[Federal Register Volume 59, Number 81 (Thursday, April 28, 1994)]
[Unknown Section]
[Page ]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-10086]


[Federal Register: April 28, 1994]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-33933; File No. SR-NYSE-94-14]
April 20, 1994.


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the New York Stock Exchange, Inc., Relating to Health Care 
Portfolio Market Index Target-Term Securities

    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 12, 1994, the New York Stock Exchange, Inc. (``NYSE'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'' or ``SEC'') the proposed rule change as described in 
Items I, II, and III 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.
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    \1\15 U.S. 78s(b)(1) (1988).
    \2\CFR 240.19b-4 (1991).
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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 for trading Market Index Target-Term 
Securities (``MITTS''),\3\ the return on which is based upon a 
portfolio of securities of U.S. companies in the health care industry 
(``Health Care Portfolio''), Initially, the Health Care Portfolio will 
contain the securities of 22 health care companies that are traded in 
the United States on the NYSE or are National Market System securities 
traded through the facilities of the National Association of Securities 
Dealers Automated Quotation System (``NASDAQ'').\4\
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    \3\``MITTS'' and ``Market Index Target-Term Securities'' are 
service marks of Merrill Lynch & Co., Inc. (``Merrill Lynch'').
    \4\The companies represented in the Health Care Portfolio are: 
Abbott Laboratories; American Home Products Corporation; Baxter 
International Inc.; Beverly Enterprises, Inc.; Bristol-Meyers Squibb 
Company; FHP International Corporation; Foundation Health 
Corporation; Genesis Health Ventures, Inc.; Health Management 
Associates, Inc.; Health Care and Retirement Corporation; The 
Hillhaven Corporation; Horizon Healthcare Corporation; Johnson & 
Johnson; Eli Lilly and Company; Living Centers of America, Inc.; 
Pacificare Health Systems, Inc.; Pfizer Inc.; Sierra Health 
Services, Inc.; United Healthcare Corporation; U.S. Healthcare, 
Inc.; Warner-Lambert Company; and Wellpoint Health Networks Inc.
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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 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 the 
Item IV below. The NYSE 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

