[Federal Register Volume 60, Number 86 (Thursday, May 4, 1995)]
[Notices]
[Pages 22084-22086]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-10969]



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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-35651; File SR-Amex-95-05]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change and Amendment No. 1 to the Proposed Rule Change by the American 
Stock Exchange, Inc., Relating to the Listing and Trading of Indexed 
Term Notes Linked to the Real Estate Index

April 27, 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 February 
16, 1995, the American Stock Exchange, Inc. (``Amex'' 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 Amex. On April 4, 1995, the Exchange 
filed Amendment No. 1 to the proposal.\1\ The Commission is publishing 
this notice to solicit comments on the proposed rule change, as 
amended, from interested persons.

    \1\In Amendment No. 1, the Exchange proposes to: (1) clarify the 
name of the Real Estate Index; (2) specify that the Real Estate 
Index will be initialized at a value of 100; and (3) amend the 
formula for calculating the value of the Real Estate Index. See 
Letter from Claire McGrath, Managing Director and Special Counsel, 
Amex, to Michael Walinskas, Branch Chief, Office of Market 
Supervision (``OMS''), Division of Market Regulation (``Division''), 
Commission, dated April 4, 1995.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to approve for listing and trading under 
Section 107A of the Amex Company Guide (``Guide'') intermediate-term, 
indexed notes (``Notes'') whose value will be linked in part to changes 
in the level of the Real Estate Index (``Index''), a new index designed 
to reflect general movements in the underlying market for commercial 
real estate. The Index is calculated by combining the performance of 
two separate equity indexes--one comprised entirely of large, actively 
traded Real Estate Investment Trusts (``REIT50 Index''), and the other 
being the Russell 2000 Index, a broad-based index comprised of small 
capitalization stocks (``Russell 2000''). The text of the proposed rule 
change is available at the Office of the Secretary, the Amex, and at 
the Commission.

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

    In its filing with the Commission, the Exchange 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

    Under Section 107 (Other Securities) of the Guide, the Exchange may 
approve for listing and trading securities which cannot be readily 
categorized under the listing criteria for common and preferred stocks, 
bonds, debentures, and warrants. The Amex now proposes to list for 
trading under Section 107A of the Guide, intermediate-term, indexed 
notes, the value of which can be expected to fluctuate based on changes 
in the level of an index designed to reflect general movements in the 
underlying market for commercial real estate by combining the 
performance of two separate equity indexes--one comprised entirely of 
large, actively trade real estate investment trusts (``REITS''), i.e., 
the REIT50 Index, and the other a broad-based index of small 
capitalization stocks, i.e., the Russell 2000.
Background
    According to the Exchange, by some estimates over half of the 
wealth in the United States and as much as one-fourth of total 
corporate value are in the form of real estate. In addition, the 
Exchange represents that studies of asset allocation demonstrate clear 
diversification benefits from allocating a portion of an investment 
portfolio to real estate as a separate asset class. Traditional 
investment in a diversified portfolio of commercial real estate, 
however, is not possible for most investors, in the Exchange's opinion, 
because of high transaction costs, market illiquidity, and the 
extremely large investment required to purchase a pool of properties 
diversified across different property types and geographic regions.
    The Exchange further represents that research has demonstrated that 
the performance associated with an index of REITs may be attributed 
partly to movements in the underlying real estate market and partly to 
the small capitalization nature of REIT securities. Therefore, by 
subtracting a portion of the returns associated with a broad-based 
small capitalization stock index from the returns generated by an index 
of REITs, the Exchange believes that an index can be generated that 
more closely reflects the performance of the underlying real estate 
market. The Exchange states that the proposed Notes are intended to use 
this method to provide an exchange-listed alternative for investors who 
wish to gain exposure to general movements in the real estate sector or 
whose portfolios are heavily weighted in real estate and wish to shed 
some of that exposure.
Note Structure
    The proposed Notes will conform to the listing guidelines under 
Section 107A of the Guide which provide, in part, that such issues 
have: (1) a public distribution of at least one million trading units; 
(2) a minimum of 400 holders; and (3) a market value of not less than 
$4 million.\2\ The Notes will have a term of two to five years and may 
provide for periodic payments to holders. Upon maturity, holders will 
receive not less than 90% of the original issue price plus an amount in 
U.S. dollars equal to a participation rate (i.e., a specified 
percentage) multiplied by the increase, if any, in the level of the 
Index at the time of the offering and the average of the closing Index 
level on the first ten days of the last twenty days preceding maturity 
(``Closing Index Level'').\3\

