[Federal Register: November 29, 2002 (Volume 67, Number 230)]
[Notices]
[Page 71219-71223]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr29no02-156]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-46882; File No. SR-Amex-2002-76]
Self-Regulatory Organizations; Notice of Filing and Order
Granting Accelerated Approval of Proposed Rule Change by the American
Stock Exchange LLC Relating to the Listing and Trading of Notes Based
on the Select Fifty Index
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 September 20, 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.
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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 Amex proposes to approve for listing and trading notes, the
return on which is based upon the performance of an equal-dollar
weighted portfolio of securities representing the fifty stocks with the
largest market capitalization in the S&P 500 Composite Stock Price
Index (the ``S&P 500 Index'' or ``Underlying Index''), as reduced by an
adjustment factor as described below (the ``Select Fifty Index'' or
``Index'').\3\
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\3\ As of September 3, 2002 the portfolio of securities
comprising the Select Fifty Index consists of: Abbott Laboratories;
American Express Company; American International Group, Inc.; Amgen
Inc.; Anheuser-Busch Companies, Inc.; AOL Time Warner Inc.; AT&T
Corp.; Bank of America Corporation; Bank One Corporation; Bellsouth
Corporation; Bristol-Meyers Squibb Company; ChevronTexaco
Corporation; Cisco Systems, Inc.; Citigroup Inc.; The Coca-Cola
Company; Dell Computer Corporation; E.I. du Pont de Nemours and
Company; Eli Lilly and Company; Exxon Mobil Corporation; Federal
Home Loan Mortgage Corporation; Federal National Mortgage
Association; Fifth Third Bancorp; General Electric Company; The
Goldman Sachs Group, Inc.; Hewlett-Packard Company; The Home Depot,
Inc.; International Business Machines Corporation; Intel
Corporation; J.P. Morgan Chase & Co.; Johnson & Johnson; Medtronic,
Inc.; Merck & Co., Inc.; Microsoft Corporation; Minnesota Mining and
Manufacturing Company; Morgan Stanley, Dean Witter, Discover & Co.;
Oracle Corporation; PepsiCo, Inc.; Pfizer Inc.; Pharmacia
Corporation; Philip Morris Companies Inc.; The Procter & Gamble
Company; SBC Communications Inc.; Texas Instruments Incorporated;
U.S. Bancorp; Verizon Communications Inc.; Viacom Inc.; Wachovia
Corporation; Wal-Mart Stores, Inc.; Wells Fargo & Company; and
Wyeth.
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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 Amex included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item III below. The Exchange has prepared summaries, set forth in
Sections A, B, and C below, of the most significant aspects of such
statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
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.\4\ The Amex proposes
to list for trading under Section 107A of the Company Guide notes based
on the Select Fifty Index. The Select Fifty Index will be determined,
calculated and maintained solely by the Amex.\5\
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\4\ See Securities Exchange Act Release No. 27753 (March 1,
1990). 55 FR 8626 (March 8, 1990) (order approving File No. SR-Amex-
89-29).
\5\ Subject to the criteria in the prospectus regarding the
construction of the Index, the Exchange has sole discretion
regarding changes to the Index due to annual reconstitutions and
adjustments to the Index and the multipliers of the individual
components.
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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 & Co., Inc. (``Merrill Lynch''). The
Notes will have a term of not less than one, nor more than ten years.
The Notes will entitle the owner at maturity to receive an amount based
upon the percentage change between the ``Starting Index Value'' and the
``Ending Index Value'' (the ``Redemption
[[Page 71220]]
Amount''). The ``Starting Index Value'' is the value of the Select
Fifty Index on the date the issuer prices the Notes for the initial
sale to the public. The ``Ending Index Value'' is the value of the
Select Fifty Index over a period shortly prior to the expiration of the
Notes. The Ending Index Value will be used in calculating the amount
owners will receive upon maturity. The Notes will not have a minimum
principal amount that will be repaid and, accordingly, payments on the
Notes prior to or at maturity may be less than the original issue price
of the Notes. During an approximately two-week period in the designated
month each year, the investors will have the right to require the
issuer to repurchase the Notes at a redemption amount based on the
value of the Select Fifty Index at such repurchase date. The Notes are
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 Notes are cash-settled in U.S. dollars and do not give the
holder any right to receive a portfolio security or any other ownership
right or interest in the portfolio of securities comprising the Select
Fifty Index. The Notes are designed for investors who want to
participate or gain exposure to a broad section of large capitalization
companies and who are willing to forego market interest payments on the
Notes during such term.
