[Federal Register Volume 59, Number 193 (Thursday, October 6, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-24794]


[[Page Unknown]]

[Federal Register: October 6, 1994]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-34759; File No. SR-CBOE-94-04]

 

Self-Regulatory Organizations; Order Approving Proposed Rule 
Change and Filing and Order Granting Accelerated Approval of Amendment 
Nos. 1 and 2 to the Proposed Rule Change by the Chicago Board Options 
Exchange, Inc. Relating to the Listing Criteria for Certain Hybrid 
Securities.

September 30, 1994.

I. Introduction

    On February 25, 1994, the Chicago Board Options Exchange, Inc. 
(``CBOE'' or ``Exchange''), pursuant to section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act'')\1\ and Rule 19b-4 
thereunder,\2\ filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission'') a proposed rule change to establish 
specific listing criteria for certain hybrid securities. Notice of the 
proposal appeared in the Federal Register on April 7, 1994.\3\ No 
comment letters were received on the proposed rule change. The CBOE 
filed Amendment No. 1 to the proposed rule change on September 28, 
1994,\4\ and Amendment No. 2 on September 29, 1994.\5\ This order 
approves the CBOE proposal, as amended.
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    \1\15 U.S.C. 78s(b)(1) (1988).
    \2\17 CFR 240.19b-4 (1992).
    \3\See Securities Exchange Act Release No. 33843 (March 31, 
1994), 59 FR 16666 (April 7, 1994).
    \4\In Amendment No. 1, the CBOE amends, in several respects, the 
proposed listing criteria for contingent value rights, equity-linked 
notes, and paired securities, as described herein, to conform the 
proposed rule language to the listing criteria for such products 
previously approved by the Commission for the New York Stock 
Exchange, Inc. (``NYSE'') and/or the American Stock Exchange, Inc. 
(``Amex''). See Letter from Michael Meyer, Schiff Hardin & Waite, to 
Brad Ritter, Senior Counsel, Office of Market Supervision, Division 
of Market Regulation, Commission, dated September 27, 1994 
(``Amendment No. 1'').
    \5\In Amendment No. 2, the CBOE proposes to require that the 
Exchange distribute a circular to the membership providing guidance 
regarding member firm compliance responsibilities (including 
suitability recommendations and account approval) when handling 
transactions in contingent value rights. See Letter from Michael 
Meyer, Schiff Hardin & Waite, to Brad Ritter, Senior Counsel, Office 
of Market Supervision, Division of Market Regulation, Commission, 
dated September 29, 1994 (``Amendment No. 2'').
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II. Description of the Proposal

    Pursuant to CBOE Rule 31.5.F, the Exchange may approve for listing 
securities which can not be readily categorized under the listing 
criteria for common and preferred stocks, bonds, debentures, warrants, 
or unit investment trusts. The CBOE is now proposing to: (1) Amend Rule 
31.5.F to decrease the minimum aggregate market value of such 
securities to $4 million;\6\ (2) add Rule 31.5.H to provide listing 
standards for contingent value rights (``CVRs''); (3) add Rule 31.5.I 
to provide listing standards for equity-linked term notes (``ELNs''); 
and (4) add Rule 31.5.J to provide listing standards for paired 
securities.
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    \6\See Amendment No. 1, supra note 4.
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A. Contingent Value Rights