    \2\The proposal incorrectly indicates that Section 107A requires 
a market value of not less than $20 million. Section 107A was 
recently amended to set the minimum market value to $4 million. See 
Securities Exchange Act Release No. 34765 (September 30, 1994), 59 
FR 51220 (October 7, 1994).
    \3\If the Closing Index Level is lower than the level of the 
Index at the time of the offering, holders will receive at least 90% 
of the original issue price. The minimum level that holders will 
receive at maturity will be set at the time of the offering of the 
Notes.
    The Notes may not be redeemed prior to maturity and holders of the 
Notes have no claim to the securities underlying the Index. Thus, 
holders will be able to liquidate their investment prior to maturity 
only by selling the Notes in the secondary market. The Exchange 
anticipates that the trading value of the Notes in the secondary market 
will depend in large part on the value of the securities comprising the 
Index and such other factors as the level of interest rates, the 
volatility of the value of the Index, the time remaining to maturity, 
dividend rates, and the credit of the issuer.
    The Notes will be subject to the equity margin rules of the 
Exchange. The Exchange will also distribute a circular to its 
membership prior to trading the Notes providing guidance with regard to 
member firm compliance responsibilities (including suitability 
recommendations) when handling transactions in the notes and 
highlighting the special risks and characteristics of the 
Notes.\4\ [[Page 22085]] 

    \4\The Commission notes that the Amex will be required to submit 
a draft of the circular to the Commission staff for approval prior 
to distribution to members.
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The Index
    The Notes will be linked to the Real Estate Index, a new index 
designed to reflect general movements in the underlying market for 
commercial real estate. The Index is calculated as a combination of the 
performance of two separate equity indexes: the REIT50 Index, which is 
a total return index comprised of 50 large, actively traded REITS;\5\ 
and the Russell 2000 Index, which is a well-established capitalization-
weighted broad-based index designed to track the performance of the 
small capitalization segment of the stock market.\6\

    \5\See Discussion of the REIT50 Index, infra.
    \6\See Discussion of the Russell 200 Index, infra.
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    The Exchange represents that the method for calculating the value 
of the Index was developed based upon research that has demonstrated 
that the performance associated with an index of REITs may be 
attributed partly to movements in the underlying real estate market, 
and partly to the small capitalization nature of REIT stocks. 
Therefore, by subtracting a portion of the returns associated with a 
broad-based small capitalization stock index (such as the Russell 2000) 
from the returns generated by an index of REITs, the Exchange believes 
that an index can be generated that more closely reflects the 
performance of the underlying real estate market. Based on historical 
research and for purposes of simplicity, the Exchange has determined 
that the portion of small capitalization stock returns to be subtracted 
from the returns of the REIT50 Index will be set at a fixed level of 
50% of the value of the Russell 2000.
    The Index will initially be set at a level of 100 as of the market 
close on the day prior to the start of trading of the Notes. At any 
point in time, the Index value is calculated by multiplying the initial 
Index level (i.e., 100) by a factor determined as follows: First, the 
percentage change in the REIT50 Index from the market close on the day 
prior to the start of trading of the Notes is determined. Next, the 
percentage change of the Russell 2000 from the market close on the day 
prior to the start of trading of the Notes is determined. One half of 
the calculated percent change in the Russell 2000 is then subtracted 
from the calculated percent change in the REIG50 Index. This 
differential is added to the number one to yield the factor by which 
the initial Index level is multiplied to determine the current Index 
level. The following formula summarizes this calculation:
[GRAPHIC][TIFF OMITTED]TN04MY95.000


Where:
RE50=REIT50 Index.
R2000=Russell 2000 Index.
Init=Indicates the level of the designated index as of the market close 
on the day prior to the start of trading of the Notes.
t=Indicates the current level of the designated index.

    The Index will be calculated continuously based on the most 
recently reported values of the REIT50 Index and the Russell 2000 and 
disseminated every 15 seconds over the Consolidated Tape Association 
Network B.

