[Federal Register Volume 59, Number 194 (Friday, October 7, 1994)]
[Unknown Section]
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From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-24843]


[[Page Unknown]]

[Federal Register: October 7, 1994]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-34765; File No. SR-Amex-94-36]

 

Self-Regulatory Organizations; Notice of Filing and Order 
Granting Accelerated Approval of a Proposed Rule Change and Amendment 
No. 1 to the Proposed Rule Change by the American Stock Exchange, Inc. 
Relating to Equity-Linked Term Notes (``ELNs'')

September 30, 1994.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''), 15 U.S.C. 78s(b)(1), notice is hereby given that on 
September 7, 1994, the American Stock Exchange, Inc. (``Amex'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'' or ``SEC'') the proposed rule change as described in 
Items I and II below, which items have been prepared by the Amex. On 
September 20, 1994, the Amex filed Amendment No. 1 to the proposed rule 
change.\1\ The Commission is publishing this notice to solicit comments 
on the proposed rule change from interested persons.
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    \1\In Amendment No. 1, the Exchange proposes to require issuers 
of ELNs who reserve the ability to satisfy their obligations at 
maturity with either cash or shares of the linked security to 
publish notice, no less than 10 and no more than 20 business days 
prior to maturity of the ELNs, of how the issuer intends to satisfy 
its obligations. See Letter from Claire McGrath, Managing Director 
and Special Counsel, Derivative Securities, Amex, to Michael 
Walinskas, Branch Chief, Office of Market Supervision, Division of 
Market Regulation, Commission, dated September 20, 1994 (``Amendment 
No. 1'').
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Amex proposes to amend: (1) Section 107A of the Amex Company 
Guide (``Guide'') to allow the Exchange greater latitude in evaluating 
the listing eligibility of those securities which cannot be readily 
categorized under the Exchange's existing listing criteria; and (2) 
Section 107B of the Guide to provide for greater flexibility in the 
listing criteria for Equity-Linked Term Notes (``ELNs''). The text of 
the proposed rule change is available at the Office of the Secretary, 
Amex, and at the Commission.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the Amex included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The Amex has prepared summaries, set forth in sections 
(A), (B), and (C) below, of the most significant aspects of such 
statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and the 
Statutory Basis for, the Proposed Rule Change

