[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