[Federal Register: March 30, 2005 (Volume 70, Number 60)]
[Notices]
[Page 16322-16325]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr30mr05-136]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-51425; File No. SR-NASD-2004-139]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change and Amendment No. 1 Thereto by the National Association of
Securities Dealers, Inc. Relating to the Listing and Trading of
Leveraged Index Return Notes Linked to the Dow Jones Industrial Average
March 23, 2005.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on September 15, 2004, the National Association of Securities Dealers,
Inc.
[[Page 16323]]
(``NASD''), through its subsidiary, The Nasdaq Stock Market, Inc.
(``Nasdaq''), filed with the Securities and Exchange Commission
(``Commission'') the proposed rule change as described in Items I, II,
and III below, which Items have been prepared by Nasdaq. On March 21,
2005, the Exchange amended its proposal.\3\ The Commission is
publishing this notice to solicit comments on the proposed rule change,
as amended, from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Amendment No. 1, dated March 21, 2005 (``Amendment No.
1''). In Amendment No. 1, the Exchange provided additional details
regarding the proposed index linked notes and underlying index.
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I. Self-Regulatory Organization's Statement of the Terms of the
Substance of the Proposed Rule Change
Nasdaq proposes to list and trade Leveraged Index Return Notes
Linked to the Dow Jones Industrial Average (``Notes'') issued by
Merrill Lynch & Co., Inc. (``Merrill Lynch'').
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, Nasdaq 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 IV below. Nasdaq 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
Nasdaq proposes to list and trade the Notes. The Notes provide for
a return based upon the Dow Jones Industrial Average (``Index'').
The Index
The Index is a price-weighted index published by Dow Jones &
Company, Inc. A component stock's weight in the Index is based on its
price per share, rather than the total market capitalization of the
issuer of that component stock. The Index is designed to provide an
indication of the composite price performance of 30 common stocks of
corporations representing a broad cross-section of U.S. industry. The
corporations represented in the Index tend to be market leaders in
their respective industries, and their stocks are typically widely held
by individuals and institutional investors. The corporations currently
represented in the Index are incorporated in the U.S. and its
territories, and their stocks are traded on the New York Stock Exchange
and The Nasdaq National Market. The component stocks in the Index are
selected (and any changes are made) by the editors of the Wall Street
Journal (``WSJ''). Changes to the stocks included in the Index tend to
be made infrequently. Historically, most substitutions have been the
result of mergers, but from time to time, changes may be made to
achieve what the editors of the WSJ deem to be a more accurate
representation of the broad market of the U.S. industry. The value of
the Index is the sum of the primary market prices of each of the 30
common stocks included in the Index, divided by a divisor that is
designed to provide a meaningful continuity in the value of the Index.
In order to prevent certain distortions related to extrinsic factors,
the divisor may be adjusted appropriately. The current divisor of the
Index is published daily in the WSJ and other publications. Other
statistics based on the Index may be found in a variety of publicly
available sources.
As of August 27, 2004, the market capitalization of the securities
included in the Index ranged from a high of approximately $346 billion
to a low of approximately $24 billion. The average daily trading volume
for Index components (calculated over the previous thirty trading days)
ranged from a high of approximately 24 million shares to a low of
approximately 1.7 million shares.
The value of the Index is widely disseminated at least every 15
seconds by providers that are independent from Merrill Lynch. In the
event the calculation or dissemination of the Index is discontinued,
Nasdaq will delist the Notes.
Other Information
Under NASD Rule 4420(f), Nasdaq may approve for listing and trading
innovative securities that cannot be readily categorized under
traditional listing guidelines.\4\ Nasdaq proposes to list the Notes
for trading under NASD Rule 4420(f).
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\4\ See Exchange Act Release No. 32988 (September 29, 1993); 58
FR 52124 (October 6, 1993).
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The Notes, which will be registered under Section 12 of the Act,
will initially be subject to Nasdaq's listing criteria for other
securities under Rule 4420(f). Specifically, under NASD Rule
4420(f)(1):
The issuer shall have assets in excess of $100 million and
stockholders' equity of at least $10 million.\5\ In the case of an
issuer which is unable to satisfy the income criteria set forth in NASD
Rule 4420(a)(1), Nasdaq generally will require the issuer to have the
following: (i) Assets in excess of $200 million and stockholders'
equity of at least $10 million; or (ii) assets in excess of $100
million and stockholders' equity of at least $20 million;
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\5\ Merrill Lynch satisfies this listing criterion.