Russell 2000 Index

    The Russell 2000 is a well established benchmark index of the 
small-capitalization segment of the U.S. equity market. Options on the 
Russell 2000 trade at the Chicago Board Options Exchange and futures 
trade at the Chicago Mercantile Exchange. The Russell 2000 is 
capitalization-weighted, and values are disseminated every 15 seconds 
to market vendors through the Option Price Reporting Authority. The 
value of the Russell 2000 does not reflect reinvestment of dividends 
paid on component stocks in the Index.
REIT50 Index
    The REIT50 Index is a new capitalization-weighted index and, as 
discussed below, is a total return index. The Exchange represents that 
the REIT50 Index conforms with Exchange Rule 901C, which specifies 
criteria for inclusion of stocks in an index on which standardized 
options will be traded. The REIT50 Index is composed of the 50 largest 
publicly-traded equity REITs, as measured by market capitalization. The 
REIT50 Index will be maintained so that at each quarterly review, as 
discussed below, over the prior six-month period, the components of the 
Index will have had an average monthly trading volume of at least 
400,000 shares with share prices greater than or equal to $5 for the 
majority of business days during the preceding three calendar 
months.\7\ The REIT50 Index also does not and will not include health 
care REITs or REITs that invest primarily in real estate mortgages or 
debt securities.\8\ The REIT50 Index also will exclude real estate 
operating companies and partnerships.\9\

    \7\Telephone conversation between Claire McGrath, Managing 
Director and Special Counsel, Amex, and Brad Ritter, Senior Counsel, 
OMS, Division, Commission, on April 5, 1995.
    \8\Id.
    \9\Id.
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    The Exchange will review the component securities on a quarterly 
basis to ensure that the REIT50 Index continues to represent only the 
largest and most actively traded REITs. After the close of trading on 
the last business day of December, March, June, and September, all 
eligible REITs will be ranked by descending market capitalization, and 
the 50 largest, subject to the maintenance criteria discussed above, 
will comprise the REIT50 Index until the next quarterly review. Only 
REITs that have been trading for at least three calendar months will be 
considered for inclusion in the REIT50 Index. Resulting composition 
changes will be made after the close of trading on the third Friday of 
January, April, July, and October. The divisor of the REIT50 Index will 
be adjusted as necessary to ensure that there is no discontinuity in 
the value of [[Page 22086]] the REIT50 Index as a result of these 
replacements.
    The number of component stocks in the REIT50 Index will remain 
fixed between quarterly reviews. In the event that one or more 
component securities must be removed due to merger, takeover, 
bankruptcy, or other circumstances, the REIT next on the list from the 
most recent quarterly review, subject to the maintenance criteria 
discussed above, will be selected to replace that security in the 
REIT50 Index. In such case, the divisor will be adjusted as necessary 
to ensure that there is no discontinuity in the value of the REIT50 
Index.
    The REIT50 Index is a total return index in that the regular cash 
dividends of its component securities are included in calculating the 
value of the REIT50 Index. Therefore, at the close of trading each day, 
the prices of component securities that will trade ``ex-dividend'' the 
next day will be adjusted (downward) by the value of the dividend to 
reflect the price impact on the stock as it trades without (or ``ex'') 
the dividend on the following day. The divisor is then adjusted to 
ensure continuity of the Index value. The REIT50 Index value will be 
calculated and disseminated every 15 seconds over the Consolidated Tape 
Association's Network B under a separate ticker symbol so that the two 
component indexes that comprise the Index (i.e., the REIT50 and the 
Russell 2000 Indexes) may be monitored separately, and the Index value 
calculated independently.
    Because the Notes are linked to an index of equity securities, the 
Exchange's equity floor trading rules will apply to the trading of the 
Notes. In addition, members and member firms will have an obligation 
pursuant to Exchange Rule 411 to learn the essential facts relating to 
every customer prior to trading the Notes. The Exchange also will 
require, pursuant to Exchange Rule 411, that a member or member firm 
specifically approve a customer's account for trading the Notes prior 
to, or promptly after, the completion of the transaction.
    The Exchange believes 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) 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 inappropriate 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 solicited or received with respect to the 
proposed rule change.

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

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) By order approve such proposed rule change, or
    (B) Institute proceedings to determine whether the proposed rule 
change should be disapproved.

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, N.W., Washington, D.C. 20549. 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
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, N.W., 
Washington, D.C. Copies of such filing will also be available for 
inspection and copying at the principal office of the Amex. All 
submissions should refer to File No. SR-Amex-95-05 and should be 
submitted by May 25, 1995.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\10\

    \10\17 CFR 200.30-3(a)(12) (1994).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-10969 Filed 5-3-95; 8:45 am]
BILLING CODE 8010-01-M