    In March 1990, the Commission approved the adoption of Section 107A 
of the Guide, which provides listing criteria for hybrid securities, 
i.e., securities that have features common to both debt and equity 
securities, yet do not fit within the traditional definitions of such 
securities.\2\ In May 1993, the Commission approved the adoption of 
Section 107B of the Guide to specifically permit the listing of 
ELNs.\3\ An ELN is an intermediate-term, hybrid instrument whose value 
at maturity is linked to the performance of a highly capitalized, 
actively traded common stock or sponsored ADR.
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    \2\See Securities Exchange Act Release No. 27753 (March 1, 
1990), 55 FR 8626 (March 8, 1990).
    \3\See Securities Exchange Act Release No. 32343 (May 20, 1993), 
58 FR 30833 (May 27, 1993). The Exchange's ELNs listing standards 
were subsequently amended to broaden the universe of securities 
eligible to underlie an issue of ELNs. See Securities Exchange Act 
Release No. 33328 (December 13, 1993), 58 FR 66041 (December 17, 
1993) (order providing alternate trading volume and market 
capitalization requirements for the underlying security) and 34549 
(August 18, 1994), 59 FR 43873 (August 25, 1994) (order allowing 
ELNs linked to sponsored American Depositary Receipts (``ADRs'') and 
other securities issued by non-U.S. companies subject to reporting 
requirements under the Act) (``Exchange Act Release No. 34549'').
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    Section 107A of the Guide currently specifies minimum issuer 
qualifications, public distribution, aggregate market value guidelines, 
and other criteria to assist the Exchange in its case-by-case review 
and determination of the suitability of any hybrid security (including 
ELNs) for listing and trading. The Exchange now proposes to amend 
Section 107A of the Guide to provide additional flexibility in the 
listing of such securities. Specifically, it is proposed that the 
aggregate minimum market value criteria be changed from $20 million to 
$4 million, consistent with the current listing requirements for 
currency and index warrants under Section 106 of the Guide. The 
Exchange also proposes to eliminate, in favor of a case-by-case review, 
the minimum holder requirement for securities that are listed pursuant 
to Section 107A of the Guide but which are traded in thousand dollar 
denominations on the Exchange's bond trading floor.
    The Exchange believes that these revision will provide the Exchange 
with the flexibility necessary to evaluate the suitability of such 
securities for listing. The Exchange states that hybrid securities have 
special appeal for various investors, especially institutions. The 
Exchange also believes that securities admitted to listing under 
Section 107A of the Guide benefit investors by providing important 
investment, hedging, and market timing opportunities, as well as 
benefiting those issuers that offer hybrid securities as a means of 
raising capital at an advantageous cost.
    With respect to Section 107B, the Exchange proposes a number of 
changes which it believes will provide for greater flexibility in the 
listing criteria for ELNs and the criteria for the underlying linked 
stock. Specifically, the Exchange proposes to: (1) amend the definition 
of an ELN to encompass instruments which are linked, in whole or in 
part, to the market performance of a non-convertible preferred stock; 
(2) amend Section 107B(d) to provide an additional minimum market 
capitalization and trading volume tier for the underlying security of 
$500 million in market capitalization and 80 million shares traded in 
the 12-months prior to the date of listing;\4\ (3) amend Section 
107B(d) to 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;\5\ and (4) amend Section 107B(f) to provide for the 
issuance of ELNs, subject to the concurrence of the staff of the 
Commission, that relate to more than the allowable maximum percentages 
of outstanding shares of the underlying security.\6\ Finally, the 
Exchange proposes to clarify that issuers of ELNs have the option of 
specifying at the time of issuance that the issuer may satisfy their 
obligations at maturity of the ELN either with cash or by physical 
delivery of the underlying linked stock. The Exchange shall require any 
issuer that reserves the right to make physical delivery of the 
underlying stock at maturity, to publish notice, no less than 10 and no 
more than 20 business days prior to maturity of the ELN, of how the 
issuer intends to satisfy its obligations.\7\
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    \4\Currently, the underlying linked security must either have: 
(i) a minimum market capitalization of $3 billion and a trading 
volume in the U.S. during the 12 months preceding listing of the ELN 
of at least 2.5 million shares; or (ii) a minimum market 
capitalization of $1.5 billion and a trading volume in the U.S. 
during the 12 months preceding listing of the ELN of at least 20 
million shares.
    \5\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 of Section 107B of 
the Guide. 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 raise significant 
regulatory concerns for which a Section 19(b) rule filing would be 
required.
    \6\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.
    \7\See Amendment No. 1, supra note 1.
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    The Exchange believes these revisions strike an appropriate balance 
between the Exchange's responsiveness to innovation in the securities 
markets and its need to ensure the protection of investors and the 
maintenance of fair and orderly markets. Moreover, the Exchange 
believes that these changes will not have an adverse impact on the 
markets for the underlying linked security in view of the requirements 
that the linked security must have a large minimum market 
capitalization and a large trading volume over the preceding 12 months. 
Under the listing standards for ELNs, without approval from the staff 
of the Commission, an ELN issuer will only be able to issue an ELN 
linked to a maximum of 5% of the outstanding shares of the underlying 
security. The Exchange believes, therefore, that the issuer should be 
able to satisfy all, or substantially all, of its obligations at 
maturity by physical delivery of the linked security. Under these 
circumstances, the Exchange believes there would be no need or 
incentive on the part of the ELN issuer to enter the market for the 
linked security to any significant degree in order to discharge its 
obligations to ELN holders at the time of maturity. Additionally, all 
of the other requirements for the listing of ELNs currently in place 
will continue to apply to the listing of ELNs.\8\
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    \8\See Section 107B of the Guide.
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    The Amex believes the proposed rule change is consistent with 
Section 6(b) of the Act in general and furthers the objectives of 
Section 6(b)(5) in particular in that it is designed to prevent 
fraudulent and manipulative acts and practices, to promote just and 
equitable principles of trade, to foster cooperation and coordination 
with persons engaged in facilitating transactions in securities, and to 
remove impediments to and perfect the mechanism of a free and open 
market and a national market system.