    CVRs are unsecured obligations providing for a possible cash 
payment at maturity based on the value of an equity security issued by 
an affiliate of the issuer of the CVRs (``related security''). The 
holder of a CVR would be entitled to a cash payment at maturity if the 
market price of the related security is lower than a predetermined 
target price. If the market price of the related security equals or 
exceeds the target price, the holder of the CVR would not be entitled 
to receive such a cash payment.
    Under proposed Rule 31.5.H, a CVR would be eligible for listing by 
the CBOE if: (1) The issuer satisfies the net worth and earnings 
requirements set forth in Exchange Rule 31.5.A;\7\ (2) the issuer has 
assets in excess of $100 million; (3) there is a minimum public 
distribution of one million CVRs; (4) there are at least 400 public 
holders of the CVRs; (5) the aggregate market value of the CVRs is at 
least $4 million; and (6) the CVRs have an original term to maturity of 
at least one year.\8\
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    \7\ specifically, an issuer must have: (1) Total assets 
(including the value of patents, copyrights, and trademarks but 
excluding the value of goodwill) less total liabilities of at least 
$4 million; and (2) pre-tax income of at least $750,000 in its last 
fiscal year, or in two of its last three fiscal years and net income 
of at least $400,000.
    \8\ See Amendment No. 1, supra note 4.
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    Because CVRs are linked to another security, the Exchange has 
proposed safeguards that are designed to meet the investor protection 
concerns raised by the trading of CVRs.\9\ First, pursuant to CBOE Rule 
30.50(c), 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 CVRs. Second, consistent with CBOE Rule 
30.50(c), the Exchange will further require that a member or member 
firm specifically approve a customer's account for trading CVRs prior 
to, or promptly after, the completion of the transaction. Third, prior 
to the commencement of trading of CVRs, the Exchange will distribute a 
circular to the membership providing guidance regarding member firm 
compliance responsibilities (including suitability recommendations and 
account approval) when handling transactions in CVRs.
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    \9\Id.
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B. Equity-Linked Term Notes

