[Federal Register: September 18, 2003 (Volume 68, Number 181)]
[Notices]
[Page 54758-54761]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr18se03-87]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-48486; File No. SR-Amex-2003-74]
Self-Regulatory Organizations; Notice of Filing and Order
Granting Accelerated Approval of a Proposed Rule Change by the American
Stock Exchange LLC Relating to the Listing and Trading of Contingent
Principal Protection Notes Linked to the Performance of the Standard &
Poor's 500 Stock Index
September 11, 2003.
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 August 13, 2003, the American Stock Exchange LLC (``Amex'' 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
Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons and to grant accelerated
approval of the proposed rule change.
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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 Standard & Poor's 500 Index (``S&P 500'' or ``Index'').
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 Amex 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 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 Amex proposes to list for trading under
Section 107A of the Company Guide notes, the performance of which is
linked to the Index (``Contingent Principal Protected Notes'' or
``Notes'').\4\ The Exchange represents that the Index value will be
disseminated at least once every fifteen seconds throughout the trading
day.\5\ The Index is determined, calculated and maintained solely by
S&P.\6\ The Notes will provide for an uncapped participation in the
positive performance of the Index during their term while also reducing
the risk exposure to the principal investment amount as long as the
Index does not at any time decline to a pre-established level to be
determined at the time of issuance (``Contingent Level'').\7\ This
Contingent Level will be a pre-determined percentage decline from the
level of the Index at the close of the market on the date the Notes are
priced for initial sale to the public (``Initial Level''). A decline of
the Index to the Contingent Level is referred to as a ``Contingent
Event.'' If there is a Contingent Event, at any time during the term of
the Notes, then at maturity, the holder's principal investment of
$1,000 will be reduced to the Contingent Level, even if the Index later
rises.\8\
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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\ Credit Suisse First Boston (USA), Inc. (``CSFB'') and
Standard & Poor's Corporation (``S&P'') have entered into a non-
exclusive license agreement providing for the use of the Index by
CSFB and certain affiliates and subsidiaries in connection with
certain securities including these Notes. S&P is not responsible and
will not participate in the issuance and creation of the Notes.
\5\ Telephone conversation between Jeffrey P. Burns, Associate
General Counsel, Amex and Florence Harmon, Senior Special Counsel,
Division of Market Regulation (``Division''), Commission, dated
September 11, 2003.
\6\ Amex represents that the Index is a broad-based stock index,
which provides an indication of the performance of the U.S. equity
market. The 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 Stock Market, Inc. (``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.
\7\ The issuer represents to Amex that the intended Contingent
Level will be a decline in the Initial Level of between 55 to 60%.
Telephone conversation between Jeffrey P. Burns, Associate General
Counsel, Amex and Florence Harmon, Senior Special Counsel, Division,
Commission, dated September 11, 2003.
\8\ Id.
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The Contingent Principal Protection Notes will initially conform to
the listing guidelines under Section 107A,\9\ and continued listing
guidelines under Sections 1001-1003,\10\ of the Company
[[Page 54759]]
Guide. The Notes are senior non-convertible debt securities of CSFB.
The Notes will have a term of five (5) years. CSFB will issue the Notes
in denominations of whole units (``Unit''), with each Unit representing
a single Note. The original public offering price will be $1,000 per
Unit. The Notes will entitle the owner at maturity to receive at least
100% of the principal investment amount, as long as the Index never
experiences a Contingent Event. In this case, the holder of the Notes
would receive the full principal investment amount of the Notes plus
the percentage change of the Index during the term. Accordingly, even
if the Index declines substantially but never reaches the Contingent
Level, the holder will receive the principal investment amount of the
Notes at maturity. If however, the Index experiences a Contingent Event
during the term, the holder loses the ``principal protection'' and will
be entitled to receive a payment on the Notes based on the percentage
change of the Index, positive or negative. The Notes will not have a
minimum principal investment 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. Accordingly, the Notes are
not ``principal protected'' and are fully exposed to any decline in the
level of the Index.\11\ The Notes are also not callable by the Issuer.
