[Federal Register: February 13, 2007 (Volume 72, Number 29)]
[Notices]
[Page 6795-6796]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr13fe07-77]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-55248; File No. SR-Amex-2006-90]
Self-Regulatory Organizations; American Stock Exchange LLC; Order
Approving Proposed Rule Change, as Modified by Amendment Nos. 1 and 2
Thereto, To List and Trade Notes Linked to the Performance of the Hang
Seng China Enterprises Index
February 6, 2007.
On September 22, 2006, the American Stock Exchange LLC (``Amex'' or
``Exchange'') submitted to the Securities and Exchange Commission
(``Commission''), pursuant to Section 19(b)(1) of the Securities
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a
proposed rule change to list and trade notes linked to the performance
of the Hang Seng China Enterprises Index (``Index''). Amex amended the
proposal on November 15, 2006 and subsequently on December 12, 2006.\3\
The proposed rule change, as amended, was published for comment in the
Federal Register on December 26, 2006.\4\ No comments were received on
the proposal. This order approves the proposed rule change, as amended.
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\1\ 15 U.S.C. 78s(b)(l).
\2\ 17 CFR 240. 19b-4.
\3\ Amendment No. 2 replaced and superseded the original rule
filing and Amendment No. 1 in their entirety.
\4\ Securities Exchange Act Release No. 54943 (December 15,
2006), 71 FR 77422 (``Notice'').
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Under Section 107A of its Company Guide (``Company Guide''), Amex
proposes to list notes issued by Citigroup Funding, Inc. (the
``Issuer'') under the name ``Stock Market Upturn Notes'' that are based
on the value of the Index (the ``Notes''). The Index is currently based
on 37 common stocks that are listed and traded on the Stock Exchange of
Hong Kong and are among the largest companies in the 200-stock Hang
Seng Composite Index (``HSCI''). The Index is compiled by HSI Services
Limited (the ``Index Calculator''), a wholly owned subsidiary of Hang
Seng Bank. The Index is capitalization-weighted and revised twice each
year to eliminate any components whose weight might exceed 15% of the
Index.
The Notes would offer investors exposure to certain stocks traded
on the Stock Exchange of Hong Kong. The Notes would be cash-settled in
U.S. dollars, must be held to maturity, and would pay out according to
a formula set forth in the notice of Amex's proposal.\5\ Unlike
traditional debt securities, the Notes would not have a minimum
principal amount that would be repaid at maturity and thus the return
could be less than the original issue price. The Notes would entitle
the holder at maturity to receive an amount based on the percentage
change of the Index, subject to a maximum payment determined at the
time of issuance.
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\5\ See Notice, supra note 4, 71 FR at 77423-24.
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The Notes would be senior non-convertible debt securities of the
Issuer. Like traditional debt securities, therefore, the Notes are
dependent upon the creditworthiness of the Issuer. This credit risk is
addressed by the listing standards in Amex Rule 107A, which provide
that a security may not be listed on the Exchange unless its issuer
satisfies certain financial requirements.
Section 107A of the Company Guide also requires a market value of
$4 million for initial listing. In addition, the Notes would have to
comply with continued listing standards in Sections 1001-1003 of the
Amex Company Guide. Under Section 1002(b) of the Company Guide, the
Exchange would 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.\6\
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\6\ In this case, the Exchange would look for guidance to
Section 1003(b)(iv)(A) (relating to bonds) which states that the
Exchange would normally consider suspending dealings in, or removing
from the list, a security if the aggregate market value or the
principal amount of the bonds publicly held is less than $400,000.
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The Notes would trade as equity securities subject to Amex rules
governing, among other things, priority, parity, and precedence of
orders; specialist responsibilities; margin; and customer suitability
requirements. In addition, the Exchange would halt trading in the Notes
if the circuit breaker parameters of Exchange Rule 117 are reached. In
exercising its discretion to halt or suspend trading in the Notes, the
Exchange may consider the factors set forth in Exchange Rule 918C(b),
and other factors that may be relevant. In particular, if the Index
value is not being disseminated as required, the Exchange may halt
trading during the day in which the interruption to the dissemination
of the Index value occurs. If the interruption to the dissemination of
the Index value persists past the trading day in which it occurred, the
Exchange would halt trading no later than the beginning of the trading
day following the interruption.
Amex has represented that it would rely on its existing
surveillance procedures governing index-linked securities, which Amex
represents are adequate to properly monitor trading in the Notes. The
Exchange has an information-sharing agreement with the Stock Exchange
of Hong Kong for the purpose of providing information in connection
with trading in or related to the components comprising the Index.
