inadvisable. With respect to
continued listing guidelines for distribution of the Notes, the
Exchange will rely in part, on the guidelines for bonds in section
1003(b)(iv). Section 1003(b)(iv)(A) provides that the Exchange will
normally consider suspending dealings in, or removing from the list,
a security if the aggregate market value or the principal amount of
bonds publicly held is less than $400,000.
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The payment that a holder or investor of a Note will be entitled to
receive (the ``Redemption Amount'') depends entirely on the relation of
the average of the values of the DJIA at the close of the market on
five business days shortly before the maturity of the Notes (the
``Ending Value'') and the closing value of the DJIA on the date the
Notes are priced for initial sale to the public (the ``Starting
Value'').
If the Ending Value is greater than the Starting Value, the
Redemption Amount per Unit will equal:
[GRAPHIC] [TIFF OMITTED] TN29NO02.072
not to exceed the Capped Value.If the Ending Value is less than or
equal to the Starting Value, the Redemption Amount per Unit will equal:
[GRAPHIC] [TIFF OMITTED] TN29NO02.073
The Notes are cash-settled in U.S. dollars and do not give the
holder any right to receive a portfolio security, dividend payments or
any other ownership right or interest in the portfolio or index of
securities comprising the DJIA. The Notes are designed for investors
who want to participate or gain exposure to the DJIA, subject to a cap,
and who are willing to forego market interest payments on the Notes
during such term. The SEC has previously approved the listing of
options on, and securities the performance of which have been linked to
or based on, the DJIA.\8\
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\8\ See Securities Exchange Act Release Nos. 39011 (September 3,
1997), 62 FR 47840 (September 11, 1997) (approving the listing and
trading of options on the DJIA); 39525 (January 8, 1998), 63 FR 2438
(January 15, 1998) (approving the listing and trading of
DIAMONDSSM Trust Units, portfolio depositary receipts
based on the DJIA).
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As of October 29, 2002, the market capitalization of the securities
included in the DJIA ranged from a high of $279.3 billion to a low of
$10 billion. The average daily trading volume for these same securities
for the last six months, as of the same date, ranged from a high of
57.3 million shares to a low of 2 million shares.
Because the Notes are linked to a portfolio of equity securities,
the Amex's existing equity floor trading rules will apply to the
trading of the Notes. First, pursuant to Amex rule 411, the Exchange
will impose a duty of due diligence on its members and member firms to
learn the essential facts relating to every customer prior to trading
the Notes.\9\ Second, the Notes will be subject to the equity margin
rules of the Exchange.\10\ Third, the Exchange will, prior to trading
the Notes, distribute a circular to the membership providing guidance
with regard to member firm compliance responsibilities (including
suitability recommendations) when handling transactions in the Notes
and highlighting the special risks and characteristics of the Notes.
With respect to suitability recommendations and risks, the Exchange
will require members, member organizations and employees thereof
recommending a transaction in the Notes: (1) To determine that such
transaction is suitable for the customer, and (2) to have a reasonable
basis for believing that the customer can evaluate the special
characteristics of, and is able to bear the financial risks of such
transaction. In addition, Merrill Lynch will deliver a prospectus in
connection with the initial sales of the Notes.
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\9\ Amex rule 411 requires that every member, member firm or
member corporation use due diligence to learn the essential facts,
relative to every customer and to every order or account accepted.
\10\ See Amex rule 462 and section 107B of the Company Guide.
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The Exchange represents that its surveillance procedures are
adequate to properly monitor the trading of the Notes. Specifically,
the Exchange will rely on its existing surveillance procedures
governing equities, which have been deemed adequate under the Act. In
addition, the Exchange also has a general policy, which prohibits the
distribution of material, non-public information by its employees.
2. Statutory Basis
The Exchange believes that the proposed rule change is consistent
with section 6(b) of the Act, \11\ in general, and furthers the
objectives of section 6(b)(5),\12\ in particular, in that it is
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, in general,
to protect investors and the public interest.
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\11\ 15 U.S.C. 78f(b).
\12\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received from Members, Participants or Others
The Exchange did not receive any written comments on the proposed
rule change.
III. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Persons making written submissions
should file six copies thereof with the Secretary, Securities and
Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549-0609.
