[Federal Register: November 3, 2003 (Volume 68, Number 212)]
[Notices]
[Page 62334-62337]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr03no03-97]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-48708; File No. SR-Amex-2003-91]
Self-Regulatory Organizations; American Stock Exchange LLC;
Notice of Filing and Order Granting Accelerated Approval of Proposed
Rule Change Relating to the Listing and Trading of Notes Based on the
Morgan Stanley Technology Index
October 28, 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 October 22, 2003, the American Stock Exchange LLC (``Amex'') filed
with the Securities and Exchange Commission (``Commission'') the
proposed rule change as described in Items I and II below, which the
Amex has prepared. 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 Amex proposes to list and trade, under Section 107A of the Amex
Company Guide, senior non-convertible debt securities (``Notes'') of
Morgan Stanley, the return on which is based on the performance of the
Morgan Stanley Technology 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 the
Statutory Basis for, the Proposed Rule Change
1. Purpose
Under Section 107A of the Amex Company Guide, the Amex may approve
for listing and trading securities that 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 Notes
based on the Morgan Stanley Technology Index.\4\ The Technology Index
will be determined, calculated and maintained solely by the Amex.\5\
The Notes will conform to the listing guidelines under Section 107A of
the Amex Company Guide \6\ and the continued listing guidelines under
Sections 1001-1003 of the Amex Company Guide.\7\
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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\ The Morgan Stanley Technology Index is an equal-dollar
weighted index consisting of thirty-five (35) securities designed to
measure the performance of a cross-section of highly capitalized
U.S. companies that are active in nine technology subsectors: (i)
computer services; (ii) design software; (iii) server software; (iv)
PC software and new media; (v) networking and telecommunications
equipment; (vi) server hardware; (vii) server hardware; (viii) PC
hardware and peripherals; and (ix) specialized systems and semi-
conductors.
\5\ As further described in the prospectus, the Amex is solely
responsible for calculating and maintaining the Technology Index in
consultation with Morgan Stanley & Co., Inc. These duties, among
others, include changes to the Index due to annual reconstitutions
and adjustments. The Amex has re-submitted a letter dated August 29,
1995 from Morgan Stanley to the Commission that describes the role
of the Amex with respect to the calculation and maintenance of the
Technology Index, and has further represented that the same
methodology will apply with respect to the Notes that are the
subject of this proposed rule change. See Memorandum from Jeffrey P.
Burns, Associate General Counsel, Amex, to Patrick M. Joyce, Special
Counsel, Commission, dated October 21, 2003.
\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 Amex
Company Guide, the Amex 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 Amex's continued listing guidelines are set forth in
Sections 1001 through 1003 of Part 10 to the Amex Company Guide.
Section 1002(b) of the Amex Company Guide states that the Amex will
consider removing from listing any security where, in the opinion of
the Amex, it appears that the extent of public distribution or
aggregate market value has become so reduced to make further
dealings on the Amex inadvisable. With respect to continued listing
guidelines for distribution of the Notes, the Amex will rely, in
part, on the guidelines for bonds in Section 1003(b)(iv). Section
1003(b)(iv)(A) provides that the Amex 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 senior non-convertible debt securities of Morgan
Stanley that will have a term of not less than one year nor more than
ten years. The ``Initial Index Value'' is the value of the Technology
Index on the date the Notes are priced for the initial sale to the
public. At maturity the holder of Notes will be entitled to receive an
amount based upon an ``Average Index Value,'' which will be determined
by calculating the arithmetic average of the ``Closing Index Value'' on
each of three (3) trading days on which no market disruption event
occurs, beginning on or after December 23, 2004. 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. The Notes are not callable by the
issuer.
The ``Redemption Amount,'' which is the payment that a holder or
investor will receive at maturity of the Note, will be based on whether
the Average Index Value is greater or less than the Initial Index
Value. If the Average Index Value is greater than the Initial Index
Value, a holder of the Notes will receive a Redemption Amount in cash
equal to $10 plus the ``Leveraged Upside Payment.'' The Leveraged
Upside Payment is equal to $10 multiplied by
[[Page 62335]]
200% of the percentage increase in the value of the Technology Index
Notes, subject to a maximum payment amount (or ``Capped Amount'')
determined at the time of issuance. The calculation of this Redemption
Amount is set forth below:
[GRAPHIC] [TIFF OMITTED] TN03NO03.000
If the Average Index Value is less than or equal to the Initial
Index Value, a holder of the Notes will receive a Redemption Amount in
cash equal to the principal amount multiplied by an ``Index Performance
Factor.'' This Index Performance Factor is the relationship between the
Average Index Value and the Initial Index Value, and will be a number
equal or less than 1.0. The calculation of this Redemption Amount is
set forth below:
[GRAPHIC] [TIFF OMITTED] TN03NO03.001
The Redemption Amount in this case would accordingly be less than
or equal to $10 for each $10 principal amount of the Notes.