    The Exchange is also proposing to add Rule 31.5.I to its rules to 
establish specific listing criteria for ELNs.\10\ ELNs are 
intermediate-term, hybrid instruments whose value will be linked to the 
performance of a highly-capitalized, actively traded common stock, non-
convertible preferred stock, or sponsored American Depositary Receipt 
(``ADR'').\11\
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    \10\ The CBOE notes that the Commission has previously approved 
the listing of ELNs by the NYSE and the Amex. The CBOE states that 
with two exceptions, as discussed herein, the CBOE's proposed 
standards are virtually identical to the NYSE's and Amex's listing 
standards for ELNs. See Securities Exchange Act Release Nos. 32343 
(May 20, 1993). 58 FR 30833 (May 27, 1933) (order originally 
approving the listing of ELNs by the Amex); 33328 (December 13, 
1993), 58 FR 66041 (December 17, 1993) (order approving revised 
market capitalization and trading volume requirements for the 
listing of ELNs by the Amex); 33468 (January 13, 1994), 59 FR 3387 
(January 21, 1994) (order originally approving the listing of ELNs 
by the NYSE); 33841 (March 31, 1994), 59 FR 16671 (April 7, 1994) 
(order approving revised market capitalization and trading volume 
requirements for the listing of ELNs by the NYSE); 34545 (August 18, 
1994), 59 FR 43877 (August 25, 1994) (order approving the listing of 
ELNs by the NYSE linked to securities issued by non-U.S. companies) 
(``Exchange Act Release No. 34545''); and 34549 (August 18, 1994), 
59 FR 43873 (August 25, 1994) (order approving the listing of ELNs 
by the Amex linked to securities issued by non-U.S. companies) 
(``Exchange Act Release No. 34549'') (collectively, ``Equity-Linked 
Note Approval Orders'').
    \11\See Amendment No. 1, supra note 4.
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    An issuer of ELNs may provide for periodic interest payments to 
holders, whether based on a fixed or floating rate.\12\ Furthermore, a 
particular issuance of ELNs may also be subject to a ``cap'' on the 
maximum principal amount to be repaid to holders upon maturity of the 
ELNs, and, additionally, may feature a ``floor'' on the minimum 
principal amount to be repaid to holders upon maturity of the ELNs. The 
Exchange believes that the listing flexibility available to an issuer 
of ELNs will permit the creation of securities which will offer 
investors the opportunity to more precisely focus on a specific 
investment strategy.
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    \12\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. Id. The Commission, at 
that time, may require the CBOE 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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    ELNs will conform to the listing guidelines under CBOE Rule 31.5.F, 
which provide that: (1) Issuers must satisfy certain asset/equity 
requirements;\13\ and (2) issues must have (a) a minimum public 
distribution of one million trading units; (b) a minimum of 400 unit 
holders; and (c) an aggregate market value of at least $4 million.\14\ 
Several additional criteria will also apply to the listing of ELNs. 
First, the issuer must have a minimum tangible net worth of $150 
million. Second, the original issue price of a series of ELNs, when 
combined with all of the issuer's other ELNs listed on a national 
securities exchange or otherwise publicly traded in the United States, 
may not be greater than 25% of the issuer's net worth at the time of 
issuance. Third, ELNs will have an original term to maturity of not 
less than two years and not more than seven years, except ELNs linked 
to a security issued by a non-U.S. company\15\ (including a sponsored 
ADR) must have an original term to maturity of not more than three 
years. Additionally, ELNs will be treated as equity instruments for, 
among other purposes, margin requirements.\16\
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    \13\Specifically, issuers must have assets in excess of $100 
million and stockholders' equity of at least $10 million. In the 
case of an issuer which does not satisfy the earnings criteria set 
forth in CBOE 31.5.A (see supra note 6), the Exchange generally will 
require the issuer to have: (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.
    \14\See Amendment No. 1, supra note 4.
    \15\The Exchange defines a non-U.S. company as any company which 
was formed or incorporated outside of the U.S. Id.
    \16\Id.
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    Although the Exchange does not believe that ELNs will have any 
discernible impact on the trading market for the underlying linked 
stock, it nevertheless proposes that each equity security (including 
sponsored ADRs) on which the value of the ELN is based must either 
have: (1) A market capitalization of at least $3 billion and U.S. 
trading volume of at least 2.5 million shares during the one-year 
period preceding the listing of the ELN, (2) a market capitalization of 
at least $1.5 billion and U.S. trading volume of at least 20 million 
shares during the one-year period preceding the listing of the ELN, or 
(3) a market capitalization of at least $500 million and U.S. trading 
volume of at least 80 million shares during the one-year period 
preceding the listing of the ELN. Moreover, the proposed rule change 
would provide the Exchange with flexibility, subject to the concurrence 
of the staff of the Commission, to list an ELN linked to a security 
that does not meet the specific market capitalization and volume 
criteria.\17\ In addition to the market capitalization and trading 
volume requirements, the underlying security to which an ELN is linked 
must be: (1) Issued by a company which is subject to reporting 
requirements under the Act; (2) listed on a national securities 
exchange or traded through Nasdaq; and (3) subject to last sale 
reporting pursuant to Rule 11As3-1 of the Act.\18\ Finally, without the 
concurrence of the staff of the Commission, an issue of ELNs linked to 
a security issued by a U.S. company may not be linked to more than 5% 
of the total outstanding shares of that security.\19\
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    \17\Depending on the proposed facts, the Commission may require 
the Exchange to submit a rule filing to the Commission pursuant to 
section 19(b) of the Act to address the regulatory issues raised by 
any proposed offering of ELNs that does not satisfy the market 
capitalization and/or trading volume requirements set forth above. 
In this connection, the Commission notes that any proposal to list 
an ELN linked to a security with a market capitalization of less 
than $500 million would raised significant regulatory concerns for 
which a section 19(b) rule filing would be required.
    \18\See Amendment No. 1, supra note 4.
    \19\As with the market capitalization and trading volume 
requirements, the Commission notes that based on the proposed facts, 
the Exchange may be required to submit a rule filing to the 
Commission pursuant to section 19(b) of the Act to address 
regulatory issues raised by any Exchange proposal to list an ELN 
related to more than the allowable percentages of outstanding shares 
of the underlying security.
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    With regard to ELNs linked to securities issued by non-U.S. 
companies (including sponsored ADRs) subject to reporting requirements 
under the Act, the following additional requirements apply: (1) The 
term of such ELNs shall be limited to between two and three years; (2) 
either (i) the Exchange must have in place a comprehensive market 
information sharing agreement\20\ 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 primarily 
traded), or (ii) at least 50% of the market for the underlying security 
and all related securities\21\ for the six months prior to issuance 
must occur in the U.S. market (as defined below);\22\ (3) if linked to 
an ADR, the ADR must be sponsored;\23\ (4) there must be a minimum of 
2,000 holders of the linked security; (5) 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 and all related securities 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 and all related securities 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 and all related 
securities for the six months prior to listing occurred in the U.S. 
market; and (6) no ELN may be listed if the U.S. market for the 
underlying security and all related securities accounted for less than 
30% of the worldwide trading volume for the security and related 
securities during the prior six months, regardless of whether the 
relevant comprehensive market information sharing agreement is in 
place.\24\ With the concurrence of the staff of the Commission, the 
Exchange may determine to list an ELN linked to a security (including a 
sponsored ADR) issued by a non-U.S. company subject to reporting 
requirements under the Act that exceeds the above percentages.\25\
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    \20\See Amendment No. 1, supra note 4. 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. 33554 (January 31, 1994), 59 FR 
5622 (February 7, 1994) (order approving File No. SR-CBOE-93-38) 
(``ADR Approval Order'').
    \21\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 Amendment No. 1, supra note 4; and ADR 
Approval Order, supra note 20.
    \22\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.
    \23\ See Amendment No. 1, supra note 4.
    \24\Additionally, without a comprehensive market information 
sharing agreement, an ELN may not be listed linked to a security 
issued by a non-U.S. company (including a sponsored ADR) if the U.S. 
market for the security and all related securities for the prior six 
months was less than 50% of the worldwide market for such 
securities. Id.
    \25\See supra note 18.
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    The proposal defines the U.S. market\26\ as the U.S. self-
regulatory organizations that are members of the Intermarket 
Surveillance Group (``ISG'')\27\ and whose markets are linked together 
by the Intermarket Trading System (``ITS'').\28\
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    \26\See  Amendment No. 1, supra note 4; and ADR Approval Order, 
supra note 20.
    \27\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 CBOE; the Chicago Stock 
Exchange, Inc.; the Cincinnati Stock Exchange, Inc.; the National 
Association of Securities Dealers, Inc.; the NYSE; 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.
    \28\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 
multiple 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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    As with CVRs, because ELNs are linked to another security, the 
Exchange has proposed safeguards that are designed to meet the investor 
protection concerns raised by the trading of ELNs.\29\ First, pursuant 
to CBOE Rule 30.50(c), 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 ELNs. Second, consistent with CBOE 
Rule 30.50(c), the Exchange will further require that a member or 
member firm specifically approve a customer's account for trading ELNs 
prior to, or promptly after, the completion of the transaction. Third, 
prior to the commencement of trading of ELNs, the Exchange will 
evaluate the nature and complexity of the issue and, if appropriate, 
distribute a circular to the membership providing guidance regarding 
member firm compliance responsibilities (including suitability 
recommendations and account approval) when handling transactions in 
ELNs.\30\
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    \29\See Amendment No. 1, supra note 4.
    \30\The Commission notes that the ELNs are subject to the equity 
margin rules of the Exchange. Id.
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C. Paired Securities