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

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

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

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

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    The Amex has requested that the proposed rule change be given 
accelerated effectiveness pursuant to Section 19(b)(2) of the Act.
    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) of the Act\9\ 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, regarding the 
proposed amendments to Section 107A of the Guide, the Commission 
believes that the proposal will provide the Amex with added flexibility 
to list and trade hybrid securities, which may benefit investors by 
providing additional investment and hedging opportunities, as well as 
benefitting issuers who offer hybrid securities as a means of raising 
capital. Additionally, the proposed changes to Section 107A of the 
Guide will conform Amex's rules regarding the listing of hybrid 
securities to those already approved for the New York Stock Exchange, 
Inc. (``NYSE''). The NYSE's hybrid listing rules do not contain a 
minimum holder requirement for hybrid issues traded in thousand dollar 
denominations on the Exchange's bond floor. Additionally, Section 
703.19 of the NYSE's Listed Company Manual provides that an issue of a 
hybrid security must have a minimum market value at issuance of $4 
million.
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    \9\15 U.S.C. Sec. 78f(b)(5) (1982).
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    The Commission also believes that the proposed amendments to 
Section 107B of the Guide are consistent with the Act. Specifically, 
the proposal to amend 107B provide that ELNs may be linked to non-
convertible preferred stock, in addition to common stock, will conform 
Amex's rules to those approved by the Commission for the listing and 
trading of Equity-Linked Debt Securities (``ELDS'') on the NYSE.\10\
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    \10\See Section 703.21 of the NYSE Listed Company Manual.
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    With respect to the remaining amendments to Section 107B, the 
Commission believes that the proposed changes do not raise any 
significant regulatory issues that were not addressed in the 
Commission's prior approval orders regarding ELNs.\11\ The Commission 
finds that the proposal to add an additional market capitalization and 
trading volume requirement for eligible linked securities will expand 
the number of securities that can be linked to ELNs while maintaining 
the requirement that the linked security be an actively traded common 
stock or sponsored ADR issued by a highly capitalized issuer. While the 
proposal introduces a third alternative for ELN eligibility that 
reduces the minimum market capitalization requirement for the linked 
security, the stock of such an issuer (or sponsored ADR related 
thereto) could only be linked to an ELN issue if its trading volume in 
the U.S. for the prior one-year period is at least 80 million shares, 
which is four times higher than the current minimum trading volume 
requirement.\12\ 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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    \11\See supra note 3.
    \12\See supra note 4.
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    Additoinally, allowing the Amex, subject to the concurrence of the 
staff of the Commission, to approve an issue of ELNs that either does 
not satisfy one of the existing requirements regarding market 
capitalization and trading volume,\13\ or that exceeds the maximum 
allowable percentage of shares of the underlying security,\14\ 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.\15\
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    \13\See supra note 5.
    \14\See supra note 6.
    \15\If the Amex proposed an ELN that raised unique or 
significant regulatory concerns, the staff of the Commission would 
require the Amex to submit a rule filing to the Commission pursuant 
to Section 19(b) of the Act.
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    Finally, the Commission notes that the prior approval orders 
regarding ELNs\16\ did not contain a prohibition against an issuer 
retaining the ability to satisfy its obligations at maturity of the ELN 
either in cash or with shares of the underlying security. Without 
Commission approval, a particular issuance of ELNs may not be linked to 
more than 5% of the outstanding shares of the underlying security. In 
these cases, because of the large market capitalization and trading 
volume requirements for the underlying security, the Commission 
believes that the ELN will have minimal impact on the market for the 
underlying security even if the issuer determines to satisfy its 
obligations with shares and must purchase the necessary shares prior to 
maturity. We note that if the Commission were to approve an ELN related 
to more than the maximum allowable percentages specified in Section 
107B, the Commission would be able to impose restrictions and 
limitations, on a case-by-case basis, to minimize the potential of the 
ELN having an adverse impact on the market for the underlying security. 
The Commission also believes that it is appropriate for issuers to 
publish notice, no less than 10 and no more than 20 business days prior 
to maturity of the ELN, about the issuer's intention to satisfy its 
obligations to the holders of the ELNs with either cash or shares of 
the underlying security.\17\
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    \16\See supra note 3.
    \17\See Amendment No. 1, supra note 1.
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    The Commission finds good cause for approving the proposed rule 
change and Amendment No. 1 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 Exchange to begin listing hybrid 
securities (including ELNs) satisfying the revised listing standards 
described herein without delay. For the reasons discussed above, the 
Commission believes that the proposal does not raise any significant 
regulatory issues. The amendments to Section 107A and those allowing 
ELNs linked to nonconvertible preferred stock merely conform the Amex's 
rules to those previously approved for the NYSE, which were published 
and for which no comments were received by the Commission.\18\ 
Additionally, the Commission believes that the issues raised by the 
remaining proposed amendments to Rule 107B were adequately addressed in 
the Commission's prior approval orders regarding ELNs. Moreover, in 
recently approving the proposal by 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 Amex 
represented to the Commission that no problems had been reported 
regarding the listing and trading of ELNs.\19\
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    \18\See Securities Exchange Act Release No. 33468 (January 13, 
1994), 59 FR 3387 (January 21, 1994).
    \19\See Exchange Act Release No. 34549, supra note 3.
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    For the above reasons, the Commission believes it is consistent 
with Section 19(b)(2)\20\ of the Act to approve the proposed rule 
change and Amendment No. 1 to the proposal on an accelerated basis.
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    \20\15 U.S.C. Sec. 78s(b)(2) (1988).
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V. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing. Persons making written submissions 
should file six copies thereof with the Secretary, Securities and 
Exchange Commission, 450 Fifth Street NW., Washington, DC 20549. Copies 
of the submission, all subsequent amendments, all written statements 
with respect to the proposed rule change that are filed with the 
Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for inspection and copying in the 
Commission's Public Reference Section, 450 Fifth Street NW., 
Washington, DC 20549. Copies of such filing will also be available for 
inspection and copying at the principal office of the Amex. All 
submissions should refer to file Number SR-Amex-94-36 and should be 
submitted by October 28, 1994.
    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\21\ that the proposed rule change (SR-Amex-94-36), as amended, is 
approved.
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    \21\15 U.S.C. Sec. 78s(b)(2) (1982).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\22\
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    \22\17 CFR 200.30-3(a)(12) (1993).
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Jonathan G. Katz,
Secretary.
[FR Doc. 94-24843 Filed 10-6-94; 8:45 am]
BILLING CODE 8010-01-M