[Federal Register Volume 60, Number 125 (Thursday, June 29, 1995)]
[Notices]
[Pages 33884-33887]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-16054]



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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-35886; File No. SR-Amex-95-20]


Self-Regulatory Organizations; Order Granting Accelerated 
Approval of a Proposed Rule Change and Notice of Filing and Order 
Granting Accelerated Approval of Amendment Nos. 1 and 2 to the Proposed 
Rule Change by the American Stock Exchange, Inc. Relating to the 
Listing and Trading of Indexed Term Notes

June 23, 1995.
    On May 30, 1995, the American Stock Exchange, Inc. (``Amex'' or 
``Exchange'') submitted to the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b) of the Securities Exchange 
Act of 1934 (``Act''),\1\ and Rule 19b-4 thereunder,\2\ a proposed rule 
change to list and trade indexed term notes (``Notes''), the return on 
which is based in whole or in part on changes in the value of twenty-
four (24) equity securities of companies that have been identified by 
the Note underwriter, The Bear Stearns Companies (``Bear Stearns''), as 
``consolidation candidates.'' Notice of the proposal appeared in the 
Federal Register on June 9, 1995.\3\ No comment letters were received 
on the proposal. The Exchange filed Amendment No. 1 to the proposed 
rule change on June 12, 1995,\4\ and Amendment No. 2 on June 20, 
1995.\5\ This order approves the Amex proposal, as amended.

    \1\ 15 U.S.C. 78s(b)(1) (1988).
    \2\ 17 CFR 240.19b-4 (1994).
    \3\ See Securities Exchange Act Release No. 35802 (June 2, 
1995), 60 FR 30614.
    \4\ In Amendment No. 1, the Exchange amended the proposal to 
provide that at maturity, (1) holders of the Notes will participate 
in 90% of the percentage change between the ``original portfolio 
value'' and the ``average portfolio value''; and (2) the average 
portfolio value will be determined by reference to the average of 
the monthly closing Index values over the term of the Notes. See 
Letter from William Floyd-Jones, Jr., Assistant General Counsel, 
Legal & Regulatory Policy Division, Amex, to Michael Walinskas, 
Branch Chief, Office of Market Supervision (``OMS''), Division of 
Market Regulation (``Division''), Commission, dated June 8, 1995 
(``Amendment No. 1'').
    \5\ In Amendment No. 2, as described below, the Exchange 
clarifies the Exchange rules that will govern the trading of the 
Notes. See Letter from Michael Bickford, Vice President, Capital 
Markets Group, Amex, to Michael Walinskas, Branch Chief, OMS, 
Division, Commission, dated June 20, 1995 (``Amendment No. 2'').
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    Under Section 107 of the Amex Company Guide (``Guide''), the 
Exchange may approve for listing and trading securities which cannot be 
readily categorized under the listing criteria for common and preferred 


[[Page 33885]]
stocks, bonds, debentures, or warrants.\6\ The Amex now proposes to 
list for trading, under Section 107A of the Guide, Notes whose value is 
based in whole or in part on changes in the value of twenty-four (24) 
equity securities of companies that have been identified by the Note 
underwriter as ``consolidation candidates'' (``Index'').\7\

    \6\ See Securities Exchange Act Release No. 27753 (March 1, 
1990), 55 FR 8626 (March 8, 1990).
    \7\ The components of the Index are: Agouron Pharmaceuticals, 
Inc; Biogen, Inc.; Campbell Soup Co.; Crestar Financial Corp.; 
Electronic Arts, Inc.; Heinz (H.J.) Co.; Healthcare COMPARE Corp.; 
Integra Financial Corp.; McCormick & Co., Inc.; Mercantile 
Bancorporation; Mesa, Inc.; Midlantic Corp., Inc.; The Money Store, 
Inc.; Multicare Companies, Inc.; Oryx Energy Co.; Physician Corp. of 
America; Protein Design Labs, Inc.; Quaker Oats Co.; Santa Fe Energy 
Resources; Sierra Health Services, Inc.; Triton Energy Corp.; United 
Companies Financial Corp.; Upjohn Co.; and Vertex Pharmaceuticals, 
Inc.
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    The Notes are non-convertible debt securities of Bear Stearns, and 
will conform to the listing guidelines under Section 107A of the 
Guide.\8\ The Notes will have a term of three years from the date of 
issue. The Notes provide for a single payment at maturity, and will 
bear no periodic payments of interest. At maturity, the Notes will 
entitle the holder to receive an amount based upon ninety percent (90%) 
of the percentage change between the ``original portfolio value'' \9\ 
and the ``average portfolio value'',\10\ provided, however that the 
amount payable at maturity will not be less than 90% of the principal 
amount of the Notes. Thus, while there is no cap on the appreciation, 
investors participate in only 90% of the appreciation, as calculated 
above.\11\ The Notes are cash-settled in that they do not give the 
holder any right to receive an Index security or any other ownership 
right or interest in the securities comprising the Index, although the 
return on the investment is based on the aggregate value of the Index.