    The Exchange is also proposing to add Rule 31.5.J to its rules to 
set forth specific listing criteria for ``paired securities.'' Under 
proposed Rule 31.5.J, the term ``paired securities'' would be defined 
as securities which may be transferred and traded only in combination 
with one another as a single economic unit and for which the securities 
are printed back-to-back on the same certificate.\31\ Under the 
proposed rule, the issuers of the paired securities would be required 
to satisfy, on an aggregate basis, the size and earnings criteria set 
forth in Exchange Rule 31.5.A.\32\ In the event the pairing agreement 
between the issuers of the paired securities is terminated, the issuer 
which initially met the original listing criteria need only satisfy the 
Exchange's continued listing guidelines in order to remain listed on 
the Exchange. The other security, however, which at the time of listing 
did not qualify for listing under CBOE Rule 31.5.A must, at the time of 
termination, meet both the net worth, earnings, and distribution 
requirements of Rule 31.5.A in order to remain listed on the 
Exchange.\33\ The Exchange has represented that it will only list an 
issue of paired securities as a competitive response to the listing of 
an issue of paired securities by another securities exchange and where 
the securities are being paired for purposes other than for bypassing 
the Exchange's equity listing standards.\34\
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    \31\See Amendment No. 1, supra note 4.
    \32\See supra note 7.
    \33\See Amendment No. 1, supra note 4; and supra note 7.
    \34\See Amendment No. 1, supra note 4.
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III. Commission Findings and Conclusions