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 at
[[Page 71218]]
the Commission's Public Reference Room. Copies of such filing will also
be available for inspection and copying at the principal office of the
Exchange. All submissions should refer to the File No. SR-Amex-2002 88
and should be submitted by December 20, 2002.
IV. Commission's Findings and Order Granting Accelerated Approval of
Proposed Rule Change
After careful consideration, the Commission finds that the proposed
rule change is consistent with the requirements of the Act and the
rules and regulations thereunder, applicable to a national securities
exchange, and, in particular, with the requirements of section 6(b)(5)
of the Act.\13\ The Commission finds that this proposal is similar to
several approved instruments currently listed and traded on the
Amex.\14\ Accordingly, the Commission finds that the listing and
trading of the Notes based on the DJIA is consistent with the Act and
will promote just and equity principles of trade, foster cooperation
and coordination with persons engaged in regulating, clearing,
settling, processing information with respect to, and facilitating
transactions in securities, and, in general, protect investors and the
public interest consistent with section 6(b)(5) of the Act.\15\
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\13\ 15 U.S.C. 78f(b)(5).
\14\ See Securities Exchange Act Release Nos. 46021 (June 3,
2002), 67 FR 39753 (June 10, 2002) (approving the listing and
trading of non-principal protected exchangeable notes linked to the
Select European 50 Index); 45639 (March 25, 2002), 67 FR 15258
(March 29, 2002) (approving the listing and trading of non-principal
protected exchangeable notes linked to the Oil and Natural Gas
Index); 45305 (January 17, 2002), 67 FR 3753 (January 25, 2002)
(approving the listing and trading of non-principal protected
exchangeable notes linked to the Biotech-Pharmaceutical Index);
45160 (December 17, 2001), 66 FR 66485 (December 26, 2001)
(approving the listing and trading of non-principal protected
exchangeable notes linked to the Balanced Strategy Index); 44483
(June 27, 2001), 66 FR 35677 (July 6, 2001) (approving the listing
and trading of non-principal protected exchangeable notes linked to
the Institutional Holdings Index); 44437 (June 18, 2001), 66 FR
33585 (June 22, 2001) (approving the listing and trading of non-
principal protected exchangeable notes linked to the Industrial 15
Index); and 44342 (May 23, 2001); 66 FR 29613 (May 31, 2001)
(approving the listing and trading of non-principal protected
exchangeable notes linked to the Select Ten Index).
\15\ 15 U.S.C. 78f(b)(5). In approving this rule, the Commission
notes that it has considered the proposed rule's impact on
efficiency, competition, and capital formation. 15 U.S.C. 78c(f).
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As described more fully above, at maturity, the holder of a Note
will receive an amount based upon the percentage change of the DJIA.
Specifically, at maturity, the holder of a Note will be entitled to
receive a payment equal to three times the amount of that percentage
increase, not to exceed a certain maximum payment, if the value of the
DJIA has increased over the term of such Note. The Notes will provide
investors who are willing to forego market interest payments during the
term of the Notes with a means to participate or gain exposure to the
DJIA, subject to a cap.
The Commission notes that the Exchange's rules and procedures that
address the special concerns attendant to the trading of hybrid
securities will be applicable to the Notes. In particular, by imposing
the hybrid listing standards, suitability, disclosure, and compliance
requirements noted above, the Commission believes that the Exchange has
addressed adequately the potential problems that could arise from the
hybrid nature of the Notes. Moreover, the Commission notes that the
Exchange will distribute a circular to its membership calling attention
to the specific risks associated with the Notes. The Commission also
notes that Merrill Lynch will deliver a prospectus in connection with
the initial sales of the Notes. In addition, the Commission notes that
Amex will incorporate and rely upon its existing surveillance
procedures governing equities, which have been deemed adequate under
the Act. Moreover, the Commission also notes that the Exchange has a
general policy that prohibits the distribution of material, non-public
information by its employees.