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.\7\ In particular the Commission finds that the proposed rule
change is consistent with the requirements of section 6(b)(5) of the
[[Page 6796]]
Act,\8\ which requires among other things, that the Exchange's rules be
designed to promote just and equitable principles of trade, to
facilitate transactions in securities, to remove impediments to and
perfect the mechanism of a free and open market and a national market
system, and, in general, to protect investors and the public interest.
The Commission notes that it has previously approved the listing and
trading of other index-linked securities that have a structure similar
to the Notes.\9\
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\7\ In approving the rule, the Commission notes that it has
considered the proposed rule's impact on efficiency, competition and
capital formation. See 15 U.S.C. 78c(f).
\8\ 15 U.S.C. 78f(b)(5).
\9\ See Securities Exchange Act Release No. 51563 (April 15,
2005), 70 FR 21257 (April 25, 2005) (SR-Amex-2005-01) (approving
generic listing standards for index-linked securities); Securities
Exchange Act Release No. 51227 (February 18, 2005), 70 FR 9395
(February 25, 2005) (SR-Amex-2005-010) (approving the listing and
trading of notes linked to the performance of the Nikkei 225 Index);
and Securities Exchange Act Release No. 50016 (July 14, 2004), 69 FR
43639 (July 21, 2004) (SR-Amex-2004-43) (approving the listing and
trading of notes linked to the performance of the Nikkei 225 Index).
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The Commission further believes that the proposal is consistent
with section 11A(a)(1)(C)(iii) of the Exchange Act,\10\ which sets
forth Congress' finding that it is in the public interest and
appropriate for the protection of investors and the maintenance of fair
and orderly markets to assure the availability to brokers, dealers, and
investors of information with respect to quotations for and
transactions in securities. Quotations for and last-sale information
regarding the Notes will be disseminated through the Consolidated
Quotation System. The index value is calculated and disseminated daily
and may be verified by a number of independent sources.\11\
Furthermore, financial information regarding the Issuer would be
publicly available, thus allowing investors to confirm the
creditworthiness of the Issuer. The Commission believes that Amex's
proposal is reasonably designed to promote transparency in the pricing
of the Notes, and to prevent trading when a reasonable degree of
transparency cannot be assured. The proposal also appears reasonably
designed to prevent conveyance of inside information from the Index
Calculator to market participants who may trade the Notes.
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\10\ 15 U.S.C. 78k-1(a)(1)(C)(iii).
\11\ See e-mail dated January 30, 2007 from Sudhir C.
Bhattacharyya, Assistant General Counsel, Amex, to Mitra Mehr,
Special Counsel, Division of Market Regulation, Commission.
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In support of this proposal, the Exchange has made the following
representations:
(1) Amex has received a representation from HSCI Services Limited,
the Index Calculator, that: (a) Appropriate firewalls exist to ensure
independence of operations among different units within the Hang Seng
Group; and (b) policies and procedures are in place containing, among
other things, insider trading prohibitions, designed to prevent
conflicts of interest.
(2) Amex would distribute a circular to its 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. In addition, the Issuer would deliver a prospectus in connection
with the initial sale of the Notes.
(3) Amex would rely on its existing surveillance procedures
governing index-linked securities, which are adequate to properly
monitor trading in the Notes.
(4) Amex prohibits the initial and/or continued listing of any
security that is not in compliance with Rule 10A-3 under the Act.\12\
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\12\ See 17 CFR 240.10A-3(c)(1).
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This order is conditioned on Amex's adherence to these
representations.
In addition, Amex has represented that it would file a proposed
rule change pursuant to Rule 19b-4 under the Act if: (1) HSCI
substantially changes either the index component selection methodology
or the weighting methodology; (2) a new component is added to the Index
(or pricing information is used for a new or existing component) that
constitutes more than 10% of the weight of the Index with whose
principal trading market the Exchange does not have a comprehensive
surveillance-sharing agreement; or (3) a successor or substitute index
is used in connection with the Notes. The Commission believes that each
of these circumstances represents material changes to the
characteristics of the Index described herein and on which the
Commission is basing its findings. Under these circumstances, the
Exchange could not rely on this approval to list and trade the Notes.
It is therefore ordered, pursuant to section 19(b)(2) of the Act,
that the proposed rule change (SR-Amex-2006-90), as modified by
Amendment No. 2 be, and it hereby is, approved.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\13\
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\13\ 17 CFR 200.30-3(a)(12).
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Nancy M. Morris,
Secretary.
[FR Doc. E7-2417 Filed 2-12-07; 8:45 am]
BILLING CODE 8010-01-P