    Pursuant to the listing criteria set forth in Section 703.19 of the 
Exchange's Listed Company Manual (``Manual''), the Exchange proposes to 
list and trade MITTS. MITTS are securities that entitle the holder to 
receive from the issuer upon maturity an amount based upon the change 
in the market value of a stock index or portfolio, provided that a 
minimum amount (90% of the principal amount) will be repaid. The 
Exchange is submitting the proposed rule change specifically to enable 
the Exchange to list for trading MITTS on the Health Care Portfolio 
(``Health Care Portfolio MITTS'') issued by Merrill Lynch.
    Health Care Portfolio MITTS will allow investors to combine 
protection of a substantial portion of the principal amount of the 
MITTS with the potential additional payments based on a portfolio of 
securities of selected health care companies. The Health Care Portfolio 
MITTS will provide that at least 90% of the principal amount thereof 
will be repaid at maturity.
The Security
    Health Care Portfolio MITTS will entitle the owner at maturity to 
receive an amount based upon the percentage change between the 
``Original Portfolio Value'' and the ``Ending Average Portfolio 
Value,'' subject to a minimum repayment amount. The ``Original 
Portfolio Value'' is the value of the Health Care Portfolio on the date 
on which the issuer prices the Health Care Portfolio MITTS issue for 
the initial offering to the public. The ``Ending Average Portfolio 
Value'' is the average of the values of the Health Care Portfolio at 
the end of the five calendar quarters preceding the expiration of the 
Health Care Portfolio MITTS on December 31, 1999.\5\ The Ending Average 
Portfolio Value will be used in calculating the amount owners will 
receive upon maturity.\6\
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    \5\Specifically, the Ending Average Portfolio Value will equal 
the average of the quarterly values of the Health Care Portfolio 
beginning in the calendar quarter ending December 31, 1998. The 
quarterly value for each of the first four of the final five 
calendar quarters shall be the Health Care Portfolio value on the 
last scheduled Exchange trading day on which there is no market 
disruption event, The quarterly value for the final calendar quarter 
shall be the Health Care Portfolio Value on the seventh scheduled 
Exchange trading day preceding maturity of the Health Care MITTS 
unless there is a market disruption event in which case the sixth 
trading day preceding maturity shall be used.
    \6\The Health Care Portfolio MITTS will entitle a holder at 
maturity to receive for each $10 principal amount of MITTS an amount 
equal to the Ending Average Portfolio Value of the Health Care 
Portfolio divided by 10, but in any event no less than $9 per each 
$10 principal amount of Health Care Portfolio MITTS.
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    If the market value of the portfolio has declined, the owner will 
receive not less than a specified percentage of the principal amount of 
the security. (For instance, if the market value of the portfolio used 
to calculate the amount payable at maturity has declined more than 10%, 
the owners of the Health Care Portfolio MITTS will receive 90% of the 
principal amount of the securities.) The payment at maturity is based 
on changes in the value of the portfolio, but does not reflect the 
payment of dividends on the securities that comprise the portfolio.
    As with other MITTS, Health Care Portfolio MITTS may not be 
redeemed prior to maturity and are not callable by the issuer. Owners 
may sell the security on the Exchange. The Exchange anticipates that 
the trading value of the security in the secondary market will depend 
in large part on the value of the Health Care Portfolio and also on 
other factors, including the level of interest rates, the volatility of 
the value of the Health Care Portfolio, the time remaining to maturity, 
dividend rates, and the creditworthiness of the issuer.
    The Exchange will only list for trading Health Care Portfolio MITTS 
issues that have at least one million outstanding securities, at least 
400 owners, a minimum life of one year and at least a $4 million market 
value, and that otherwise comply with the Exchange's initial listing 
criteria. In addition, the Exchange will monitor each issue to verify 
that it complies with the Exchange's continued listing criteria.\7\
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    \7\See section 703.19 of the Manual.
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    Merrill Lynch will deposit registered securities representing 
Health Care Portfolio MITTS with its depository, the Depository Trust 
Company (``DTC''), so as to permit book-entry settlement of 
transactions by participants in DTC.
The Portfolio
    The Health Care Portfolio consists of the common stock of 22 highly 
capitalized health care companies. The common stock of the 22 companies 
initially will be equally weighted within the portfolio on the pricing 
date. The public float (i.e., the market price multiplied by the number 
of shares outstanding) of the 22 companies differ significantly (from a 
high of $28 billion (Bristol Meyers Squibb Co.) to a low of $285 
million (Horizon Healthcare Corp.)), as do the market prices of their 
common stock (from a high of $84.625 (United Healthcare Corporation) to 
a low of $15.375 (Beverly Enterprises, Inc.)).\8\
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    \8\Prices specified in this paragraph, and prices and exchange 
rates used to calculate public float specified in this paragraph, 
are as of March 7, 1994.
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    The common stock of 19 of the 22 component companies is listed on 
the Exchange. The common stock of the other three component companies 
is traded through NASDAQ. At the outset, the common stock of each of 
the companies represented in the Health Care Portfolio will have equal 
representation. That is, the common stock of each company included in 
the portfolio shall be assigned a multiplier on the pricing date such 
that all component companies represent an equal percentage of the value 
of the entire portfolio on such date. The multiplier indicates the 
number of shares of common stock (or fraction of one share) included in 
the calculation of the portfolio. Thus, each of the 22 companies 
represented shall represent 4.545% of the total portfolio on the 
pricing date.
    The multipliers assigned to the component companies will be 
adjusted for certain events such as stock splits, reverse stock splits, 
or stock dividends, and the value of the component securities will also 
be adjusted for certain events including a liquidation, bankruptcy, 
insolvency, merger, or consolidation involving the issuer of the 
underlying shares. For example, if the issuer of the shares underlying 
a component company has been subject to a merger or a consolidation and 
is not the surviving entity, then a value for such common stock will be 
determined at the time such issuer is merged or consolidated and will 
equal the last available market price for such common stock and that 
value will be constant for the remaining term of the Health Care 
Portfolio MITTS.\9\
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    \9\Merrill Lynch will not attempt to find a replacement stock or 
to compensate for the extinction of a security due to bankruptcy or 
a similar event.
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    Based upon the reported prices of the common stock, a Merrill Lynch 
affiliate or an independent third party will calculate the value of the 
Health Care Portfolio on at least a daily basis and make those values 
available to investors.
The Issuer
    The Exchange has determined that the issuer of the Health Care 
Portfolio MITTS, Merrill Lynch, meets the listing criteria set forth in 
Section 703.19 of the Manual. The Exchange states that Merrill Lynch is 
an Exchange-listed company in good standing and has sufficient assets 
to justify the issuance of MITTS offerings of the size contemplated by 
the proposed rule change.
    The Exchange believes that the proposed rule change is consistent 
with Section 6 of the Act, in general, and with section 6(b)(5), 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 a national market system, and, in 
general, to protect investors and the public interest.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The NYSE does not believe that the proposed rule change will impose 
any inappropriate burden on competition.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received from Members, Participants or Others

    No written comments were solicited or received with respect to the 
proposed rule change.

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. Persons making written submissions 
should file six copies thereof with the Secretary, Securities and 
Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549. 
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 Section, 450 Fifth Street NW., 
Washington, DC 20549. Copies of such filing will also be available for 
inspection and copying at the principal office of the NYSE. All 
submissions should refer to File No. SR-NYSE-94-14 and should be 
submitted by May 19, 1994.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\10\
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    \10\17 CFR 200.30-3(a)(12) (1993).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-10086 Filed 4-26-94; 8:45 am]
BILLING CODE 8010-01-M