[Federal Register Volume 60, Number 167 (Tuesday, August 29, 1995)]
[Notices]
[Pages 44917-44921]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-21358]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-36130; File No. SR-Amex-95-05]
Self-Regulatory Organizations; Order Approving a Proposed Rule
Change and Amendment No. 1 to the Proposed Rule Change and Notice of
Filing and Order Granting Accelerated Approval of Amendment No. 2 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
August 22, 1995.
On February 16, 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 value of the Real
Estate Index (``Index''), a new index designed to reflect general
movements in the underlying market for commercial real estate. On April
4, 1995, the Exchange filed Amendment No. 1 to the proposal.\3\ Notice
of the proposal and Amendment No. 1 appeared in the Federal Register on
May 4, 1995.\4\ No comment letters were received on the proposal. The
Exchange filed Amendment No. 2 to the proposed rule change on August
10, 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\In Amendment No. 1, the Exchange: (1) clarified the name of
the Real Estate Index; (2) specified that the Real Estate Index will
be initialized at a value of 100; and (3) amended 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.
\4\See Securities Exchange Act Release No. 35651 (April 27,
1995), 60 FR 22084.
\5\In Amendment No. 2, the Exchange amended the proposal to
provide that: (1) the value of the REIT50 Index (as defined herein)
will only be calculated and disseminated once per day; (2) all
components of the REIT50 Index are and will continue to be
``reported securities,'' as defined in Rule 11Aa3-1 of the Act, that
are traded on the Amex, New York Stock Exchange (``NYSE''), or are
National Market securities traded through Nasdaq; and (3) the volume
maintenance criteria for the REIT50 Index will be changed to require
an average monthly trading volume of 400,000 shares over the prior
three months instead of the six month period originally proposed.
See Letter from Claire McGrath, Managing Director and Special
Counsel, Derivative Securities, Amex, to Michael Walinskas, Branch
Chief, Office of Market Supervision (``OMS''), Division of Market
Regulation (``Division''), Commission, dated August 10, 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 that cannot be
readily categorized under the listing criteria for common and preferred
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 the Index. The
Index has been designed to fluctuate based on changes in the level of
the underlying market for commercial real estate by combining the
performance of two separate equity indexes--one comprised entirely of
large actively traded 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 index. The Exchange
believes that by subtracting a percentage of the returns associated
with a broad-based small capitalization stock index (such as the
Russell 2000 Index) from the returns generated by an index of REITs, an
index can be generated that more
[[Page 44918]]
closely reflects the performance of the underlying real estate
market.\7\ The Exchange states that the Notes are intended 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 hedge some of that
exposure.
\6\See Securities Exchange Act Release No. 27753 (March 1,
1990), 55 FR 8626 (March 8, 1990).
\7\See Discussion of the Index, infra.
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The Notes will be non-convertible debt securities of the issuer and
will conform to the listing guidelines under Section 107A of the
Guide.\8\ The Notes will have a term of two to five years from the date
of issue and may provide for periodic payments to holders. At maturity,
holders of the Notes will receive not less than 90% of the original
issue price of the Notes plus an amount in U.S. dollars equal to
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 of the last
twenty business days preceding maturity (``Closing Index Level'').\9\
\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 issuer-specific 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\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.
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The Notes may not be redeemed prior to maturity and holders of the
Notes will 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 floor trading and margin
rules of the Exchange. 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 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.
The Index
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, activity traded REITs;\10\ and the Russell
2000 Index.\11\ 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
of the day prior to the start of trading of the Notes is determined.
Next, the percentage change of the Russell 2000 Index 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 Index is then subtracted from the calculated percent change in the
REIT50 Index. This differential is added to the number one to yield the
factor by which the initial Index level (i.e., 100) is multiplied to
determine the current Index level. The following formula summarizes
this calculation:
\10\See Discussion of the REIT50 Index, infra.
\11\See Discussion of the Russell 2000 Index, infra.
[GRAPHIC][TIFF OMITTED]TN29AU95.008
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 Index
and will be disseminated every 15 seconds over the Consolidated Tape
Association Network B.
Russell 2000 Index
The Russell 2000 Index is a well established, broad-based,
benchmark index of the small-capitalization segment of the U.S. equity
market.\12\ Options on the Russell 2000 Index trade at the Chicago
Board Options Exchange\13\ 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 Index does not
reflect reinvestment of dividends paid on component stocks on the
index.
