[Federal Register Volume 59, Number 164 (Thursday, August 25, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-20895]


[[Page Unknown]]

[Federal Register: August 25, 1994]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-34549; File No. SR-Amex-93-46]

 

Self-Regulatory Organizations; Order Granting Approval and Notice 
of Filing and Order Granting Accelerated Approval of Amendment No. 6 to 
a Proposed Rule Change by the American Stock Exchange, Inc., Relating 
to Equity Linked Term Notes

August 18, 1994.
    On December 29, 1993, the American Stock Exchange, Inc. (``Amex'' 
or ``Exchange'') filed with 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 relating to Equity Linked Term Notes (``ELNs''). 
Notice of the proposal and Amendment No. 1\3\ appeared in the Federal 
Register on January 26, 1994.\4\ No comment letters were received on 
the proposed rule change. The Exchange filed Amendment No. 2 to the 
proposed rule change on January 31, 1994, Amendment No. 3 on March 9, 
1944, Amendment No. 4 on April 28, 1994, Amendment No. 5 on June 27, 
1994, and Amendment No. 6 on July 18, 1994.\5\ This order approved the 
Exchange's proposal, as amended.
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    \1\15 U.S.C. 78s(b)(1) (1982).
    \2\17 CFR 240.19b-4 (1993).
    \3\The amended rule language contained in Amendment No. 1 to the 
proposal was subsequently withdrawn by the Amex. See Amendment No. 
6, infra note 5.
    \4\See Securities Exchange Act Release No. 33483 (January 14, 
1994), 59 FR 3745 (January 26, 1994).
    \5\Amendment No. 6 withdraws and supersedes the rule language 
originally proposed for section 107B of the Amex Company Guide 
(``Guide''), as subsequently amended by Amendment Nos. 1 through 5. 
The changes proposed in Amendment No. 6 are fully described herein. 
See Letter from Claire McGrath, Managing Director and Special 
Counsel, Derivative Securities, Amex, to Michael Walinskas, Branch 
Chief, Office, Division, Commission, dated July 18, 1994 
(``Amendment No. 6'').
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    The Amex proposes to amend Section 107B of the Guide with respect 
to the listing criteria for ELNs.\6\ ELNs are intermediate term (two to 
seven years), non-convertible, hybrid securities, the value of which is 
linked to the performance of a highly capitalized, actively traded 
common stock. ELNs may provide for periodic interest payments to 
holders based on fixed or floating rates, or they may be structured as 
``zero coupon'' instruments with no payments to holders prior to 
maturity.\7\ ELNs may be subject to a ``cap'' on the maximum principal 
amount to be repaid to holders upon maturity, and they may feature a 
``floor'' on the minimum principal amount paid to holders upon 
maturity.
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    \6\The Commission approved the listing and trading of ELNs on 
May 20, 1993. See Securities Exchange Act Release No. 32343 (May 20, 
1993), 58 FR 30833 (``Exchange Act Release No. 32343''). The 
Commission subsequently approved an amendment to the listing 
standards for ELNs to provide for alternative capitalization and 
trading volume requirements for the underlying security. See 
Securities Exchange Act Release No. 33328 (December 13, 1993), 58 FR 
66041 (December 17, 1993).
    \7\The Exchange has agreed to notify the Commission if an issuer 
of ELNs intends to provide for periodic interest payments to holders 
based on a floating interest rate. See Exchange Act Release No. 
32343, supra note 6, at note 6. The Commission, at that time, may 
require the Amex to submit a rule filing pursuant to Section 19(b) 
of the Act prior to permitting the Exchange to list an ELN with such 
terms.
