[Federal Register: June 10, 2002 (Volume 67, Number 111)]
[Notices]
[Page 39753-39757]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr10jn02-123]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-46021; File No. SR-Amex-2002-40]
Self-Regulatory Organizations; Notice of Filing and Order
Granting Accelerated Approval of Proposed Rule Change and Amendments
No. 1 and No. 2 thereto by the American Stock Exchange LLC Relating to
the Listing and Trading of Notes Based on the Select European 50 Index
June 3, 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 April 24, 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.
On May 6, 2002, the Amex submitted Amendment No. 1 to the proposed rule
change.\3\ On May 31, 2002, the Amex submitted Amendment No. 2 to the
proposed rule change.\4\ 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.
\3\ See letter from Jeffrey P. Burns, Assistant General Counsel,
Amex, to Nancy Sanow, Assistant Director, Division of Market
Regulation (``Division''), Commission, dated May 3, 2002. Amendment
No. 1 replaced the original proposal in its entirety and clarified
certain descriptive language used in the original proposal.
\4\ See letter from Jeffrey P. Burns, Assistant General Counsel,
Amex, to Nancy Sanow, Assistant Director, Division, Commission,
dated May 30, 2002. In Amendment No. 2, the Amex further modified
the proposed rule change by adding language clarifying the
calculation of the Dow Jones EURO STOXX 50 Index.
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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 the Dow Jones EURO
STOXX 50 Return Index in U.S. dollars (the ``U.S. Dollar DJ EURO STOXX
50 Index''), as reduced by an adjustment factor as described below (the
``Select European 50 Index'' 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 Exchange included statements
concerning the purpose of and basis for
[[Page 39754]]
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.\5\ The Amex proposes
to list for trading under Section 107A of the Company Guide notes based
on the Select European 50 Index (the ``Notes''). The Index will be
calculated and published by the Amex.
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\5\ See Securities Exchange Act Release No. 27753 (March 1,
1990), 55 FR 8626 (March 8, 1990) (order approving File No. Amex-89-
29) (``Hybrid Approval Order'').
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The Notes will conform to the initial 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, no 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 Amount''). The ``Starting
Index Value'' is the value of the 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 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.
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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 pretax 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 may not be called by
the issuer. The holder of a Note does not have any right to receive any
of the underlying securities comprising the U.S. Dollar DJ EURO STOXX
50 Return Index or any other ownership right or interest in the Select
European 50 Index. The Notes are designed for investors who want to
participate or gain exposure to the stock market performance of highly-
capitalized European companies and who are willing to forgo market
interest payments on the Notes during such term. The Select European 50
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 value of the Select European 50 Index at any time will equal:
(1) The value of the U.S. Dollar DJ EURO STOXX 50 Return Index, less
(2) a pro rata portion of the annual index adjustment factor,\8\
divided by (3) the index divisor used to establish a benchmark Index
value of 100.00 at the close of trading on the date the Notes are
priced for initial sale to the public. The Select European 50 Index
will reflect payment of dividends, if any, on the underlying securities
comprising the Index. The U.S. Dollar DJ EURO STOXX 50 Return Index \9\
measures the total return of the Dow Jones EURO STOXX 50,\10\ in U.S.
dollars. Both indices are calculated by STOXX Ltd. (``STOXX''), a joint
venture between Deutsche B[ouml]rse AG, Dow Jones & Company (``Dow
Jones''), Euronext Paris SA and the SWX Swiss Exchange. The U.S. Dollar
DJ EURO STOXX 50 Return Index differs from the Dow Jones EURO STOXX 50
only in that (1) it reflects the reinvestment of dividends paid on the
stocks underlying the index (subject to the withholding taxation laws
of the various European countries applicable to those dividends) and
(2) it is converted to U.S. dollar from Euros based on the exchange
rate at 8:15 p.m. Central European Time.
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\8\ Each day, the Select European 50 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 European 50 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.