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
Technology Index. The Notes are designed for investors who want to
participate in or gain exposure to the companies involved in various
technology subsectors 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 the Technology Index.\8\
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\8\ See Securities Exchange Act Release Nos. 36283 (September
26, 1995), 60 FR 51825 (October 3, 1995) (approving the listing of
options on the Morgan Stanley High Technology 35 Index); and 41472
(June 2, 1999), 64 FR 31331 (June 10, 1999) (approving a reduction
in the Morgan Stanley High Technology Index Value).
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As of October 14, 2003, the market capitalization of the securities
that would represent the Technology Index would range from a high of
$314.4 billion to a low of $3.14 billion. The average monthly trading
volume of the securities comprising the Index for the last six months,
as of the same date, ranged from a high of 742.5 million shares to a
low of 36.02 million shares. The aggregate market capitalization of all
securities in the Index was approximately $1.714 trillion. The Amex
would continue to calculate and disseminate the value of the Notes
every fifteen seconds over the Consolidated Tape Association's Network
B.
Because the Notes are linked to an equity index, the Amex's
existing equity floor trading rules would apply to the trading of the
Notes. First, pursuant to Amex Rule 411, the Amex would 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 would be subject to the equity margin rules of the Amex.\10\
Third, the Amex would, 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 Amex would
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, Morgan Stanley will deliver a prospectus in
connection with the initial purchase 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 Amex Company
Guide.
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The Amex 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. Because the Index is
maintained by a broker-dealer or an affiliate of a broker-dealer, it is
imperative that there be a functional separation, such as a firewall,
between the trading desk of the broker-dealer and the research persons
responsible for maintaining the Index. Morgan Stanley has represented
to the Commission that such a firewall exists. Moreover, because Morgan
Stanley presents Amex with a list of potential component replacements,
it is imperative that both Morgan Stanley and Amex have policies that
prohibit the distribution of material, non-public information by its
employees. Morgan Stanley and Amex have represented that they have
policies that prohibit the distribution of material, non-public
information by their employees.
2. Statutory Basis
The Amex believes that the proposed rule change is consistent with
Section 6(b) of the Act \11\ and furthers the objectives of Section
6(b)(5) of the Act \12\ 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 Amex 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 Amex 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
[[Page 62336]]
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 Amex. All
submissions should refer to the File No. SR-Amex-2003-91 and should be
submitted by November 24, 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.\13\ The Commission finds that this proposal is similar to
several approved notes whose value is linked to an equity index
currently listed and traded on the Amex.\14\ Accordingly, the
Commission finds that the listing and trading of the Notes based on the
Technology Index are 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 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. 47911 (May 22,
2003), 68 FR 32558 (May 30, 2003) (approving the listing and trading
of notes (Wachovia TEES) linked to the S&P 500); 47983 (June 4,
2003), 68 FR 35032 (June 11, 2003) (approving the listing and
trading of a CSFB Accelerated Return Notes linked to S&P 500); 48152
(July 10, 2003), 68 FR 42435 (July 17, 2003) (approving the listing
and trading of a UBS Partial Protection Note linked to the S&P 500);
48151 (July 10, 2003), 68 FR 42438 (July 17, 2003) (approving the
listing and trading of Merrill Lynch Accelerated Return Notes linked
to the performance of the Amex Biotechnology Index); and 48486
(September 11, 2003), 68 FR 54758 (September 18, 2003) (approving
the listing and trading of CSFB contingent principal protection
notes linked to the S&P 500).