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    In addition to the general listing criteria contained in Section 
107A of the Guide,\8\ ELNs must also conform to the special listing 
criteria of Section 107B of the Guide which provide that: (1) Each 
issuer must have a tangible net worth of at least $150 million; (2) the 
total original issue price of the particular issue of ELNs combined 
with all of the issuer's other ELNs listed on a national securities 
exchange or traded through the National Association of Securities 
Dealers, Inc. Automated Quotation system (``NASDAQ'') may not be 
greater than 25% of the issuer's tangible net worth at the time of 
issuance; (3) each underlying linked stock must have either (i) a 
market capitalization of at least $3 billion and a trading volume in 
the 12-month period preceding listing (in all markets in which the 
underlying security is traded) of at least 2.5 million shares, or (ii) 
a market capitalization of at least $1.5 billion and a trading volume 
in the 12-month period preceding listing (in all markets in which the 
underlying security is traded) of at least 20 million shares; (4) the 
issuer of the underlying linked stock must be a U.S. reporting company 
under the Act; (5) the issuance of ELNs relating to an underlying 
linked stock may not exceed 5% of the total outstanding shares of such 
stock; (6) the linked security must either be listed on a national 
securities exchange or traded through NASDAQ; and (7) the linked 
security must be subject to last sale reporting.
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    \8\Under Section 107A of the Guide, an issue of ELNs must have: 
(1) A minimum public distribution of one million trading units and a 
minimum of 400 unit holders; (2) an aggregate market value of at 
least $20 million; (3) where cash settled, the settlement must be in 
U.S. dollars; and (4) where redeemable, a redemption price of at 
least three dollars. In addition, Section 107A provides that issuers 
of hybrid securities must have assets of at least $100 million, 
stockholders' 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. Issues not meeting these financial criteria must 
have assets in excess of $200 million and stockholders' equity in 
excess of $10 million, or alternatively, assets in excess of $100 
million and stockholders' equity of at least $20 million.
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    The Exchange is now proposing to amend Section 107B in order to 
provide for the listing and trading of ELNs linked to a security, 
including a sponsored ADR,\9\ that is traded in the U.S. markets and is 
issued by a non-U.S. company\10\ that is subject to reporting 
requirements under the Act. Except for the requirement that the issuer 
of the underlying linked security must be a U.S. company, the listing 
requirements for ELNs linked to a security issued by a non-U.S. company 
will be the same as those set forth above with the following 
enhancements:\11\ (1) Section 107B of the Guide is being amended to 
clarify that the trading volume requirement refers to U.S. trading 
volume;\12\ (2) the term of such ELNs shall be limited to between two 
and three years; (3) either (i) the Exchange must have in place a 
comprehensive market information sharing agreement\13\ with the primary 
exchange on which the underlying security is primarily traded (in the 
case of ADRs, with the primary exchange where the security underlying 
the ADR is traded), or (ii) at least 50% of the market for the 
underlying security and all related securities\14\ for the six months 
prior to issuance must occur in the U.S. market;\15\ (4) if linked to 
an ADR, the ADR must be sponsored; (5) there must be a minimum of 2,000 
holders of the linked security; (6) the ELNs issuance may not exceed 
(i) 2% of the total shares of the underlying security outstanding 
provided at least 30% of the worldwide trading volume for the security 
for the six-months prior to listing occurred in the U.S. market, (ii) 
3% of the total shares of the underlying security outstanding provided 
at least 50% of the worldwide trading volume for the security for the 
six-months prior to listing occurred In the U.S. market, or (iii) 5% of 
the total shares of the underlying security outstanding provided at 
least 70% of the worldwide trading volume for the security for the six-
months prior to listing occurred in the U.S. market; and (7) no ELN may 
be listed if the U.S. market for the underlying security accounted for 
less than 30% of the worldwide trading volume for the security and 
related securities during the prior six months.
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    \9\Amendment No. 6, supra note 5. As opposed to an unsponsored 
ADR, a sponsored ADR is established jointly by the issuer of the 
underlying security and a depositary. With a sponsored ADR, the 
depositary is generally required to distribute notices of 
shareholder meetings and voting instructions to ADR holders, thereby 
ensuring the ADR holders will be able to exercise voting rights 
through the depositary with respect to the underlying securities.