The Select Fifty Index will consist of a portfolio of stocks
(excluding Merrill Lynch and its affiliates) of the fifty companies
with the largest market capitalization in the S&P 500 Index \8\ at the
time of initial composition or any reconstitution of the Select Fifty
Index. The Securities and Exchange Commission (``Commission'' or
``SEC'') has previously approved the listing of options on, and
securities the performance of which have been linked to or based on,
the S&P 500 Index.\9\ In addition, the Commission in 1994 granted
approval to the listing and trading of options on an index comprised of
the fifty largest U.S. stocks as measured by market capitalization.\10\
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\8\ The S&P 500 Index is a broad-based stock index which
provides an indication of the performance of the U.S. equity market.
The S&P 500 Index is a capitalization-weighted index reflecting the
total market value of 500 widely-held component stocks relative to a
particular base period. The Index is computed by dividing the total
market value of the 500 stocks by an Index divisor. The Index
Divisor keeps the Index comparable over time to its base period of
1941-1943 and is the reference point for all maintenance
adjustments. The securities included in the Index are listed on the
Amex, New York Stock Exchange, Inc. (``NYSE'') or traded through
NASDAQ. The Index reflects the price of the common stocks of 500
companies without taking into account the value of the dividend paid
on such stocks.
\9\ See Securities Exchange Act Release Nos. 19907 (June 24,
1983), 48 FR 30814 (July 5, 1983) (approving the listing and trading
of options on the S&P 500 Index); 31591 (December 18, 1992), 57 FR
60253 (December 18, 1992) (approving the listing and trading of
Portfolio Depositary Receipts based on the S&P 500 Index); 27382
(October 26, 1989), 54 FR 45834 (October 31, 1989) (approving the
listing and trading of Exchange Stock Portfolios based on the value
of the S&P 500 Index); 30394 (February 21, 1992), 57 FR 7409 (March
2, 1992) (approving the listing and trading of a unit investment
trust linked to the S&P 500 Index)(SPDR); and 45160 (December 17,
2001) 66 FR 66485 (December 26, 2001) (approving the listing and
trading of notes based on the Balanced Strategy Index).
\10\ See Securities Exchange Act Release No. 33973 (April 28,
1994), 59 FR 23245 (May 5, 1994) (approving the listing and trading
of options on the Big Cap Index).
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Components of the Select Fifty Index approved pursuant to this
filing will also meet the following criteria: (1) A minimum market
value of at least $75 million, except that up to 10% of the component
securities in the Select Fifty Index may have a minimum market value of
$50 million; (2) average monthly trading volume in the last six months
of not less than 1,000,000 shares, except that up to 10% of the
component securities in the Select Fifty Index may have an average
monthly trading volume of 500,000 shares or more in the last six
months; (3) 90% of the Select Fifty Index's numerical value and at
least 80% of the total number of component securities will meet the
then current criteria for standardized option trading set forth in
Exchange Rule 915; and (4) all component stocks will either be listed
on the Amex, the New York Stock Exchange, Inc. (``NYSE'') or traded
through the facilities of the National Association of Securities
Dealers Automated Quotation System (``NASDAQ'') and reported National
Market System securities.
If calculated as of September 16, 2002, the market capitalization
of the securities that would represent the Select Fifty Index would
range from a high of $269.1 billion to a low of $35.2 billion. The
average monthly trading volume of those same securities for the last
six months, as of the same date, ranged from a high of 463.5 million
shares to a low of 87.9 million shares. Moreover, as of September 16,
2002, all of the securities that would comprise the Select Fifty Index
were eligible for standardized options trading pursuant to Amex Rule
915.