\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 Average Index Value of the
Technology Index. Specifically, at maturity, the holder of a Note will
be entitled to receive a payment based on whether the Average Index
Value is greater or less than the Initial Index Value. If the Average
Index Value is greater than the Initial Index Value, the holder of the
Notes will receive an amount in cash equal to $10 plus the Leveraged
Upside Payment. The Leveraged Upside Payment is equal to $10 multiplied
by 200% of the percentage increase in the value of the Technology
Index, subject to the Capped Amount. If the Average Index Value is less
than or equal to the Initial Index Value, a holder of the Notes will
receive a Redemption Amount in cash equal to the principal amount
multiplied by the Index Performance Factor. The Index Performance
Factor is the relationship between the Average Index Value and the
Initial Index Value and will be a number equal or less than 1.0, and
accordingly will be less than or equal to $10 for each $10 principal
amount of the Notes.
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 Technology Index, subject to a cap.
The Commission notes that the Notes are not leveraged on the
downside, non-principal protected instruments. The Notes are debt
instruments whose price will be derived and based upon the value of the
Technology Index. The Notes do not have a minimum principal amount that
will be repaid at maturity, and the payments of the Notes prior to or
at maturity may be less than the original issue price of the Notes.
Thus, if the value of the Technology Index has declined at maturity,
the holder of the Note will receive 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 35 common stocks underlying the Technology 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. However, for the reasons discussed below, the Commission
believes that the Amex's proposal adequately addresses the concerns
raised by this type of product.
The Commission notes that the Amex'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 Amex, in the Commission's view, has
addressed adequately the potential problems that could arise from the
hybrid nature of the Notes. The Amex 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.
Moreover, the Commission notes that the Amex will distribute a
circular to its membership calling attention to the specific risks
associated with the Notes. The Commission also notes that Morgan
Stanley 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. The Commission believes that the Exchange has
appropriate surveillance procedures in place to detect and deter
potential manipulation for similar index-linked products.
Because Morgan Stanley presents Amex with a list of potential
component replacements, it is imperative that Morgan Stanley and Amex
have policies that prohibit the distribution of material, non-public
information by their employees. Morgan Stanley and Amex have
represented that they have policies that prohibit the distribution of
material, non-public information by their employees. Moreover, because
the Index is maintained by a broker-dealer or an affiliate of a broker-
dealer, it is imperative that there be a functional separation, such as
a firewall, between the trading desk of the broker-dealer and the
research persons responsible for maintaining the Index. Morgan Stanley
has represented to the Commission that such a firewall exists.
In approving the product, the Commission recognizes that the
Technology Index is an equal-dollar index comprised of 35 component
stocks designed to measure the performance of a cross-section of highly
capitalized U.S. companies that are active in nine technology
subsectors: (i) Computer services; (ii) design software; (iii) server
software; (iv) PC software and new media; (v) networking and
telecommunications equipment; (vi) server hardware; (vii) server
hardware; (viii) PC hardware and peripherals; and (ix) specialized
systems and semi-conductors. As of October 14, 2003, the market
capitalization of the securities that would represent the Technology
Index would range from a high of $314.4 billion to a low of $3.14
billion. The average monthly trading volume of the securities
comprising the Index for the
[[Page 62337]]
last six months, as of the same date, ranged from a high of 742.5
million shares to a low of 36.02 million shares. The aggregate market
capitalization of all securities in the Index was approximately $1.714
trillion. Given the compositions of the stocks underlying the
Technology Index, the Commission believes that the listing and trading
of the Notes that are based on the performance of the Technology Index
should not unduly impact the market for the underlying securities
comprising the Technology Index or raise manipulative concerns. As
discussed more fully above, the underlying stocks comprising the
Technology Index are highly capitalized U.S. securities.
Furthermore, the Commission notes that the Notes depend upon the
individual credit of the issuer, Morgan Stanley. To some extent this
credit risk is minimized by the listing standards in Section 107A of
the Amex Company Guide, which provide that only issuers satisfying
substantial asset and equity requirements may issue securities such as
the Notes. In addition, the Amex'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
Morgan Stanley, in addition to the information on the 35 component
stocks comprising the Technology Index, will be publicly available.\17\
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\16\ See Amex Company Guide Section 107A.
\17\ The Commission notes that the 35 component stocks that make
up the Technology 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 Morgan Stanley, 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 Morgan Stanley.
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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 Technology
Index will be disseminated at least once every fifteen seconds
throughout the trading day over the Consolidated Tape Association's
Network B. The Commission believes that providing access to the value
of the Technology 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
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 note 14, supra.
\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-2003-91), is hereby
approved on an accelerated basis.
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\21\ 15 U.S.C. 78s(b)(2).
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).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-27593 Filed 10-31-03; 8:45 am]
BILLING CODE 8010-01-P