\9\ The prices of the securities underlying the U.S. Dollar DJ
EURO STOXX 50 Return Index are quoted in Euros. Therefore,
investments in notes linked to the value of non-U.S. securities may
involve greater risks, subject to fluctuations of foreign currency
exchange rates, future foreign political and economic developments,
and the possible imposition of exchange controls or other foreign
governmental laws or restrictions applicable to such investments.
\10\ The Dow Jones EURO STOXX 50 Index is a capitalization-
weighted index of 50 European blue-chip stocks from countries
participating in the EMU that is quoted and priced in Euros. The
Index developed with a base value of 1000 as of December 31, 1991.
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The Commission has previously approved the listing and trading of
securities linked to the value of the Dow Jones EURO STOXX 50
Index.\11\ BRIDGES linked to the performance of the EURO STOXX 50 Index
were issued by Morgan Stanley & Co., Inc., and are currently listed and
traded on the New York Stock Exchange, Inc. (``NYSE''). The Dow Jones
EURO STOXX 50 Index was constructed by STOXX to have an initial value
of 1000 on December 31, 1991 and is designed to measure the stock
market performance of highly-capitalized companies of countries that
were expected to participate in the European Economic and Monetary
Union (the ``EMU''). The Dow Jones EURO STOXX 50 Index currently
represents the performance of 50 companies representing the market
sector leaders in Austria, Belgium, Finland, France, Germany, Greece,
Ireland, Italy, Luxembourg, Netherlands, Portugal and Spain. The index
is calculated and disseminated on a real time basis every 15 seconds
and is published daily in The Wall Street Journal.
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\11\ See Securities Exchange Act Release No. 40303 (August 4,
1998), 63 FR 42892 (August 11, 1998) (approving BRoad InDex Guarded
Equity-linked Securities (``BRIDGES'') linked to the value of the
Dow Jones EURO STOXX 50 Index).
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The Dow Jones EURO STOXX 50 Index consists of the common stocks of
companies that are leaders in their
[[Page 39755]]
industry sectors and are among the most liquid and highly-capitalized
companies in the EMU. Each component company is a major factor in its
industry and its securities are widely held by individuals and
institutional investors. The Exchange represents that each of the
components of the Dow Jones EURO STOXX 50 Index is a entity registered
pursuant to section 12 of the Act.\12\
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\12\ Telephone conversation between Jeffrey P. Burns, Assistant
General Counsel, Amex, Florence Harmon, Senior Special Counsel, and
Geoffrey Pemble, Attorney, Division, Commission (May 30, 2002).
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The Exchange believes that adequate surveillance exists for the
component stocks of the Dow Jones EURO STOXX 50 Index as a result of
``Surveillance Sharing Arrangements'' with appropriate entities in the
component stocks' home countries. Surveillance Information Sharing
Arrangements include surveillance information-sharing agreements that
the Exchange has entered into with foreign markets, memoranda of
understanding that the SEC had entered into with foreign securities
regulatory agencies and similar agreements and arrangements between the
United States or the SEC and their counterparts in the home countries
for the companies whose securities are components of the Dow Jones EURO
STOXX 50 Index. At present, in excess of 90% of the capitalization of
the Dow Jones EURO STOXX 50 is subject to Surveillance Information
Sharing Arrangements.
The Exchange will not list a new issue of Notes linked to the
Select European 50 Index if either: (i) The home countries of the
component securities representing more than 50% of the capitalization
of the Index are not subject to Surveillance Information Sharing
Arrangements; (ii) a home country of the component securities
representing more than 20% of the capitalization of the Index is not
subject to Surveillance Information Sharing Arrangements; or (iii) two
(2) home countries of component securities representing more than 33\1/
3\ percent of the capitalization of the Index are not subject to
Surveillance Information Sharing Arrangements.
Companies are selected for inclusion in the calculation of the Dow
Jones EURO STOXX 50 Index by STOXX. The companies that are included in
the Dow Jones EURO STOXX 50 Index are representative of the broad
market in the EMU and of a wide array of European industries including
the following: automobile; food and beverage; banking; industrial;
chemical; insurance conglomerates; media; consumer goods; cyclical;
pharmaceutical; non-cyclical; retail; construction; technology; energy;
telecommunications; financial services and utility. The Supervisory
Board of STOXX is responsible for adding and deleting companies from
the Dow Jones EURO STOXX 50.
