[Federal Register Volume 60, Number 54 (Tuesday, March 21, 1995)]
[Notices]
[Pages 14993-14995]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-6842]



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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-35479; File No. SR-Phlx-95-09]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by the Philadelphia Stock 
Exchange, Inc. Relating to Listing Criteria for Equity Linked Notes 
(``ELNs'')

March 13, 1995.
    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 March 8, 
1995, the Philadelphia Stock Exchange, Inc. (``Phlx'' or ``Exchange'') 
filed with the Securities and Exchange Commission (``Commission'') the 
proposed rule change as described in Items I, II, and III below, which 
Items have been prepared by the Exchange. the Commission is publishing 
this notice to solicit comments on the proposed rule change from 
interested persons.

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Phlx proposes to amend Exchange Rule 803 to adopt listing 
standards for equity linked notes (``ELNs''). The text of the proposed 
rule change is available at the Office of the Secretary, the Phlx, 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 Phlx included statements 
concerning the purpose of and basis for the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The Exchange has prepared summaries, set forth in 
Section (A), (B), and (C) below, of the most significant aspects of 
such statements.

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

    The purpose of the proposed rule change is to add subsection (h) to 
Exchange Rule 803 to permit the Exchange to list and trade ELNs. ELNs 
are intermediate-term, hybrid securities, whose value is based in whole 
or in part, to the performance of a highly capitalized, actively traded 
U.S. common stock, non-convertible preferred stock, or foreign security 
that is traded in the U.S. in the form of sponsored American Depositary 
Receipts (``ADRs''), ordinary shares, or otherwise.\1\ ELNs may pay 
periodic interest or may be issued as zero-coupon instruments with no 
payments to holders prior to maturity. ELNs may be subject to a ``cap'' 
on the maximum principal amount to be repaid to holders upon maturity, 
and they may feature a ``floor'' on the minimum principal amount paid 
to holders upon maturity. A specific issue of ELNs, for example, may 
provide holders with a fixed semi-annual interest payment, while 
capping the maximum amount to be repaid upon maturity at 135% of the 
issuance price, with no minimum floor guarantee on the principal to be 
repaid at maturity. Another issue of ELNs might offer lower semi-annual 
payments based upon a floating interest rate\2\ with a minimum floor 
for the repayment of principal of 75% of the issuance price. ELNs will 
be treated as equity instruments for, among other purposes, margin 
requirements. According to the Phlx, the flexibility available to an 
issuer of ELNs permits the creation of securities which offer issuers 
and investors the opportunity to more precisely focus on a specific 
investment strategy.

    \1\The Phlx will notify the Commission if an issue of ELNs is 
structured so that it is convertible prior to maturity and will 
submit a rule filing pursuant to Section 19(b) of the Act prior to 
listing ELNs with such terms if the Commission so requires.
    \2\The Phlx will notify the Commission if an issue of ELNs 
provides for periodic interest payments to holders based on a 
floating rate and will submit a rule filing pursuant to Section 
19(b) of the Act prior to listing ELNs with such terms if the 
Commission so requires.
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    There are four components to the proposed listing standards for 
ELNs: (1) ELN issuer standards; (2) ELN offering standards; (3) 
underlying linked security standards; and (4) limitations on the size 
of ELN offerings.
1. Issuer Listing Standards
    The issuer must be listed on or be an affiliate of a company listed 
on a national securities exchange or the Nasdaq National Market. Each 
issuer must also have a minimum tangible net worth of $150 million. 
Finally, the market value of an ELN offering, when combined with the 
market value of all other ELN offerings previously completed by the 
issuer and traded on a national securities exchange or through Nasdaq 
may not be grater than 25% of the issuer's tangible net worth at the 
time of issuance.
2. Offering Standards
    In order to ensure adequate liquidity in the markets for ELNs, each 
issuance of an ELN must have: (1) A minimum public distribution of one 
million ELNs; (2) a minimum of 400 holders of the ELNs, unless the ELNs 
are traded in $1,000 denominations, in which case thee is no minimum 
number of holders required; (3) a minimum market value of $4 million; 
and (4) a term to maturity of two to seven years (although ELNs linked 
to a non-U.S. security (including a sponsored ADR) can not have a term 
longer than three years).
3. Underlying Linked Security Standards
    In order to help ensure that ELNs will not have a disruptive effect 
on the market for the underlying securities, the linked securities must 
have sufficiently large market capitalizations and high trading 
volumes. Specifically, an underlying security must have: (1) A minimum 
market capitalization of $3 billion and trading volume in the United 
States of at least 2.5 million shares in the 12-month period preceding 
the listing of the ELN; (2) a minimum market capitalization of $1.5 
billion and trading volume in the United States of at least 20 million 
shares in the 12-month period preceding the listing of the ELN; or (3) 
a minimum market capitalization of $500 million and trading volume in 
the United States of at least 80 million shares in the 12-month period 
preceding the listing of the ELN. In addition, if an issuer proposes to 
issue ELNs on a security that does not meet the market capitalization 
and trading volume standards set forth above, the Phlx, with the 
concurrence of the staff of the Commission, may evaluate the trading 
volume, public float, and market capitalization of that security, as 
well as other relevant factors, and determine on a case-by-case basis 
that it is appropriate to list ELNs overlying that security. The Phlx 
will submit a rule filing pursuant to Section 19(b) of the Act if so 
required by the Commission if significant regulatory concerns are 
raised by a proposed ELN offering that does not meet the above market 
capitalization and trading volume standards.\3\