At the outset, each of the securities in the Select Fifty Index
will represent approximately an equal percentage of the Starting Index
Value. Specifically, each security included in the portfolio will be
assigned a multiplier on the date of issuance so that the security
represents approximately an equal percentage of the value of the entire
portfolio underlying the Select Fifty Index on the date the Notes are
priced for initial sale to the public. The multiplier indicates the
number of shares (or fraction of one share) of a security, given its
market price on an exchange or through NASDAQ, to be included in the
calculation of the portfolio. Accordingly, initially each of the fifty
companies included in the Select Fifty Index will represent
approximately 2.00% of the total portfolio at the time of issuance. The
Select Fifty Index will initially be set to provide a benchmark value
of 100.00 at the close of trading on the day the Notes are priced for
initial sale to the public.
The value of the Select Fifty Index at any time will equal: (1) The
sum of the products of the current market price for each stock
underlying the Select Fifty Index and the applicable share multiplier,
plus (2) an amount reflecting current calendar quarter dividends, and
less (3) a pro rata portion of the annual index adjustment factor.\11\
Current quarter dividends for any day will be determined by the Amex
and will equal the sum of each dividend paid by the issuer on one share
of stock underlying the Select Fifty Index during the current calendar
quarter multiplied by the share multiplier applicable to such stock on
the ex-dividend date.
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\11\ At the end of each day, the Select Fifty Index will be
reduced by a pro rata portion of the annual index adjustment factor,
expected to be 1.5% (i.e., 1.5%/365 days = 0.0041% daily). This
reduction to the value of the Select Fifty Index will reduce the
total return to investors upon exchange or at maturity. The Amex
represents that an explanation of this deduction will be included in
any marketing materials, fact sheets, or any other materials
circulated to investors regarding the trading of this product.
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As of the first day of the start of each calendar quarter, the Amex
will allocate the current quarter dividends as of the end of the
immediately preceding calendar quarter to each then outstanding
component of the Select Fifty Index. The amount of the current quarter
dividends allocated to each stock will equal the percentage of the
value of such stock contained in the portfolio of securities comprising
the Select Fifty Index relative to the value of the entire portfolio
based on the closing market price of such stock on the last day in the
immediately preceding calendar quarter. The share multiplier of each
stock will be increased to reflect the number of shares, or portion of
a share, that the amount of the current quarter dividend allocated to
each stock can purchase of each stock based on the closing market price
on the last day in the immediately preceding calendar quarter.
[[Page 71221]]
As of the close of business on each anniversary date (anniversary
of the day the Notes are priced for initial sale to the public) through
the applicable anniversary date in the year preceding the maturity of
the Notes, the portfolio of securities comprising the Select Fifty
Index will be reconstituted by the Amex so as to include the fifty
stocks (excluding Merrill Lynch and its affiliates) having the largest
market capitalization in the S&P 500 Index on the second scheduled
index business day prior to such anniversary date. The Exchange will
announce such changes to investors at least one day prior to the
anniversary date.\12\
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\12\ The Exchange will publish a notice to advise investors of
changes to the securities underlying the Index if any such changes
are made following an annual reconstitution.
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The portfolio will be reconstituted and rebalanced on the
anniversary date so that each stock in the Select Fifty Index will
represent approximately 2.00% of the value of the Select Fifty Index.
To effectuate this, the share multiplier for each new stock will be
determined by the Amex and will indicate the number of shares or
fractional portion thereof of each new stock, given the closing market
price of such new stock on the anniversary date, so that each new stock
represents an equal percentage of the Select Fifty Index value at the
close of business on such anniversary date. For example, if the Select
Fifty Index value at the close of business on an anniversary date was
150, then each of the fifty new stocks comprising the Select Fifty
Index would be allocated a portion of the value of the Select Fifty
Index equal to 3, and if the closing market price of one such new stock
on the anniversary date was 20, the applicable share multiplier would
be 0.15. Conversely, if the Select Fifty Index value was 50, then each
of the fifteen new stocks comprising the Select Fifty Index would be
allocated a portion of the value of the Select Fifty Index equal to 1
and if the closing market price of one such new stock on the
anniversary date was 20, the applicable share multiplier would be 0.05.