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There must be a minimum of 400 holders of the security, provided,
however, that if the instrument is traded in $1,000 denominations,
there must be a minimum of 100 holders;
For equity securities designated pursuant to this paragraph, there
must be a minimum public distribution of 1,000,000 trading units;
The aggregate market value/principal amount of the security will be
at least $4 million.
In addition, Merrill Lynch satisfies the listed marketplace
requirement set forth in NASD Rule 4420(f)(2).\6\ Lastly, pursuant to
Rule 4420(f)(3), prior to the commencement of trading of the Notes,
Nasdaq will distribute a circular to members providing guidance
regarding compliance responsibilities and requirements, including
suitability recommendations, and highlighting the special risks and
characteristics of the Notes. In particular, in accordance with NASD
Rule 2310(a), Nasdaq will advise members recommending a transaction in
the Notes to have reasonable grounds for believing that the
recommendation is suitable for such customer upon the basis of the
facts, if any, disclosed by such customer as to his other security
holdings and as to his financial situation and needs. In addition,
pursuant to Rule 2310(b), prior to the execution of a transaction in
the Notes that has been recommended to a non-institutional customer, a
member shall make reasonable efforts to obtain information concerning:
(1) The customer's financial status; (2) the customer's tax status; (3)
the customer's investment objectives; and (4) such other information
used or considered to be reasonable by such member in making
recommendations to the customer.
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\6\ NASD Rule 4420(f)(2) requires issuers of securities
designated pursuant to this paragraph to be listed on The Nasdaq
National Market or the New York Stock Exchange (``NYSE'') or be an
affiliate of a company listed on The Nasdaq National Market or the
NYSE; provided, however, that the provisions of Rule 4450 will be
applied to sovereign issuers of ``other'' securities on a case-by-
case basis.
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The Notes will be subject to Nasdaq's continued listing criterion
for other
[[Page 16324]]
securities pursuant to Rule 4450(c). Under this criterion, the
aggregate market value or principal amount of publicly held units must
be at least $1 million. The Notes also must have at least two
registered and active market makers as required by Rule 4310(c)(1).
Nasdaq will also consider prohibiting the continued listing of the
Notes if Merrill Lynch is not able to meet its obligations on the
Notes.
The Notes are a series of senior non-convertible debt securities
that will be issued by Merrill Lynch and will not be secured by
collateral. The Notes will be issued in denominations of whole units
(``Unit''), with each Unit representing a single Note. The original
public offering price will be $10 per Unit. The Notes will not pay
interest and are not subject to redemption by Merrill Lynch or at the
option of any beneficial owner before maturity. The Notes' term to
maturity is 5 years.
At maturity, if the value of the Index has increased, a beneficial
owner of a Note will be entitled to receive the original offering price
($10), plus an amount calculated by multiplying the original offering
price ($10) by an amount expected to be between 105 percent and 115
percent (``Participation Rate'') of the percentage increase in the
Index. If, at maturity, the value of the Index has not changed or has
decreased by up to 20 percent, then a beneficial owner of a Note will
be entitled to receive the full original offering price.
However, unlike ordinary debt securities, the Notes do not
guarantee any return of principal at maturity. Therefore, if the value
of the Index has declined at maturity by more than 20 percent, a
beneficial owner will receive less, and possibly significantly less,
than the original offering price: for each 1 percent decline in the
Index below 20 percent, the redemption amount of the Note will be
reduced by 1.25 percent of the original offering price.
The change in the value of the Index will normally (subject to
certain modifications explained in the prospectus supplement) be
determined by comparing (a) the average of the values of the Index at
the close of the market on five business days shortly before the
maturity of the Notes to (b) the closing value of the Index on the date
the Notes are priced for initial sale to the public. The value of the
Participation Rate will be determined by Merrill Lynch on the date the
Notes are priced for initial sale based on the market conditions at
that time. Both the value of the Index on the date the Notes are priced
and the Participation Rate will be disclosed in Merrill Lynch's final
prospectus supplement, which Merrill Lynch will deliver in connection
with the initial sale 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, dividend payments, or
any other ownership right or interest in the portfolio of securities
comprising the Index. The Notes are designed for investors who want to
participate or gain exposure to the Index, and who are willing to
forego market interest payments on the Notes during the term of the
Notes.
