[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