    \3\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.
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    The issuer of the linked security must be a reporting company under 
the Act and the underlying linked security must be traded on a national 
securities exchange or through Nasdaq and be [[Page 14994]] subject to 
last sale reporting pursuant to Rule 11Aa3-1 under the Act. 
Additionally, ELNs can be linked to certain non-U.S. companies\4\ 
subject to reporting requirements under the Act whose securities are 
traded in the U.S. either as ordinary shares or sponsored ADRs, 
provided there are at least 2,000 holders of the underlying linked 
security. For ELNs linked to non-U.S. securities (including sponsored 
ADRs) either: (1) The Exchange must also have in place a comprehensive 
surveillance agreement with the primary exchange in the home country 
where the security underlying the ELN is primarily traded (or in the 
case of sponsored ADRs, on the primary exchange where the security 
underlying the ADR is traded); or (2) the combined trading volume of 
the underlying security and other related securities occurring in the 
U.S. market represents (on a share equivalent basis) at least 50% of 
the combined worldwide trading volume in the underlying security, other 
related securities, and other classes of common stock related to the 
underlying security over the six month period preceding the date of 
listing of the ELN. The U.S. market includes trading only on the U.S. 
self-regulatory organizations included in the Intermarket Surveillance 
Group\5\ and linked through the Intermarket Trading System.\6\

    \4\A non-U.S. company is any company formed or incorporated 
outside of the United States.
    \5\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 
American Stock Exchange, Inc. (``Amex''); the Boston Stock Exchange, 
Inc.; the Chicago Board Options Exchange, Inc. (``CBOE''); the 
Chicago Stock Exchange, Inc.; the Cincinnati Stock Exchange, Inc.; 
the National Association of Securities Dealers, Inc. (``NASD''), the 
New York Stock Exchange, Inc. (``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.
    \6\ITS is a communications system designed to facilitate trading 
among competing markets by providing each market with order routing 
capabilities based on current quotation information. The system 
links the participant markets and provides facilities and procedures 
for: (1) the display of composite quotation information at each 
participant market, so that brokers are able to determine readily 
the best bid and offer available from any participant for multiply 
trading securities; (2) efficient routing of orders and sending 
administrative messages (on the functioning of the system) to all 
participating markets; (3) participation, under certain conditions, 
by members of all participating markets in opening transactions in 
those markets; and (4) routing orders from a participating market to 
a participating market with a better price.
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4. Limitations of Size of Particular ELN Offerings
    Without the concurrence of the staff of the Commission, the 
issuance of ELNs relating to any underlying U.S. security may not 
exceed five percent of the total outstanding shares of such underlying 
security. Further, without the concurrence of the staff of the 
Commission, the issuance of ELNs relating to any non-U.S. security 
(including sponsored ADRs) that is traded in the U.S. and is issued by 
a non-U.S. company subject to U.S. reporting requirements may not 
exceed: (1) 2% of the total shares outstanding worldwide provided at 
least 30% of the worldwide trading volume in the underlying security 
occurs in the U.S. market during the six month period preceding the 
date of listing of the ELN; (2) 3% of the total shares outstanding 
worldwide provided at least 50% of the worldwide trading volume in the 
underlying security occurs in the U.S. market during the six month 
period preceding the date of listing of the ELN; or (3) 5% of the total 
shares outstanding worldwide provided at least 70% of the worldwide 
trading volume in the underlying security occurs in the U.S. market 
during the six month period preceding the date of listing of the ELN. 
An ELN may not be linked to a non-U.S. security (including a sponsored 
ADR) where such security and all related securities had less than 30% 
of the worldwide trading volume occur in the U.S. during the six month 
period preceding the date of listing of the ELN. The Exchange may 
determine, on a case-by-case basis and with the concurrence of the 
staff of the Commission, to approve for listing ELNs that relate to 
more than these allowable percentages.\7\

    \7\As with the market capitalization and trading volume 
requirements, the Commission notes that based on the proposed facts, 
the Phlx 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 Phlx proposal to list ELNs related to more than the 
allowable percentages of outstanding shares of the underlying 
security.
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    Finally, because ELNs are linked to price movements in another 
security, the Exchange proposes three additional safeguards that are 
designed to satisfy the investor protection concerns raised by the 
trading of ELNs. First, for each ELN issue, the Exchange will 
distribute a circular to its membership\8\ providing guidance 
concerning member firm compliance responsibilities (including 
suitability recommendations and account approval) when handling 
transactions in ELNs. Second, members will have a duty of due diligence 
pursuant to Exchange Rule 746 to learn the essential facts relating to 
every customer trading ELNs prior to their first ELN transaction. 
Third, pursuant to Exchange Rule 747, a member must approve a 
customer's account for trading ELNs prior to the completion of the 
customer's first ELN transaction.