STOXX reviews the Dow Jones EURO STOXX 50 Index annually, and
accordingly, will add or delete stocks pursuant to its review
procedures.
The number of shares outstanding and the share price for each class
of stock are used to determine each component company's market
capitalization. No company is permitted to comprise more than 10
percent of the value of the Index. If any company exceeds 10 percent of
the value of the index, STOXX will cap that company's representation in
the index at 10 percent and adjust the relative representation of the
remaining component stocks so that they represent 90 percent. In order
to avoid distortions, changes in the index for dividends, stock splits,
rights offerings, spin-offs, repurchases and the like are made on a
quarterly basis, unless the number of outstanding shares of a component
company changes by more than 10 percent, in which case the adjustment
is made immediately.
As of May 1, 2002, the market capitalization of the 50 companies
that currently represent the Dow Jones EURO STOXX 50 Index ranged from
a high of $115.32 billion (Royal Dutch Petroleum) to a low of $13.40
billion (Air Liquide). In addition, the market prices of the common
stock of companies comprising the Index ranged from a high of $257.77
(Muenchener Rueckver AG) to a low of $4.57 (Unicredito Italiano
SPA).\13\ The ten companies with the highest weighting in the Dow Jones
EURO STOXX 50 Index represented 40.66 percent of the Index while the
ten companies with the smallest weighting represented 7.57 percent of
the Index.
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\13\ These values are as of April 17, 2002.
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As of May 1, 2002, the seven (7) countries that are represented in
the Dow Jones Euro Stoxx 50 Index account for the following
percentages: (1) Belgium, 1.78%; (2) Finland, 5.06%; (3) France,
31.74%; (4) Germany, 22.21%; (5) Italy, 9.22%; (6) Netherlands, 19.73%;
(7) Spain, 10.25%.
The US Dollar DJ EURO STOXX 50 Return Index is updated once daily
after 8:15 p.m. Central European time. The prior days' US Dollar DJ
EURO STOXX 50 Return Index value will be used in the calculation of the
Select European 50 Index until the new value is published. The Exchange
will calculate the Select European 50 Index and, similar to other stock
index values published by the Exchange, the value of the Index will be
calculated continuously and disseminated 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 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, in conjunction with the Amex's Hybrid
Approval Order, 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 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 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
[[Page 39756]]
promote just and equitable principles of trade, to foster cooperation
and coordination with persons engaged in 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-2002-40 and
should be submitted by July 1, 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 European 50 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 Select European 50 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).
\20\ Id.
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The Notes are non-convertible and will conform to the Amex initial
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 European 50 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 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. 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 European 50 Index is based (the Dow Jones EURO STOXX
50 Return Index), is calculated by STOXX, a joint venture between
Deutsche B[ouml]rse AG, Dow Jones, Euronext Paris SA and the SWX Swiss
Exchange, an entity independent of both the Exchange and the Issuer,
and thus, a factor which the Commission believes should act to minimize
the possibility of manipulation. The Dow Jones EURO STOXX 50 Index is
calculated and disseminated every 15 seconds to market information
vendors, and is converted to U.S. dollar from Euros based on the
exchange rate daily at 8:15 p.m. Central European Time.
The Commission also notes that the Amex will issue a circular on
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.\21\
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\21\ 15 U.S.C. 78f(b)(5).
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[[Page 39757]]
Amex has requested that the Commission find good cause for
approving the proposed rule change, as amended, 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
European 50 Index is based (the Dow Jones EURO STOXX 50 Return Index)
is a portfolio of highly capitalized and actively traded securities
similar to component securities in hybrid securities products that have
been approved by the Commission for U.S. exchange trading.
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, as amended.
It is therefore ordered, pursuant to section 19(b)(2) of the
Act,\22\ that the proposed rule change, as amended (SR-Amex-2002-40) is
hereby approved on an accelerated basis.
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\22\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\23\
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\23\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-14432 Filed 6-7-02; 8:45 am]
BILLING CODE 8010-01-P