    \8\ Specifically, the Notes must have: (1) A minimum public 
distribution of one million trading units; (2) a minimum of 400 
holders; (3) an aggregate market value of at least $4 million; and 
(4) a term of at least one year. Additionally, the issuer of the 
Notes must have assets of at least $100 million, stockholders' 
equity of at least $10 million, and pre-tax income of at least 
$750,000 in the last fiscal year or in two of the three prior fiscal 
years. As an alternative to these financial criteria, the issuer may 
have either: (1) assets in excess of $200 million and stockholders' 
equity in excess of $10 million; or (2) assets in excess of $100 
million and stockholders' equity in excess of $20 million.
    \9\ The ``original portfolio value'' is the closing level of the 
Index at the time that the Notes are priced immediately preceding 
the issuance of the Notes.
    \10\ The ``average portfolio value'' is the average of the 
closing values of the Index on the last trading day of each of the 
36 months during the term of the Notes. See Amendment No. 1, supra 
note 4.
    \11\ The Commission notes that because the average portfolio 
value is based on an average of closing Index values over the term 
of the Notes, the percentage change between the ``original portfolio 
value'' and the ``average portfolio value'' may be significantly 
different than the percentage change in the value of the Index 
between the date that the Notes are issued and the maturity date for 
the Notes.
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    According to the Amex, the Notes will allow investors to combine 
the protection of a portion of the principal amount of the Notes with a 
potential additional payment based upon the performance of an Index of 
24 equity secuities of ``consolidation candidates''. In particular, the 
proposed Notes will provide 90% principal protection with the 
opportunity to participate in 90% of any appreciation of the underlying 
Index, as calculated above.
    The Index consists of 24 securities that satisfy the following 
criteria: (1) A minimum market capitalization per component of $75 
million, except that up to 10% of the number of component securities in 
the Index may have individual market capitalizations of not less than 
$50 million; (2) trading volume per Index component in each of the six 
months prior to the offering of the Notes of not less than one million 
shares, except that up to 10% of the number of Index component 
securities may have a trading volume in each of the six months prior to 
the offering of not less than 500,000; (3) at least 90% of the number 
of components in the Index will satisfy the then current criteria for 
standardized options trading set forth in Exchange Rule 915; (4) all 
components of the Index will be listed on the Amex or the New York 
Stock Exchange, or will be National Market securities traded through 
Nasdaq; and (5) all components of the Index will be subject to last 
sale reporting pursuant to Rule 11Aa3-1 of the Act.
    At the outset, each of the securities in the Index will have equal 
representation. Specifically, each security included in the Index will 
be assigned a multiplier on the date of issuance of the Notes so that 
each component represents an equal percentage of the value of the Index 
on the date of issuance. The multiplier indicates the number of shares 
of a security, rounded to the nearest whole share, given its market 
price on an exchange or through Nasdaq, to be included in the 
calculation of the Index. Accordingly, each of the 24 companies 
included in the Index will represent approximately 4.17 percent of the 
weight of the Index at the time of issuance of the Notes. The Index 
divisor will initially be set to provide a benchmark value of 100.00 at 
the close of trading on the day preceding the issuance of the Notes.
    The number of shares of each component stock in the Index will 
remain fixed except in the event of certain types of corporate actions 
such as the payment of a dividend (other than an ordinary cash 
dividend), a stock distribution, stock split, reverse stock split, 
rights offering, distribution, reorganization, recapitalization, or 
similar event with respect to the component securities. The number of 
shares of each component security may also be adjusted, if necessary, 
in the event of a merger, consolidation, dissolution, or liquidation of 
an issuer, or in certain other events such as the distribution of 
property by an issuer to shareholders. Shares of a component security 
may be replaced (or supplemented) with other securities under certain 
circumstances, such as the conversion of a component stock into another 
class of security, or the spin-off of a subsidiary. If the security 
remains in the Index, the number of shares of that security will be 
adjusted, if necessary, to the nearest whole share, to maintain the 
component's relative weight in the Index at the level immediately prior 
to the corporate action.\12\ In all cases, the divisor will be 
adjusted, if necessary, to ensure continuity of the value of the Index. 
In the event that a security in the Index is canceled due to a 
corporate consolidation and the holders of such security receive cash, 
the cash value of such securities will be included in the Index and 
will accrue interest at LIBOR to term, compounded daily.