\12\See Securities Exchange Act Release No. 31382 (October 30,
1992), 57 FR 52802 (November 5, 1992) (order approving the listing
of options on the Russell 2000 Index) (``Exchange Act Release No.
31382'').
\13\Id.
REIT50 Index
The REIT50 Index is a new capitalization-weighted index that
conforms with Exchange Rule 901C and, as discussed below, is a total
return index. The REIT50 Index is composed of the 50 largest publicly-
traded equity REITs, as measured by market capitalization, traded on
the Amex, NYSE, or as National Market securities traded through
Nasdaq.\14\ The REIT50 Index will be maintained so that at each
quarterly review, as discussed below, each component of the Index will
have had an average monthly trading volume of at least 400,000 shares
over the prior three month period,\15\ with share prices greater than
or equal to $5 for the
[[Page 44919]]
majority of business days during the preceding three calendar months.
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. The REIT50 Index also will exclude real estate operating
companies and partnerships.
\14\See Amendment No. 2, supra note 5.
\15\Id.
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As of January 31, 1995, the highest weighed component in the REIT50
Index accounted for 4.66% of the value of the index, and the top five
components accounted for 21.00% of the value of the REIT50 Index. Also,
during the period from August 1, 1994 through January 31, 1995, the
average daily trading volume per component of the REIT50 Index ranged
from a low of 19,567 shares per day to a high of 140,173 shares per
day. Moreover, as of January 31, 1995, 98.87% of the REIT50 Index, by
weight, and 98.00%, by number of components, were eligible for
standardized options trading pursuant to Amex Rule 915.\16\
\16\Telephone conversation between Clifford Weber, Managing
Director, New Products Development, Amex, and Brad Ritter, Senior
Counsel, OMS, Division, Commission, on August 22, 1995.
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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 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
assure continuity of the Index value. The REIT50 Index value will be
calculated continuously throughout the trading day but the value of the
REIT50 Index will only be disseminated once per day after the close of
trading on the Exchange. This daily closing value for the REIT50 Index
will be disseminated over the Consolidated Tape Association's Network B
under a separate ticker symbol.\17\
\17\The Exchange believes that the continuous dissemination of
the value of the REIT50 Index throughout the trading day will likely
result in confusion between the REIT50 Index and the Morgan Stanley
REIT Index that the Exchange will be disseminating every 15 seconds
throughout the trading day. See Securities Exchange Act Release No.
36103 (August 14, 1995) (approval of the Amex's proposal to list
options on the Morgan Stanley REIT Index). Because the values of
both the Index and the Russell 2000 Index will be disseminated
throughout the trading day, the value of the REIT50 Index at any
particular time can easily be calculated by anyone who wants to know
the value of the REIT50 Index more frequently than once per day. See
Amendment No. 2, supra note 5.
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.\18\
Specifically, the Commission believes that providing for exchange-
trading of the Notes will offer a new and innovative means for
investors of participating in the market for commercial real
estate.\19\ In particular, the Commission believes that the Notes will
permit investors to gain equity exposure in the commercial real estate
market, 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.\20\
\18\15 U.S.C. Sec. 78f(b)(2) (1988).
\19\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. 35886 (June 23, 1995), 60 FR 33884, (June 29, 1995)
(approval for listing of indexed term notes linked to a portfolio of
``consolidation candidate'' securities), 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'').
\20\Id.
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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, i.e., the securities comprising the Russell 2000 and REIT50
Indexes. 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 product because the final
rate or return of the Notes is derivatively priced, based on the
performance of the underlying indexes. 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 securities
represented in the underlying linked indexes.\21\ The Commission
believes the Amex has adequately addressed each of these issues such
that the Commission's regulatory concerns are adequately minimized.\22\
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.\23\ 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 indexes underlying the Notes.
\21\Id.
\22\Id.
\23\The Commission notes that the Exchange will also distribute
a circular to its membership calling attention to the specific risks
associated with the Notes.