    \8\The Commission notes that the circular must be in a form 
approved by the Commission.
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    The Phlx represents that the proposed rule change is consistent 
with Section 6(b) of the Act in general and furthers the objectives of 
Section 6(b)(5)\9\ 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 regulating, clearing, settling, processing 
information with respect to, and facilitating transactions in 
securities, to remove impediments to and perfect the mechanism of a 
free and open market and a national market system and in general to 
protect investors and the public interest. Specifically, the Phlx 
believes the proposal strikes an appropriate balance between the Phlx's 
need to adapt and respond to innovations in the securities markets and 
the Phlx's concomitant need to ensure the protection of investors and 
the maintenance of fair and orderly markets. The Phlx believes the 
proposed numerical, quantitative listing standards should ensure that 
only substantial companies capable of meeting their contingent 
obligations created by ELNs are able to list such products on the 
Exchange. Similarly, by providing for the distribution of circulars to 
the membership concerning member firm compliance responsibilities and 
requirements, the Phlx believes the proposal addresses any potential 
sales practice concerns that may arise in connection with ELNs. The 
Phlx also believes that the trading of ELNs will provide investors with 
important investment and hedging benefits that will serve to satisfy 
better their investment and portfolio management needs.

    \9\15 U.S.C. 78f(b)(5) (1988).
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(B) Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition. [[Page 14995]] 

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

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

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

    Because the foregoing proposed rule change: (1) Does not 
significantly affect the protection of investors or the public 
interest; (2) does not impose any significant burden on competition; 
and (3) does not become operative for 30 days from February 22, 1995, 
it has become effective pursuant to Section 19(b) (3) (A) of the Act 
and Rule 19b-4 (e) (6) thereunder. The proposed ELN listing standards 
are virtually identical to the listing standards for equity linked 
notes previously approved by the Commission for NYSE,\10\ the Amex,\11\ 
the CBOE,\12\ and the NASD.\13\ Accordingly, because the Commission has 
already approved similar rules for other exchanges, the Phlx believes 
that summary effectiveness of the proposed rule change will not 
significantly affect the protection of investors or the public interest 
and will not impose any significant burden on competition.\14\ At any 
time within 60 days of the filing of the proposed rule change, the 
Commission may summarily abrogate such rule change if it appears to the 
Commission that such action is necessary or appropriate in the public 
interest, for the protection of investors, or otherwise in furtherance 
of the purposes of the Act.

    \10\See Securities Exchange Act Release Nos. 33468 (January 13, 
1994), 59 FR 3387 (January 21, 1994) (order originally approving the 
listing of ELNs on 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 on the NYSE); 
34545 (August 18, 1994), 59 FR 43877 (August 25, 1994) (order 
approving the listing of ELNs on the NYSE linked to securities 
issued by non-U.S. companies).
    \11\See Secruities Exchange Act Release Nos. 32343 (May 20, 
1993), 58 FR 30833 (May 27, 1993) (order originally approving the 
listing of ELNs on 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 on the 
Amex); 34549 (August 18, 1994), 59 FR 43873 (August 25, 1994) (order 
approving the listing of ELNs on the Amex linked to securities 
issued by non-U.S. companies).
    \12\See Securities Exchange Act Release No. 34759 (September 30, 
1994), 59 FR 50939 (October 6, 1994).
    \13\See Securities Exchange Act Release No. 34758 (September 30, 
1994), 59 FR 50943 (October 6, 1994).
    \14\The Commission notes that prior to listing any ELNs, the 
Exchange will be required to obtain approval from the staff of the 
Commission concerning the Exchange's surveillance procedures 
applicable to the trading ELNs.
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing. Persons making written submissions 
should file six copies thereof with the Secretary, Securities and 
Exchange Commission, 450 Fifth Street NW., Washington, D.C. 20549. 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for inspection and copying at the 
Commission's Public Reference Section, 450 Fifth Street NW., 
Washington, D.C. 20549. Copies of such filing will also be available 
for inspection and copying at the principal office of the Phlx. All 
submissions should refer to File No. SR-Phlx-95-09 and should be 
submitted by April 11, 1995.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\15\

    \15\17 CFR 200.30-3 (a)(12) (1994).
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Johathan G. Katz,
Secretary.
[FR Doc. 95-6842 Filed 3-20-95; 8:45 am]
BILLING CODE 8010-01-M