The last anniversary date on which such reconstitution will occur will
be the anniversary date in the year preceding the maturity of the
Notes. As noted above, investors will receive information on the new
portfolio of securities comprising the Select Fifty Index at least one
day prior to each anniversary date.
The multiplier of each component stock in the Select Fifty Index
will remain fixed until adjusted for quarterly dividend adjustments,
annual reconstitutions or certain corporate events, such as payment of
a dividend other than an ordinary cash dividend, a distribution of
stock of another issuer to its shareholders,\13\ stock split, reverse
stock split, and reorganization.
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\13\ If the issuer of a component security in the Select Fifty
Index issues to all of its shareholders publicly traded stock of
another issuer, such new securities will be added to the portfolio
comprising the Select Fifty Index until the subsequent anniversary
date. The multiplier for the new component will equal the product of
the original issuer's multiplier and the number of shares of the new
component issued with respect to one share of the original issuer.
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The multiplier of each component stock may be adjusted, if
necessary, in the event of a merger, consolidation, dissolution or
liquidation of an issuer or in certain other events such as the
distribution of property by an issuer to shareholders. If the issuer of
a stock included in the Select Fifty Index were to no longer exist,
whether by reason of a merger, acquisition or similar type of corporate
transaction, a value equal to the stock's final value will be assigned
to the stock for the purpose of calculating the Select Fifty Index
value prior to the subsequent anniversary date. For example, if a
company included in the Select Fifty Index were acquired by another
company, a value will be assigned to the company's stock equal to the
value per share at the time the acquisition occurred. If the issuer of
stock included in the Select Fifty Index is in the process of
liquidation or subject to a bankruptcy proceeding, insolvency, or other
similar adjudication, such security will continue to be included in the
Select Fifty Index so long as a market price for such security is
available or until the subsequent anniversary date. If a market price
is no longer available for a Select Fifty Index stock due to
circumstances including but not limited to, liquidation, bankruptcy,
insolvency, or any other similar proceeding, then the security will be
assigned a value of zero when calculating the Select Fifty Index for so
long as no market price exists for that security or until the
subsequent anniversary date. If the stock remains in the Select Fifty
Index, the multiplier of that security may be adjusted to maintain the
component's relative weight in the Select Fifty Index at the level
immediately prior to the corporate action. In all cases, the multiplier
will be adjusted, if necessary, to ensure Select Fifty Index
continuity.
The Exchange will calculate the Select Fifty Index and, similar to
other stock index values published by the Exchange, the value of the
Select Fifty Index will be calculated continuously and disseminated
every fifteen seconds over the Consolidated Tape Association's Network
B.
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.\14\ Second, the Notes will be subject to the equity margin
rules of the Exchange.\15\ 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 purchase of the Notes.
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\14\ 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.
\15\ 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 Amex 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 that 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 of the Act,\16\ in general, and furthers the objectives
of Section 6(b)(5) of the Act,\17\ in particular, in that it is
designed to prevent fraudulent and manipulative acts and practices, to
promote just and equitable principles of trade, to foster cooperation
and coordination with persons engaged in
[[Page 71222]]
facilitating transactions in securities, and to remove impediments to
and perfect the mechanism of a free and open market and a national
market system.
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\16\ 15 U.S.C. 78f(b).
\17\ 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
Written comments were neither solicited nor received.
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 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 File No. SR-Amex-2002-76 and
should be submitted by December 20, 2002.