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\9\ Pursuant to Section 107A of the Company Guide, the initial
listing standards for the Notes will require: (1) A market value of
at least $4 million; and (2) a term of at least one year. Because
the Notes will be issued in $1,000 denominations, the minimum public
distribution requirement of one million units and the minimum holder
requirement of 400 holders do not apply. In addition, the listing
guidelines provide that the issuer has 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.
\10\ The Exchange's continued listing guidelines are set forth
in Sections 1001 through 1003 of Part 10 to the Exchange's Company
Guide. Specifically, 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.
\11\ A negative return of the Index will reduce the redemption
amount at maturity with the potential that the holder of the Note
could lose his entire investment amount.
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The payment that a holder or investor of a Note would be entitled
to receive (the ``Redemption Amount'') will depend on the relation of
the level of the Index at the close of the market on a single business
day (``Valuation Date'') shortly before maturity of the Notes (``Final
Level'') and the closing level of the Index on the date the Notes are
priced for initial sale to the public Initial Level. In addition,
whether the Notes retain ``principal protection'' or are fully exposed
to the performance of the Index is determined by whether the Index ever
experiences a Contingent Event during the term of the Notes.
If the Index never experiences a Contingent Event, the Redemption
Amount per Unit will equal:
[GRAPHIC] [TIFF OMITTED] TN18SE03.000
subject to a minimum payment amount of $1,000.
If the Index experiences a Contingent Event at any time during the
term of the Notes, the Redemption Amount per Unit will equal:
[GRAPHIC] [TIFF OMITTED] TN18SE03.001
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 Index. The Notes are designed for investors
who want to participate or gain exposure to the Index, subject to a
cap, and while partially limiting their investment risk and who are
willing to forego market interest payments on the Notes during such
term. The Commission has previously approved the listing of options on,
and securities the performance of which have been linked to or based
on, the Index.\12\
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\12\ See Securities Exchange Act Release Nos. 46883 (November
21, 2002), 67 FR 71216 (November 29, 2002) (approving the listing
and trading of non-principal protected notes linked to the DJIA);
46882 (November 21, 2002), 67 FR 71219 (November 29, 2002)
(approving the listing and trading of non-principal protected notes
linked to the Select Fifty 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); 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).
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As of August 5, 2003, the market capitalization of the securities
included in the Index ranged from a high of $279.526 billion to a low
of $356 million. The average daily trading volume for these same
securities for the last six (6) months ranged from a high of 39.915
million shares to a low of 0.040 million shares respectively.
Because the Notes are issued in $1,000 denominations, the Amex's
existing 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.\13\
Second, even though the Exchange's debt trading rules apply, the Notes
will be subject to the equity margin rules of the Exchange.\14\ 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, CSFB will
deliver a prospectus in connection with the initial sales of the Notes.
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\13\ Amex Rule 411 requires that every member, member firm or
member corporation use due diligence to lean the essential facts,
relative to every customer and to every order or account accepted.
\14\ 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
[[Page 54760]]
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 \15\ in general, and furthers the
objectives of Section 6(b)(5),\16\ 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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\15\ 15 U.S.C. 78f(b).
\16\ 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 has not solicited and 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 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-2003-74
and should be submitted by October 9, 2003.
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.\17\ The Commission believes that the proposal is similar to
several approved instruments currently listed and traded on the
Amex.\18\ Accordingly, the Commission finds that the listing and
trading of the Notes based on the Index is consistent with the Act and
will promote just and equitable principles of trade, foster cooperation
and coordination with persons engaged in regulating, clearing,
settling, processing information with respect to, and facilitating
transactions securities, and, in general, protect investors and the
public interest consistent with Section 6(b)(5) of the Act.\19\
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\17\ 15 U.S.C. 78f(b)(5).
\18\ See Securities Exchange Act Release Nos. 48152 (July 10,
2003), 68 FR 42435 (July 17, 2003) (approving the listing and
trading of the UBS Partial Protection Note linked to the Index);
47983 (June 4, 2003), 68 FR 35032 (June 11, 2003) (approving the
listing and trading of a CSFB Accelerated Return Notes linked to
Index); 47911 (May 22, 2003), 68 FR 32558 (May 30, 2003) (approving
the listing and trading of notes (Wachovia TEES) linked to the
Index); 31591 (December 18, 1992), 57 FR 60253 (December 18, 1992)
(approving the listing and trading of Portfolio Depositary Receipts
based on the Index); 30394 (February 21, 1992), 57 FR 7409 (March 2,
1992) (approving the listing and trading of a unit investment trust
linked to the Index)(SPDR); 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 Index); and 19907 (June
24, 1983), 48 FR 30814 (July 5, 1983) (approving the listing and
trading of options on the Index).