    \10\The exchange defines a non-U.S. company as any company 
formed or incorporated outside of the United States. Telephone 
conversation between Claire McGrath, Managing Director and Special 
Counsel, Derivative Securities, Amex, and Brad Ritter, Attorney, 
Office of Derivatives and Equity Regulation, Division of Market 
Regulation, Commission, on July 19, 1994. See also, 17 CFR 240.3b-
4(b) (1985) (definition of foreign issuer under the Act).
    \11\See Amendment No. 6, supra note 5.
    \12\See infra notes 16-18 and accompanying text. This will also 
apply to ELNs linked to securities issued by U.S. companies.
    \13\See Amendment No. 6, supra note 5; and Letter form Benjamin 
Krause, Senior Vice President, Capital Markets Group, Amex, to 
Sharon Lawson, Assistant director, Office, Division, Commission, 
dated March 8, 1994 (``March 8 Letter''). A comprehensive market 
information sharing agreement would provide for the exchange of 
market trading activity, clearing activity, and the identity of the 
ultimate purchaser or seller of the securities traded. See, e.g., 
Securities Exchange Act Release No. 33555 (January 31, 1994), 59 FR 
5619 (February 7, 1994) (order approving File No. SR-Amex-93-28) 
(``ADR Approval Order'').
    \14\Such related securities include all classes of common stock 
issued by the foreign issuer and ADRs that overlie any of these 
classes of common stock. See March 8 Letter, supra note 13.
    \15\The trading volume for any linked security trading on an 
exchange that is not part of the U.S. market will be included in the 
determination of world-wide trading volume, but not in the 
determination of U.S. market trading volume. The Exchange represents 
that it shall use its best efforts to discover all markets (foreign 
and U.S.) on which the underlying security and all related 
securities trade. Id.
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    The proposal defines the U.S. market\16\ as the U.S. self-
regulatory organizations that are members of the Intermarket 
Surveillance Group (``ISG'')\17\ and whose markets are linked together 
by the Intermarket Trading System (``ITS'').\18\
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    \16\Id.
    \17\ISG was formed on July 14, 1983 to, among other things, 
coordinate more effectively surveillance and investigative 
information sharing arrangements in the stock and options markets. 
See Intermarket Surveillance Group Agreement, July 14, 1983. The 
most recent amendment to the ISG Agreement, which incorporates the 
original agreement and all amendments made thereafter, was signed by 
ISG members on January 29, 1990. See Second Amendment to the 
Intermarket Surveillance Group Agreement, January 29, 1990. The 
members of the ISG, (and accordingly, of the U.S. market) are: the 
Amex; the Boston Stock Exchange, Inc.; the Chicago Board Options 
Exchange, Inc.; the Chicago Stock Exchange, Inc.; the Cincinnati 
Stock Exchange, Inc.; the National Association of Securities 
Dealers, Inc.; the New York Stock Exchange, Inc.; the Pacific Stock 
Exchange, Inc.; and the Philadelphia Stock Exchange, Inc. Because of 
potential opportunities for trading abuses involving stock index 
futures, stock options and the underlying stock and the need for 
greater sharing of surveillance information for these potential 
intermarket trading abuses, the major stock index futures exchanges 
(e.g., the Chicago Mercantile Exchange and the Chicago Board of 
Trade) joined the ISG as affiliate members in 1990.
    \18\ITS is a communications system designed to facilitate 
trading among competing markets by providing each market with order 
routing capabilities based on current quotation information. The 
system links the participant markets and provides facilities and 
procedures for: (1) The display of composite quotation information 
at each participant market, so that brokers are able to determine 
readily the best bid and offer available from any participant for 
multiply trading securities; (2) efficient routing of orders and 
sending administrative messages (on the functioning of the system) 
to all participating markets; (3) participation, under certain 
conditions, by members of all participating markets in opening 
transactions in those markets; and (4) routing orders from a 
participating market to a participating market with a better price.