    For the reasons discussed below, 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).\35\
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    \35\15 U.S.C. 78f(b)(5) (1988). Pursuant to section 6(b)(5) of 
the Act the Commission must predicate approval of exchange trading 
for new products upon a finding that the introduction of the product 
is in the public interest. Such a finding would be difficult with 
respect to a product that served no investment, hedging, or other 
economic function, because any benefits that might be derived by 
market participants would likely be outweighed by the potential for 
manipulation, diminished public confidence in the integrity of the 
markets, and other valid regulatory concerns.
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A. Contingent Value Rights

    The Commission believes that the CBOE's proposal to establish 
listing criteria for CVRs addresses the special concerns raised by 
these investment products. As with the equity-linked debt securities 
approved for listing by the NYSE and the Amex,\36\ CVRs are not 
leveraged instruments. Their price, however, will still be derived and 
based upon the related security. The Commission believes, however, that 
the CBOE proposal adequately minimizes the Commission's regulatory 
concerns that arise because the final rate of return of a CVR is 
derivatively priced, based on the performance of the related security. 
The proposed quantitative listing standards should ensure that only 
substantial companies capable of meeting their financial obligations 
issue CVRs. This is important in light of the contingent financial 
obligations created by these instruments, and should serve to protect 
investors and the public interest by ensuring that the companies 
listing CVRs on the Exchange have sufficient financial means to meet 
their settlement obligations. Additionally, the proposed suitability, 
disclosure, and compliance requirements noted above, adequately address 
the potential public customer concerns that could arise from the hybrid 
nature of CVRs. In this regard, before any listing occurs, the CBOE 
would be required to distribute a circular to the membership providing 
guidance regarding member firm compliance responsibilities (including 
suitability recommendations and account approval) when handling 
transactions in CVRs.
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    \36\See Equity-Linked Note Approval Orders, supra note 10.
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    Finally, the Commission notes that the criteria proposed by the 
Exchange for the listing of CVRs are virtually the same as those 
previously approved by the Commission for the listing and trading of 
CVRs by the NYSE and the Amex.\37\
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    \37\See Securities Exchange Act Release Nos. 28072 (May 30, 
1990), 55 FR 23166 (June 6, 1990) (order approving the listing of 
CVRS by the NYSE); and 27753 (March 1, 1990), 55 FR 8624 (March 8, 
1990) (order approving the listing of CVRs by the Amex).
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B. Equity-Linked Term Notes