    \12\ Telephone conference between Michael Bickford, Vice 
President, Capital Markets Group, Amex, and Brad Ritter, Senior 
Counsel, OMS, Division, Commission, on June 20, 1995 (``June 20 
Conversation''). The issuer will not attempt to find a replacement 
stock or compensate for the extinction of a security due to 
bankruptcy or a similar event.
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    The value of the Index will be calculated continuously by the Amex 
and will be disseminated every 15 seconds over the Consolidated Tape 
Association's Network B. The Index value will equal the sum of the 
products of the most recently available market prices and the 
applicable multipliers for the securities in the Index.
    The Notes may not be redeemed prior to maturity and are not 
callable by the issuer. Holders of Index Notes will be able to cash-out 
of their investment only by selling the Notes on the Amex. The Exchange 
anticipates that the trading value of the Notes in this secondary 
trading market will depend in large part on the value of the securities 
compromising the Index and also on such other factors as the level of 
interest rates, the volatility of the value of the 

[[Page 33886]]
Index, the time remaining to maturity, dividend rates, and the 
creditworthiness of the issuer, Bear Stearns.\13\

    \13\ See Amendment No. 2, supra note 5.
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    Because Index Notes are linked to an index of equity securities, 
the Amex's existing equity floor trading rules will apply to the 
trading of Index Notes.\14\ First, pursuant to Amex Rule 411, 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 Index Notes.\15\ Second, consistent with Amex Rule 411, the 
Exchange will further require that a member or member firm specifically 
approve a customer's account for trading Index Notes prior to, or 
promptly after, the completion of the transaction.\16\ Third, Index 
Notes will be subject to the equity margin rules of the Exchange.\17\ 
Fourth, the Exchange will, prior to trading Index Notes, distribute a 
circular to the membership providing guidance with regard to member 
firm compliance responsibilities (including suitability 
recommendations) when handling transactions in Index Notes and 
highlighting the special risks and characteristics of the Index 
Notes.\18\

    \14\ Id.
    \15\ Id. Amex Rule 411 requires that every member, member firm 
or member corporation use due diligence to learn the essential facts 
relative to every customer and to every order or account accepted.
    \16\ See Amendment No. 2, supra note 5.
    \17\ Id.
    \18\ Id. The Commission notes that the circular should also 
highlight the formula for calculating the payment to holders at 
maturity as well as the participation rate in the appreciation of 
the Index, as described above.
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III. Commission Findings and Conclusions

    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.\19\ 
Specifically, the Commission believes that providing for exchange-
trading of the Notes will offer a new and innovative means of 
participating in the market for securities identified by the issuer of 
the Notes as consolidation candidates.\20\ In particular, the 
Commission believes that the Notes will permit investors to gain equity 
exposure in such companies, while at the same time, limiting the 
downside risk of their original investment. For the reasons discussed 
in the Indexed Term Note Approval Orders, the Commission finds that the 
listing and trading of the Notes is consistent with the Act.\21\

    \19\ 15 U.S.C. 78f(b)(2) (1988).
    \20\ The Commission notes that the Index Notes are very similar 
in structure to other indexed term notes recently approved by the 
Commission for listing on the Amex. See Securities Exchange Act 
Release Nos. 34820 (October 11, 1994), 59 FR 52571 (October 18, 
1994) (approval for listing of indexed term notes linked to a 
portfolio of ``basic'' industry securities), 34723 (September 27, 
1994), 59 FR 50631 (October 4, 1994) (approval for listing of 
indexed term notes linked to a portfolio of banking industry 
securities), and 33495 (January 19, 1994), 59 FR 3883 (January 27, 
1994) (approval for listing of Telecommunications Basket Stock 
Upside Note Securities) (collectively, Indexed Term Note Approval 
Orders'').
    \21\ Id.
    As with the other indexed term notes approved for listing by the 
Exchange, the Notes are not leveraged instruments. Their price, 
however, will still be derived and based upon the underlying linked 
securities. Accordingly, the level of risk involved in the purchase or 
sale of Index Notes is similar to the risk involved in the purchase or 
sale of traditional common stock. Nonetheless, the Commission has 
several specific concerns with this type of products because the final 
rate or return of the Notes is derivatively priced, based on the 
performance of the underlying securities. The concerns include: (1) 
Investor protection concerns, (2) dependence on the credit of the 
issuer of the security, (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 securities.\22\ The Commission believes the Amex has adequately 
addressed each of these issues such that the Commission's regulatory 
concerns are adequately minimized.\23\ In particular, by imposing the 
listing standards, suitability, disclosure, and compliance requirements 
noted above, the Amex has adequately addressed the potential public 
customer concerns that could arise from the hybrid nature of the 
Notes.\24\ Moreover, the Commission believes that the Exchange's 
existing surveillance procedures are adequate to detect and deter any 
attempts at manipulation of the Notes and the securities in the Index.