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    The Exchange believes that the proposed rule change will benefit 
investors by expanding the number of securities that may be linked to 
ELNs, thereby providing investors with enhanced investment flexibility. 
The Exchange further believes that it is appropriate to now include 
within the existing regulatory framework for ELNs, securities that are 
traded in the U.S. and that are issued by non-U.S. companies subject to 
reporting requirements under the Act because of the significant level 
of U.S. investor interest in both U.S. and non-U.S. highly capitalized 
and actively traded reporting companies. Because an ELN and the 
underlying security traded in the U.S. to which it will be linked will 
continue to be subject to the criteria presently contained in Sections 
107A and 107B of the Guide, as enhanced herein, and the Exchange will 
have in place either a comprehensive market information sharing 
agreement with the primary exchange where the underlying security 
trades (in the case of an ADR, with the primary exchange in the country 
where the security underlying the ADR primarily trades) or the linked 
security will meet the proposed trading volume criteria where no such 
agreement exists, the Exchange believes that it will have the ability 
to inquire into potential trading problems or irregularities with 
respect to any particular ELN and the underlying security to which it 
is linked.
    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, the requirements of Section 6(b)(5)\19\ in that it is 
designed to prevent fraudulent and manipulative acts and practices, to 
promote just and equitable principles of trade, and to protect 
investors and the public interest. Specifically, in the Commission's 
order originally approving the listing and trading of ELNs, the 
Commission stated it would be willing to reexamine the issue of 
allowing ELNs linked to ADRs if such a decision were justified by the 
subsequent trading experience of ELNs and if sufficient safeguards were 
put into place to ensure the pricing integrity of both the ELN and the 
underlying ADR.\20\ The Commission is satisfied that these 
preconditions have been satisfied. As of July 1, 1994, the Amex had 11 
series of ELNs listed for trading. The Exchange represents that no 
problems have arisen and no complaints have been received by the 
Exchange with respect to the trading of these series of ELNs.\21\ 
Accordingly, the trading history of ELNs overlying common stock issued 
by U.S. companies has not raised any regulatory concerns that would 
cause the Commission to be concerned about expanding the listing of 
ELNs to include ELNs linked to securities (including sponsored ADRs) 
that are traded in the U.S. on a national securities exchange or 
through NASDAQ and that are issued by non-U.S. companies subject to 
reporting requirements under the Act.
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    \19\15 U.S.C. 78f(b)(5) (1988).
    \20\See Exchange Act Release No. 32343, supra note 6, at note 
13.
    \21\Telephone conversation between Claire McGrath, Managing 
Director and Special Counsel, Derivative Securities, Amex, and Brad 
Ritter, Attorney, Office of Derivatives and Equity Regulation, 
Division of Market Regulation, Commission, on July 19, 1994.
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    The Commission also believes that sufficient safeguards will be in 
place to ensure the pricing integrity of both the ELN and the 
underlying security. First, each of the requirements currently in place 
for the listing of ELNs (i.e., market capitalization, trading volume, 
maximum size of issuance, and U.S. last sale reporting), as enhanced 
herein, will apply where the linked security is a security that is 
traded in the U.S. and is issued by a non-U.S. company. In addition, 
the only such securities that can be linked to ELNs are those for which 
either a comprehensive market information sharing agreement is in place 
with the primary market for the security underlying the ELN (in the 
case of an ADR, with the primary exchange in the country where the 
security underlying the ADR primarily trades) or where at least 50% of 
the worldwide trading volume in the underlying security and other 
related securities for the six months prior to issuance occurs in the 
U.S. market.\22\ These standards are more stringent than those the 
Commission recently found to be adequate with respect to the listing 
and trading of options on ADRs where no comprehensive surveillance 
sharing agreement exists between the Exchange and the primary market in 
the country where the security underlying the ADR is primarily 
traded.\23\ As the Commission stated in the ADR Approval Order, the 
existence of a comprehensive surveillance sharing agreement serves as a 
deterrent to manipulation and thus protects the integrity of the 
marketplace.\24\ Additionally, the Commission stated that where the 
U.S. market is the primary market for the trading of an ADR, the U.S. 