    The Commission believes that the availability of ELNs will permit 
investors to more closely approximate their desired investment 
objectives through, for example, shifting some of the opportunity for 
upside gain in return for additional income. Accordingly, for these 
reasons, as well as the reasons stated in the Equity-Linked Note 
Approval Orders,\38\ the Commission finds that the CBOE's proposed 
standards for the listing and trading of ELNs are consistent with the 
Act and that the listing and trading of ELNs is in the public interest.
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    \38\See Equity-Linked Note Approval Orders, supra note 10.
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    As with the CVRs discussed above, ELNs are not leveraged 
instruments, however, their price will still be derived and based upon 
the underlying linked security. Accordingly, the level of risk involved 
in the purchase or sale of an ELNs is similar to the risk involved in 
the purchase or sale of traditional common stock. Nonetheless, in 
considering the proposals by the Amex and the NYSE to list and trade 
equity-linked notes, the Commission had several specific concerns with 
this type of product because the final rate of return of an ELN is 
derivatively priced, based on the performance of the underlying 
security. These concerns included: (1) Investor protection concerns; 
(2) dependence on the credit of the issuer of the instrument; (3) 
systemic concerns regarding position exposure of issuers with partially 
hedged positions or dynamically hedged positions; and (4) the impact on 
the market for the underlying linked security.\39\ The Commission 
concluded, however, that the proposals adequately addressed each of 
these issues such that the Commission's regulatory concerns were 
adequately minimized.\40\ Similarly, in this proposal, the CBOE has 
proposed safeguards, as described above, which the Commission finds to 
be equivalent to those approved for the trading of ELNs by the Amex and 
the NYSE. In particular, by imposing the listing standards, 
suitability, disclosure, and compliance requirements noted above, the 
CBOE has adequately addressed the potential public customer concerns 
that could arise from the hybrid nature of ELNs.
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    \39\Id.
    \40\Id.
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    Except in two respects, the Commission finds that Amendment No. 1 
confirms the proposal to rule changes already approved by the 
Commission for the listing and trading of ELNs by the Amex and the 
NYSE.\41\ The two new items included in this proposal are: (1) An 
additional market capitalization and trading volume requirement that 
allows the listing of ELNs linked to an underlying security with a 
minimum market capitalization of $500 million and a trading volume in 
the year prior to listing of at least 80 million shares; and (2) 
allowing flexibility for the CBOE, with the concurrence of the staff of 
the Commission, to determine on a case-by-case basis to list ELNs that 
either do not satisfy the market capitalization and trading volume 
requirements discussed above, and/or that exceed the percentage limits 
regarding the outstanding shares of the linked security. The Commission 
believes that neither of these proposals raises any significant 
regulatory issues that were not addressed in the Equity-Linked Note 
Approval Orders.\42\ The Commission finds that the proposal to add the 
third tier of eligible linked securities will expand the number of 
securities that can be linked to these equity-linked products while 
maintaining the requirement that the linked security be an actively 
traded common stock issued by a highly capitalized issuer. While the 
proposal introduces a third alternative for ELN eligibility that 
reduces the minimum market capitalization requirement of the linked 
security, the stock of such an issuer could only be linked to an issue 
of ELNs if its trading volume for the prior one-year period is at least 
80 million shares, which is four times higher than the current minimum 
trading volume for these products as currently allowed on the Amex and 
the NYSE. Moreover, in recently approving proposals by the NYSE and the 
Amex to list and trade ELNs linked to securities (including sponsored 
ADRs) issued by non-U.S. companies subject to reporting requirements 
under the Act, the NYSE and the Amex represented to the Commission that 
no problems had been reported to either exchange regarding the listing 
and trading of these products.\43\ The Commission believes that 
together, the new capitalization and trading volume requirements will 
continue to ensure that ELNs are only issued on highly liquid 
securities of broadly capitalized companies and that these requirements 
will reduce the likelihood of any adverse market impact on the 
securities underlying ELNs.
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    \41\Id.
    \42\Id.
    \43\See Exchange Act Release Nos. 34545 and 34549, supra note 
10.
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    Additionally, allowing the CBOE, with the concurrence of the staff 
of the Commission, to approve, on a case-by-case basis, an issue of 
ELNs that does not satisfy one of the existing requirements regarding 
market capitalization and trading volume,\44\ or that exceeds the 
maximum allowable percentage of shares of the underlying security,\45\ 
merely adds flexibility to the proposed rule change. The Commission 
believes that this portion of the proposal does not raise any 
regulatory concerns, particularly given the requirement of obtaining 
the concurrence of the staff of the Commission prior to listing.\46\
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    \44\See supra note 16.
    \45\See supra note 18.
    \46\If the CBOE proposed an ELN that raised unique or 
significant regulatory concerns, the staff of the Commission would 
require the CBOE to submit a rule filing to the Commission pursuant 
to section 19(b) of the Act.
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C. Paired Securities