\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).
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As described more fully above, at maturity, the holder of the Note
will receive at least 100% principal investment amount as long as the
Index never experiences a Contingent Event. Specifically, at maturity,
the holder would receive a full principal investment amount of the
Notes plus the percentage change of the Index during the term. Also, if
the Index declines substantially but never reaches the Contingent
Level, the holder will receive the principal investment amount of the
Notes at maturity. However, if the Index declines at any time during
the term of the Notes, between 55 to 65% of the Initial Level (the
exact percentage amount will be specified in the prospectus), this is a
Contingent Event and the holder's principal will be reduced accordingly
at maturity. 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 Index, subject to a minimum payment
amount.
The Commission notes that the Notes are non-convertible debt
securities whose price will be derived and based upon the Initial
Level. In addition, if the level of the Index experiences a Contingent
Event during the term, the holder of the Notes will lose the principal
protection and will be entitled to receive a payment on the Notes based
on the percentage change of the Index. Thus, the Commission notes that
the Notes will not have a minimum principal investment amount that will
be repaid, and payment on the Notes prior to or at maturity may be less
than the original issue price of the Notes. 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, but the Note holder's
principal is permanently reduced if there is a Contingent Event at any
time during the term of the Note. Because the final level of return of
the Notes is derivatively priced and based upon the performance of an
index of securities because the Notes are debt instruments that do not
guarantee a return of principal, and because investors' potential
return is limited by minimum payment amount, if the value of the Index
has increased over the term of such Note, there are several issues
regarding the trading of this type of product. However, for the reasons
discussed below, the Commission believes the Exchange's proposal
adequately addresses the concerns raised by this type of product.
In approving the product, the Commission recognizes that the Index
is a capitalization-weighted index of 500 companies listed on Nasdaq,
the NYSE, and the Amex. The Exchange represents that the Index will be
determined, calculated, and maintained by S&P.
As of August 5, 2003, the market capitalization of the securities
included in the Index ranged from a high of $279.526 billion to a low
of $356 million. The average daily trading volume for these same
securities for the last six (6) months ranged from a high of 39.915
million shares to a low of 0.040 million shares respectively.
Given the large trading volume and capitalization of the
compositions of the stocks underlying the Index, the Commission
believes that the listing and trading of the Notes that are linked to
the Index, should not unduly impact the
[[Page 54761]]
market for the underlying securities comprising the Index or raise
manipulative concerns. As discussed more fully above, the underlying
stocks comprising the Index are well-capitalized, highly liquid stocks.
Moreover, the issuers of the underlying securities comprising the Index
are subject to reporting requirements under the Act, and all of the
component stocks are either listed or traded on, or traded through the
facilities of, U.S. securities markets. 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, CSFB. 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.\20\ In any event, financial information regarding
CSFB in addition to the information on the 500 common stocks comprising
the Index will be publicly available.\21\
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\20\ See Company Guide Section 107A.
\21\ The Commission notes that the 500 component stocks that
comprise the 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 CSFB, 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,\22\ the Commission believes that this concern is
minimal given the size of the Notes issuance in relation to the net
worth of CSFB.
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\22\ See 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 Index will be
disseminated at least once every fifteen seconds throughout the trading
day. The Commission believes that providing access to the value of the
Index at least once every fifteen seconds throughout the 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 thirtieth day after the date of publication of the
notice of filing thereof in the Federal Register. The Exchange has
requested accelerated approval because this product is similar to
several other instruments currently listed and traded on the Amex.\23\
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. Therefore, the
Commission finds good cause, consistent with Section 19(b)(2) of the
Act,\24\ to approve the proposal on an accelerated basis.
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\23\ See supra note 17.
\24\ 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,\25\ that the proposed rule change (SR-Amex-2003-74), is approved
on an accelerated basis.
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\25\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\26\
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\26\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-23798 Filed 9-17-03; 8:45 am]
BILLING CODE 8010-01-P