IV. Commission's Findings and Order Granting Accelerated Approval of
Proposed Rule Change
After careful review, the Commission finds that implementation of
the proposed rule change is consistent with the requirements of Section
6 of the Act \18\ and the rules and regulations thereunder applicable
to a national securities exchange.\19\ Specifically, the Commission
believes that the proposal is consistent with Section 6(b)(5) of the
Act.\20\ The Commission believes that the availability of the Notes
will provide an instrument for investors to achieve desired investment
objectives through the purchase of an exchange-traded debt product
linked to the Select Fifty Index. These objectives include
participating in or gaining exposure to the Index while limiting
somewhat downside risk. However, the Commission notes that the Notes
are index-linked debt securities whose value in whole or in part will
be based upon the performance of the S&P 500 Index. In addition, the
Notes are non-principal protected: they do not have a minimum principal
amount that will be repaid, and payments on the Notes at maturity may
be less than their original issue price. For the reasons discussed
below, the Commission has concluded that the Amex listing standards
applicable to the Notes are consistent with the Act.
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\18\ 15 U.S.C. 78f.
\19\ 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).
\20\ Id.
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The Notes are non-convertible and will conform initially to the
Amex listing guidelines under Section 107A of the Company Guide and
continued listing guidelines under Sections 1001-1003 of the Company
Guide. The specific maturity date will not be established until the
time of the offering, but will be not less than one, nor more than ten
years from the date of issue. The Notes will entitle the owner at
maturity to receive an amount based upon the percentage change between
the Starting Index Value (the value of the Index on the date the issuer
prices the Notes for the initial sale to the public) and the Ending
Index Value (the value of the Index over a period shortly prior to the
expiration of the Notes). The Ending Index Value will be used in
calculating the amount investors will receive upon maturity. The Notes
will not have a minimum principal amount that will be repaid and,
accordingly, payments on the Notes prior to, or at maturity, may be
less than the original issue price of the Notes. During a two-week
period in the designated month each year, investors will have the right
to require the issuer to repurchase the Notes at a redemption amount
based on the value of the Index at such repurchase date. The Notes are
cash-settled in U.S. dollars and may not be called by the issuer. The
Select Fifty Index will initially be set to provide a benchmark value
of 100.00 at the close of trading on the date the Notes are priced for
initial sale to the public.
The Notes are not-leveraged, non-principal protected instruments.
The Notes are debt instruments whose price will be derived and based
upon the value of the Select Fifty Index. The Notes do not have a
minimum principal amount that will be repaid at maturity and the
payments on the Notes prior to or at maturity may be less than the
original issue price of the Notes.\21\ Thus, if the Select Fifty Index
has declined at maturity, the holder of the Note may receive
significantly less than the original public offering price of the Note.
Accordingly, the level of risk involved in the purchase or sale of the
Notes is similar to the risk involved in the purchase or sale of
traditional common stock. Because the final rate of return of the Notes
is derivatively priced, based on the performance of the Underlying
Index, and because the Notes are instruments that do not guarantee a
return of principal, there are several issues regarding the trading of
this type of product.
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\21\ The Commission recognizes that during a two-week period in
the designated month investors will have the right to require the
issuer to repurchase the Notes at a redemption amount based on the
value of the Select Fifty Index at such repurchase date.
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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 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 circular should
include, among other things, a discussion of the risks that may be
associated with the Notes in addition to details on the composition of
the Index and how the rates of return will be computed. Further,
pursuant to Exchange 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. Based on these
factors, the Commission finds that the proposal to trade the Notes is
consistent with Section 6(b)(5) of the Act.\22\ The Commission also
notes that Merrill Lynch will deliver a prospectus in connection with
the initial purchase of the Notes.
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\22\ 15 U.S.C. 78f(b)(5).
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The Commission notes that the Notes are dependent 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,
[[Page 71223]]
the Exchange's ``Other Securities'' listing standards further require
that the Notes have at least $4 million in market value.\23\ In any
event, financial information regarding Merrill Lynch, in addition to
the information on the Underlying Index, will be publicly
available.\24\
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\23\ See Company Guide Section 107A.