    The Commission believes that the CBOE's proposed listing standards 
for paired securities do not raise any substantial regulatory concerns. 
First, the proposed rule is identical to a rule previously adopted by 
the Amex.\47\ Second, the Exchange will only list an issue of paired 
securities in response to competitive pressures resulting from the 
listing of an issue of paired securities by another securities exchange 
and where the securities to be listed by the CBOE are being paired for 
purposes other than for bypassing the Exchange's equity listing 
standards.\48\ These standards should serve to protect investors by 
preventing an issuer from listing a security on the CBOE that does not 
satisfy the Exchange's listing criteria, terminating the pairing 
agreement, and then trading the securities as separate securities. The 
certificate requirement serves to further protect investors and 
minimize confusion by ensuring that investors are on notice when they 
receive such a certificate that the security is a paired security and 
cannot be traded separately from the security to which it is paired. 
Moreover, requiring that in the event of the termination of the pairing 
agreement that the security that did not originally meet the CBOE's 
listing criteria must satisfy those criteria at the time of the 
termination or else be delisted, minimizes the potential that the 
paired security vehicle will be used as a means of listing a security 
that otherwise could not be listed on the Exchange.
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    \47\See Section 117 of the Amex Company Guide.
    \48\See Amendment No. 1, supra note 4. The Commission would be 
concerned about companies being paired simply to allow one or both 
companies to meet the listing standards. The Commission believes 
that paired securities should only be allowed to be listed where 
there is a special relationship or reason, other than listing 
requirements, that makes pairing necessary.
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    The Commission finds good cause for approving Amendment Nos. 1 and 
2 to the proposed rule change prior to the thirtieth day after the date 
of publication of notice thereof in the Federal Register in order to 
allow the CBOE to begin listing hybrid securities satisfying the 
listing standards discussed above without delay. With respect to CVRs, 
the Commission finds that Amendment Nos. 1 and 2 more closely conforms 
the Exchange's proposal to proposals previously approved by the 
Commission with respect to the listing and trading of CVRs by the Amex 
and the NYSE. For that reason and for the reasons stated above, the 
Commission believes that the proposal to list and trade CVRs does not 
raise any significant regulatory issues that were not addressed when 
the NYSE and the Amex proposals were approved.
    With regard to ELNs, as discussed above, except for two aspects the 
proposal merely provides the CBOE with the ability to list equity-
linked debt securities on the same basis as the NYSE and the Amex. 
Moreover, the Commission notes that the proposals by the NYSE and the 
Amex to list and trade equity-linked debt securities were published by 
the Commission for the full comment period without any comments being 
received by the Commission. With respect to the two aspects of the ELN 
proposal which expand on the standards previously approved for the NYSE 
and the Amex, for the reasons discussed above, the Commission believes 
that no significant regulatory issues are raised that were not 
adequately addressed in the Equity-Linked Note Approval Orders.\49\
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    \49\See Equity-Linked Note Approval Orders, supra note 10.
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    Finally, Amendment No. 1 to the proposal also lowers the minimum 
size for an issue of securities listed pursuant to CBOE Rule 31.5.F 
from $20 million to $4 million. The Commission notes that this 
amendment merely conforms the CBOE's rules to those of the NYSE which 
provide that an issue of a hybrid security must have a minimum market 
value at issuance of at least $4 million.\50\
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    \50\See section 703.19 of the NYSE Listed Company Manual.
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    Accordingly, the Commission believes it is consistent with sections 
6(b)(5)\51\ and 19(b)(2)\52\ of the Act to approve Amendment Nos. 1 and 
2 to the proposal on an accelerated basis.
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    \51\15 U.S.C. 78f(b)(5) (1988).
    \52\15 U.S.C. 78s(b)(2) (1988).
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    Interested persons are invited to submit written data, views and 
arguments concerning Amendment Nos. 1 and 2 to the proposed rule 
change. 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 in the Commission's Public 
Reference Section, 450 Fifth Street, NW., Washington, DC. 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-CBOE-94-04 and should be submitted by October 27, 1994.
    It is Therefore Ordered, pursuant to Section 19(b)(2) of the 
Act,\53\ that the proposed rule change (File No. SR-CBOE-94-04), as 
amended, is approved.

    \53\15 U.S.C. 78s(b)(2) (1988).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\54\
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    \54\17 CFR 200.30-3(a)(12) (1993).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-24794 Filed 10-5-94; 8:45 am]
BILLING CODE 8010-01-M