market is the relevant pricing market for that ADR.\25\ In those cases, 
the Commission stated that a comprehensive surveillance sharing 
agreement exists because the self-regulatory organizations which make 
up the U.S. market are members of ISG, through which the Exchange can 
investigate any potential manipulations.\26\ As a result, by applying 
these same standards to ELNs linked to securities that are traded in 
the U.S. market and are issued by non-U.S. companies subject to U.S. 
reporting requirements, the Commission believes the Exchange will be 
able to detect and deter potential manipulations involving ELNs and the 
linked securities.
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    \22\In no event may an ELN be linked to a security issued by a 
non-U.S. company where less than 30% of the worldwide trading volume 
in the security and all related securities occurs in the U.S. 
market. See Amendment No. 6, supra note 5.
    \23\The standards being approved here are more stringent in two 
respects. First, whereas options may be listed on both sponsored and 
unsponsored ADRs satisfying the approved requirements, ELNs may only 
be linked to sponsored ADRs. Secondly, in determining whether the 
U.S. market accounts for at least 50% of the market for the linked 
security and all related securities the Exchange must use the 
trading volume for the prior six months with respect to ELNs, but 
for only the prior three months for options on ADRs. See ADR 
Approval Order, supra note 13.
    \24\Id.
    \25\Id.
    \26\Id.
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    Moreover, the Commission believes that the proposed method 
described above for determining whether the six-month trading 
volume\27\ of the underlying security and all related securities in the 
U.S. market is at least 50% of the worldwide trading volume of such 
securities is adequate to ensure that the U.S. market is and continues 
to be the price discovery market for the security underlying an ELN. 
The Commission notes that these procedures are substantively the same 
as those the Commission approved in the ADR Approval Order.\28\ 
Furthermore, limiting the term of ELNs linked to securities issued by 
non-U.S. companies to no more than three years will increase the 
likelihood that the U.S. market will remain the primary price discovery 
market for the underlying linked security during the term of the ELNs.
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    \27\See Amendment No. 6, supra note 7; and March 8 Letter, supra 
note 13.
    \28\See ADR Approval Order, supra note 13. The ELN requirements, 
however, do not have a U.S. volume maintenance standard similar to 
that required for options on ADRs. Because a particular series of 
ELNs is issued at one time for a set term it would be difficult to 
apply such a standard. The Commission, however, believes that the 
other requirements discussed above will help ensure that the U.S. is 
the relevant market for the ELNs.
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    Finally, the Exchange will require for ELNs linked to securities 
issued by non-U.S. companies that there be at least 2,000 holders of 
the underlying security and that the size of such ELN issuances will be 
limited to (i) 2% of the total shares of the underlying security 
outstanding provided at least 30% of the worldwide trading volume for 
the security for the six-months prior to listing occurred in the U.S. 
market, (ii) 3% of the total shares of the underlying security 
outstanding provided at least 50% of the worldwide trading volume for 
the security for the six-months prior to listing occurred in the U.S. 
market, or (iii) 5% of the total shares of the underlying security 
outstanding provided at least 70% of the worldwide trading volume for 
the security for the six-months prior to listing occurred in the U.S. 
market. The Commission believes that these restrictions will minimize 
the possibility that trading in an ELNs issuance will adversely impact 
the market for the security to which it is linked.\29\
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    \29\Additionally, the Exchange has agreed to consult with the 
Commission prior to issuing an ELN overlying an Amex-traded 
security. See Letter from Claire McGrath, Managing Director and 
Special Counsel, Derivative Securities, Amex, to Michael Walinskas, 
Branch Chief, Office, Division, Commission, dated August 18, 1994.