    \22\ Id.
    \23\ Id.
    \24\ The Exchange will also distribute a circular to its 
membership calling attention to the specific risks associated with 
the Notes. See supra note 18.
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    Further, the Commission believes that the listing standards and 
issuance restrictions discussed above, particularly, the objective 
standards for market capitalization, trading volume, and options 
eligibility, will ensure that at the time that the Notes are issued, 
the Index will be composed of highly capitalized, liquid securities. As 
a result, the Commission believes that any concerns regarding the 
potential for manipulation of the Index or adverse market impact on the 
securities comprising the Index are adequately minimized.
    The Commission realizes that Index Notes are dependent upon the 
individual credit of the issuer, Bear Stearns. To some extent this 
credit risk is minimized by the Exchange's listing standards in Section 
107A of the Guide which provide that only issuers satisfying 
substantial asset and equity requirements may issue securities such as 
Index Notes.\25\ In addition, the Exchange's hybrid listing standards 
further require that Index Notes have at least $4 million in market 
value.\26\ In any event, financial information regarding Bear Stearns, 
in addition to the information on the issuers of the securities 
comprising the Index, will be publicly available.\27\

    \25\ See supra note 8.
    \26\ See Amex Company Guide Sec. 107A.
    \27\ The companies that comprise the Index are reporting 
companies under the Act.
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    The Commission finds good cause for approving the proposed rule 
change and Amendment Nos. 1 and 2 to the proposal prior to the 
thirtieth day after the date of publication of notice of filing thereof 
in the Federal Register. Specifically, the proposal, as amended, is 
substantively similar to other indexed term notes that the Commission 
has approved for listing by the Amex.\28\ To the Commission's 
knowledge, these other issues of notes have traded on the Amex without 
any material problems occurring.\29\ The only substantive differences 
between these Notes and those previously approved are the composition 
of the index of securities on which the values of the Notes will be 
based, the method for calculating the value to be received by holders 
upon maturity of the Notes, and the amount of participation by 
investors in the appreciation of the Index during the term of the 
Notes. With regard to the composition of the Index, as discussed above, 
the Commission believes that the objective eligibility standards for 
including a particular security in the Index minimize the potential for 
manipulation of the Notes and any possible adverse market impact on the 
securities contained in the Index.

    \28\ See Indexed Term Note Approval Orders, supra note 20.
    \29\ See June 20 Conversation, supra note 12.
    The Commission also believes that the proposed method for 
calculating the amount to be paid to holders at maturity does not raise 
any significant regulatory concerns. The formula used here involves the 
averaging of 36 monthly 

[[Page 33887]]
closing Index values over a three year period. Accordingly, the 
Commission believes that this calculation method reduces the potential 
for manipulation. Moreover, as noted above, the Amex has adequate 
surveillance procedures in place to detect and deter attempts at 
manipulation involving either the Notes or the securities contained in 
the Index. Similarly, the Commission also believes that limiting 
investors' participation in the appreciation of the Index does not 
raise any regulatory concerns. The Commission has previously approved 
equity linked products where investors only receive a percentage of the 
appreciation of the linked securities.\30\ As a result, the Commission 
believes that these aspects of the Notes are consistent with the Act so 
long as they are adequately disclosed to investors by the issuer and 
described in the circular to be issued by the Exchange upon issuance of 
the Notes. Finally, the Commission has not received any comment to date 
on the proposal and has not received any comment on similarly 
structured notes previously approved.\31\

    \30\ See Securities Exchange Act Release No. 32950 (September 
23, 1993), 58 FR 50985 (September 29, 1993) (approval for the 
listing of debt exchangeable for common stock (``DECS'') by the New 
York Stock Exchange).
    \31\ See Indexed Term Note Approval Orders, supra note 20.
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    Based on the above, the Commission believes that the proposed rule 
change is consistent with Section 6(b)(5) of the Act and finds good 
cause for approving the proposal and Amendment Nos. 1 and 2 to the 
proposal on an accelerated basis.
    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. 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-95-20 and should be 
submitted by July 20, 1995.
    It therefore is ordered, pursuant to Section 19(b)(2) of the 
Act,\32\ that the proposed rule change (SR-Amex-95-20), as amended, is 
approved.

    \32\ 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.\33\

    \33\ 17 CFR 200.30-3(a)(12) (1994).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-16054 Filed 6-28-95; 8:45 am]
BILLING CODE 8010-01-M