Since the Notes will be deemed equity securities for the purpose of
Rule 4420(f), the NASD and Nasdaq's existing equity trading rules will
apply to the Notes. First, as stated, pursuant to NASD Rule 2310 and
IM-2310-2, members must have reasonable grounds for believing that a
recommendation to a customer regarding the purchase, sale or exchange
of any security is suitable for such customer upon the basis of the
facts, if any, disclosed by such customer as to his other security
holdings and as to his financial situation and needs.\7\ Members are
also reminded that the Notes are considered non-conventional
investments for purposes of NASD's Notice to Members 03-71.\8\ In
addition, as previously described, Nasdaq will distribute a circular to
members providing guidance regarding compliance responsibilities and
requirements, including suitability recommendations, and highlighting
the special risks and characteristics of the Notes. Furthermore, the
Notes will be subject to the equity margin rules. Lastly, the regular
equity trading hours of 9:30 a.m. to 4 p.m. will apply to transactions
in the Notes.
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\7\ NASD Rule 2310(b) requires members to make reasonable
efforts to obtain information concerning a customer's financial
status, a customer's tax status, the customer's investment
objectives, and such other information used or considered to be
reasonable by such member or registered representative in making
recommendations to the customer.
\8\ See NASD, NTM 03-71 (November 2003), note 1.
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Pursuant to Securities Exchange Act Rule 10A-3 and Section 3 of the
Sarbanes-Oxley Act of 2002, Public Law 107-204, 116 Stat. 745 (2002),
Nasdaq will prohibit the initial or continued listing of any security
of an issuer that is not in compliance with the requirements set forth
therein.
Nasdaq represents that the NASD's surveillance procedures are
adequate to properly monitor the trading of the Notes. Specifically,
the NASD will rely on its current surveillance procedures governing
equity securities, and will include additional monitoring on key
pricing dates.
In connection with initial distributions of its Nasdaq-listed
notes, Merrill Lynch is required to deliver the appropriate prospectus.
2. Statutory Basis
Nasdaq believes that the proposed rule change is consistent with
the provisions of Section 15A of the Act,\9\ in general, and with
Section 15A(b)(6) of the Act,\10\ in particular, in that the proposal
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. Specifically,
the proposed rule change will provide investors with another investment
vehicle based on the Index.
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\9\ 15 U.S.C. 78o-3.
\10\ 15 U.S.C. 78o-3(b)(6).
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B. Self-Regulatory Organization's Statement on Burden on Competition
Nasdaq does not believe that the proposed rule change will result
in any burden on competition that is not necessary or appropriate in
furtherance of the purposes of the Act, as amended.
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. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 35 days of the date of publication of this notice in the
Federal Register or within such longer period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
A. By order approve such proposed rule change, or
B. Institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change, as amended, is consistent with the Act. Comments may be
submitted by any of the following methods:
[[Page 16325]]
Electronic Comments
Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml.
); or Send an e-mail to rule-comments@sec.gov. Please include
File Number SR-NASD-2004-139 on the subject line.
Paper Comments
Send paper comments in triplicate to Jonathan G. Katz,
Secretary, Securities and Exchange Commission, 450 Fifth Street, NW.,
Washington, DC 20549-0609.
All submissions should refer to File Number SR-NASD-2004-139. This
file number should be included on the subject line if e-mail is used.
To help the Commission process and review your comments more
efficiently, please use only one method. The Commission will post all
comments on the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml
). 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 in the Commission's Public Reference Section, 450 Fifth
Street, NW., Washington, DC 20549. Copies of such filing also will be
available for inspection and copying at the principal office of the
NASD. All comments received will be posted without change; the
Commission does not edit personal identifying information from
submissions. You should submit only information that you wish to make
available publicly. All submissions should refer to File Number SR-
NASD-2004-139 and should be submitted on or before April 20, 2005.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\11\
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\11\ 17 CFR 200.30-3(a)(12).
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J. Lynn Taylor,
Assistant Secretary.
[FR Doc. E5-1393 Filed 3-29-05; 8:45 am]
BILLING CODE 8010-01-P