In approving the product, the Commission recognizes that the DJIA
is a price-weighted index comprised of 30 component common stocks,
representing a broad market of the U.S. industry, with each stock
affecting the DJIA in proportion to its market price. The Commission
notes that the changes in the composition of the DJIA are made solely
by the editors of the WSJ. The changes to these common stocks tend to
be made infrequently with most substitutions the result of mergers and
other extraordinary corporate actions. Further, the Commission notes
that the DJIA has remained at 30 since 1928. As of October 29, 2002,
the 30 stocks in the DJIA ranged in capitalization from a high of
$279.3 billion to a low of $10 billion. In addition, the average daily
trading volume for the component stocks over the six-month period from
May 2002 to October 2002 ranged from a high of 57.3 million shares to a
low of 2 million shares. Given the compositions of the stocks
underlying the DJIA, the Commission believes that the listing and
trading of the Notes that are linked to the DJIA, should not unduly
impact the market for the underlying securities comprising the DJIA or
raise manipulative concerns. As discussed more fully above, the
underlying stocks comprising the DJIA are well-capitalized, highly
liquid stocks. Moreover, the issuers of the underlying securities
comprising the DJIA, are subject to reporting requirements under the
Act, and all of the component stocks are either listed or traded on, or
traded through the facilities of, U.S. securities markets.
Additionally, the Amex's surveillance procedures will serve to deter as
well as detect any potential manipulation.
Furthermore, the Commission notes that the Notes are depending upon
the individual credit of the issuer, Merrill Lynch. To some extent this
credit risk is minimized by the Exchange's listing standards in section
107A of the Company Guide which provide the only issuers satisfying
substantial asset and equity requirements may issue securities such as
the Notes. In addition, the Exchange's ``Other Securities'' listing
standards further require that the Notes have a market value of at
least $4 million.\16\ In any event, financial information regarding
Merrill Lynch, in addition to the information on the 30 common stocks
comprising the DJIA, will be publicly available.\17\
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\16\ See Company Guide section 107A.
\17\ The SEC notes that the 30 component stocks that comprise
the DJIA are reporting companies under the Act, and the Notes will
be registered under section 12 of the Act.
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The Commission also has a systemic concern, however, that a broker-
dealer such as Merrill Lynch, or a subsidiary providing a hedge for the
issuer will incur position exposure. However, as the Commission has
concluded in previous approval orders for other hybrid instruments
issued by broker-dealers,\18\ the Commission believes that this concern
is minimal given the size of the Notes issuance in relation to the net
worth of Merrill Lynch.
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\18\ See, e.g., Securities Exchange Act Release Nos. 44913
(October 9, 2001), 66 FR 52469 (October 15, 2001) (order approving
the listing and trading of notes whose return is based on the
performance of the Nasdaq-100 Index) (File No. SR-NASD-2001-73);
44483 (June 27, 2001), 66 FR 35677 (July 6, 2001) (order approving
the listing and trading of notes whose return is based on a
portfolio of 20 securities selected from the Amex Institutional
Index) (File No. SR-Amex-2001-40); and 37744 (September 27, 1996),
61 FR 52480 (October 7, 1996) (order approving the listing and
trading of notes whose return is based on a weighted portfolio of
healthcare/biotechnology industry securities) (File No. SR-Amex-96-
27).
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Finally, the Commission notes that the value of the DJIA will be
disseminated at least once every 15 seconds throughout the trading day.
The Commission believes that providing access to the value of the DJIA
at least once every 15 seconds throughout the
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trading day is extremely important and will provide benefits to
investors in the product.
The Commission finds good cause for approving the proposed rule
change prior to the 30th day after the date of publication of notice
thereof in the Federal Register. The Amex has requested accelerated
approval because this product is similar to several other instruments
currently listed and traded on the Amex.\19\ The Commission believes
that the Notes will provide investors with an additional investment
choice and that accelerated approval of the proposal will allow
investors to begin trading the Notes promptly. Additionally, the Notes
will be listed pursuant to Amex's existing hybrid security listing
standards as described above. Based on the above, the Commission
believes that there is good cause, consistent with sections 6(b)(5) and
19(b)(2) of the Act \20\ to approve the proposal on an accelerated
basis.
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\19\ See supra note 14.
\20\ 15 U.S.C. 78f(b)(5) and 78s(b)(2).
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V. Conclusion
It is therefore ordered, pursuant to section 19(b)(2) of the
Act,\21\ that the proposed rule change (SR-Amex-2002-88), is hereby
approved on an accelerated basis.
\21\ 15 U.S.C. 78s(b)(2).
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For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\22\
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\22\ 17 CFR 200.30-3(a)(12).
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-30198 Filed 11-27-02; 8:45 am]
BILLING CODE 8010-01-P