\24\ The companies that comprise the Oil and Natural Gas Index
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,\25\ 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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\25\ 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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The Commission also believes that the listing and trading of the
Notes should not unduly impact the market for the component securities
of the Underlying Index or raise manipulative concerns. The Commission
notes that the Exchange maintains the Select Fifty Index and states
that it has sole discretion in determining, calculating, and
maintaining the Index. However, the prospectus provides that guidelines
under which the Exchange will perform such functions. The Commission
also notes that the Index is equal-dollar weighted but is only
rebalanced on an annual basis; however, the Commission notes that the
S&P 500 Index is broad-based and composed of stocks with significant
market capitalization and average daily trading volume. The Commission
further 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 the Exchange has addressed adequately
the potential problems that could arise from the hybrid nature of the
Notes. The Exchange will require members, member organizations and
employees thereof recommending a transaction in the Notes to: (1)
Determine that such transaction is suitable for the customer, and (2)
have a reasonable basis for believing that the customer can evaluate
the special characteristics, and bear the financial risks, of such
transaction.
In addition, the Amex equity margin rules and debt trading rules
will apply to the Notes. The Commission believes that the application
of these rules should strengthen the integrity of the Notes. The
Commission also believes that the Amex has appropriate surveillance
procedures in place to detect and deter potential manipulation for
similar index-linked products. By applying these procedures to the
Notes, the Commission believes that the potential for manipulation of
the Notes is minimal, thereby protecting investors and the public
interest. The Commission further notes that the underlying Index on
which the Select Fifty Index is based (the S&P 500 Index), is broad-
based and independent of both the Exchange and the Issuer, factors that
the Commission believes should act to minimize the possibility of
manipulation.
The Commission notes that the Select Fifty Index is equal-dollar
weighted index and that the portfolio of securities underlying the
Index will be rebalanced annually--rather than quarterly--by the Amex
so as to include the fifty stocks (excluding Merrill Lynch and its
affiliates) having the largest market capitalization in the S&P 500
Index on the second scheduled index business day prior to the
anniversary date. Although quarterly rebalancing is generally required
with respect to options and futures linked to an equal-dollar weighted
index,\26\ Amex maintains, and the Commission believes, that there are
relevant distinctions between the Notes and index options and futures.
Specifically, unlike options and futures, debt products, such as the
Notes, do not provide a leveraged ``play'' on the value of the index
and are not generally actively traded, but instead are a ``buy and
hold'' investment.\27\ Although the Commission has significant concerns
about the frequency of rebalancing in the cases of options and futures
linked to an equal-dollar weighted index (because of their leveraged
nature and active trading), the Commission believes that the Amex's
proposal to rebalance the Select Fifty Index on an annual basis is
consistent with the Act.
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\26\ See, e.g., Amex Rule 901C, Commentary .02.
\27\ Telephone conference among Jeffrey Burns, Assistant General
Counsel, Amex, Florence Harmon, Senior Special Counsel, and Geoffrey
Pemble, Special Counsel, Division of Market Regulation, Commission,
on November 19, 2002.
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Amex has requested that the Commission find good cause for
approving the proposed rule change, prior to the thirtieth 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 traded on the Amex. In
determining to grant the accelerated approval for good cause, the
Commission notes that the underlying Index on which the Select Fifty
Index is based (the S&P 500) is a broad-based index providing an
indication of the performance of the U.S. equity market. The Commission
further notes that it has previously approved the listing of options
on, and securities the performance of which have been linked to or
based on the S&P 500 Index. Additionally, the Notes will be listed
pursuant to existing hybrid security listing standards as described
above. Based on the above, the Commission finds good cause to
accelerate approval of the proposed rule change, prior to the thirtieth
day after the date of publication of notice thereof in the Federal
Register.
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\28\ that the proposed rule change, (SR-Amex-2002-76) is hereby
approved on an accelerated basis.
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\28\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\29\
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\29\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-30199 Filed 11-27-02; 8:45 am]
BILLING CODE 8010-01-P