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    In summary, the Commission believes that the proposal is consistent 
with the Act because: (1) There is nothing in the trading history of 
ELNs which raises any regulatory concerns with respect to expanding the 
ELNs listing standards to include ELNs linked to securities (including 
sponsored ADRs) that are traded in the U.S. on a national securities 
exchange or through NASDAQ and that are issued by non-U.S. companies 
subject to U.S. reporting requirements; (2) the proposed rule change 
adequately safeguards the pricing integrity of both the ELN and the 
underlying security and ensures that there is sufficient surveillance 
to detect as well as deter manipulation; and (3) the existing 
regulatory structure and issuer requirements for ELNs, as enhanced 
herein, will be applied and will ensure that ELNs will continue to be 
linked to highly capitalized companies.
    The Commission finds good cause for approving Amendment No. 6 to 
the proposed rule change prior to the thirtieth day after the date of 
publication of notice of filing thereof in the Federal Register in 
order to allow the Exchange to list without delay ELNs linked to 
securities (including sponsored ADRs) that are traded in the U.S. 
securities markets and that are issued by non-U.S. companies subject to 
U.S. reporting requirements and that satisfy the proposed listing 
guidelines. Amendment No. 6 provides that ELNs may be linked to 
equity\30\ securities issued by non-U.S. companies and traded in the 
U.S. as ADRs, ordinary shares, or otherwise, and significantly enhances 
the existing listing criteria in Sections 107A and 107B of the Guide 
for ELNs linked to securities issued by U.S. companies.
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    \30\Telephone conversation between Claire McGrath, Managing 
Director and Special Counsel, Derivative Securities, Amex, and Brad 
Ritter, Attorney, Office, Division, Commission, on dated July 19, 
1994.
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    The Commission believes that broadening the universe of securities 
that can be linked to ELNs beyond ADRs, as originally proposed, to also 
include securities traded in the U.S. as ordinary shares or otherwise 
that are issued by non-U.S. companies subject to U.S. reporting 
requirements, does not raise any regulatory issues that the Exchange 
has not adequately addressed with respect to ELNs linked to ADRs. 
Furthermore, the Commission believes that the enhanced listing criteria 
proposed in Amendment No. 6 which will apply to ELNs linked to any 
security issued by a non-U.S. company, combined with the numerical 
listing standards currently contained in Sections 107A and 107B of the 
Guide, ensure that the Amex has the ability to detect and deter 
manipulation with respect to both the ELN and the underlying security. 
Finally, the Commission believes that Amendment No. 6 conforms the 
proposed rule change to the procedures approved by the Commission for 
the listing of options on ADRs.\31\ As stated in the ADR Approval 
Order, the Commission continues to believe that these standards will 
ensure that the U.S. market is the relevant pricing market for the ELN 
and the underlying security where there is no comprehensive market 
information sharing agreement with the primary market for such security 
(for ADRs, the primary exchange in the country where the security 
underlying the ADR primarily trades).\32\ Accordingly, the Commission 
believes that good cause exists for approving Amendment No. 6 to the 
proposed rule change on an accelerated basis.
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    \31\See ADR Approval Order, supra note 13.
    \32\Id.
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    Interested persons are invited to submit written data, views and 
arguments concerning Amendment No. 6. Persons making written 
submissions should file six copies thereof with the Secretary, 
Securities and Exchange Commission, 450 Fifth Street, N.W., Washington, 
D.C. 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, 
N.W., Washington, D.C. 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 Number SR-Amex-93-46 and should be 
submitted by September 15, 1994.
    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\33\ that the proposed rule change (SR-Ammex-93-46), as amended, is 
hereby approved.
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    \33\15 U.S.C. 78s(b)(2) (1988).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\34\
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    \34\17 CFR 200.30-3(a)(12) (1993).
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Margaret H. McFarland
Deputy Secretary.
[FR Doc. 94-20895 Filed 8-24-94; 8:45 am]
BILLING CODE 8010-01-M