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In addition, even though the Exchange has not proposed any options
eligibility requirements for the components of the REIT50 Index, the
Commission believes that the listing standards and issuance
restrictions discussed above, particularly the
[[Page 44920]]
objective standards for share prices and average monthly trading
volumes\24\ for the REITs represented in the REIT50 Index will ensure
that the REIT50 Index will be composed predominantly of highly
capitalized, liquid securities.\25\ Moreover, because the value of the
Index is based on a combination of the values of the REIT50 Index and
the Russell 2000 Index, the lack of an options eligibility requirement
for the components of the REIT50 Index is even less problematic. The
Russell 2000 Index is a broad-based index composed of 2,000 equity
securities that the Commission has previously found to be not readily
susceptible to manipulation and suitable for standardized options
trading.\26\ In addition, as of January 31, 1995, greater than 98% of
the weight of the REIT50 Index, and 49 of 50 components in the index
were options eligible.
\24\The Commission notes that the average monthly trading volume
requirement of 400,000 shares per month over a three month period is
significantly higher than the Amex's initial trading volume
requirement for options on individual securities, which only
requires volume of 2.4 million shares over a 12-month period. See
Amex Rule 915.
\25\For index options and other derivative products where the
value of the product is based on an index of securities, the
Commission generally requires that a certain percentage of the
index, both by weight and by number of components, be eligible for
standardized options trading. This requirement serves to minimize
the potential for any adverse impact on the markets for the
securities underlying these indexes resulting from the trading of
these products. See, e.g., Securities Exchange Act Release No. 34157
(June 3, 1994), 59 FR 30062 (June 10, 1994). For the reasons
discussed herein, however, the Commission believes that the Amex has
structured the Notes, in general, and the REIT50 Index, in
particular, so that the lack of such maintenance criteria does not
create any significant manipulation or market impact concerns.
\26\See Exchange Act Release No. 31382, supra note 12.
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Furthermore, because the Notes are non-leveraged, intermediate-term
instruments that are based on the difference between two indexes, the
Commission believes that the lack of a component concentration
maintenance standard for the REIT50 Index does not raise any material
regulatory concerns. Specifically, the REIT50 Index will be maintained
with the 50 largest exchange-traded REITs, by market capitalization.
Moreover, as of January 31, 1995, the highest weighted component
accounted for only 4.66% of the weight of the index and the five
highest weighted components accounted for only 21.00% of the weight of
the index. The Commission believes, therefore, that the potential that
the Index could be manipulated by manipulating one or a few components
of the REIT50 Index has been adequately minimized.
As a result, the Commission believes that any concerns regarding
the potential for manipulation of the Index, the REIT50 Index, or the
Russell 2000 Index, or any adverse market impact on the securities
comprising the underlying indexes, have been adequately addressed by
the Amex.
The Commission also believes that the decision of the Amex to
disseminate the value of the REIT50 Index only once per day after the
close of trading is consistent with the Act. The value disseminated
will be the daily closing value of the REIT50 Index. The Amex will,
however, calculate the value of the REIT50 Index continuously
throughout the trading day so that the value of the Index that is
disseminated will always be based on the current value of the REIT50
Index. Moreover, because the values for the Index and the Russell 2000
Index will be disseminated every 15 seconds throughout the trading day,
investors and market participants could calculate the value of the
REIT50 Index at any time based on the formula provided above.
Additionally, the Commission believes that disseminating the value of
the REIT50 Index only once per day after the close will minimize the
potential for confusion that may exist between the REIT50 Index and the
Morgan Stanley REIT Index, which is also calculated and disseminated by
the Amex.
The Commission realizes that Index Notes will be dependent upon the
individual credit of the issuer. 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.\27\ In
addition, the Exchange's hybrid listing standards further require that
Index Notes have at least $4 million in market value.\28\ In any event,
financial information regarding the issuer, in addition to information
on the underlying indexes and the issuers of the securities comprising
the underlying indexes, will be publicly available.\29\
\27\See supra note 8.
\28\See Amex Company Guide Sec. 107A.
\29\The companies that comprise the Russell 2000 and REIT50
Indexes are reporting companies under the Act.
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The Commission finds good cause for approving the proposed rule
change and Amendment No. 2 to the proposal prior to the thirtieth day
after the date of publication of notice of filing thereof in the
Federal Register. First, Amendment No. 2 provides that the value of the
REIT50 Index will only be disseminated by the Amex once per day after
the close of trading on the Exchange. For the reasons discussed above,
the Commission believes this amendment is consistent with the Act.
Moreover, because the Notes will be priced based on the value of the
Index, the value of which will be disseminated throughout the trading
day, the Commission does not believe that this is a material change to
the proposal requiring notice in the Federal Register prior to
approval.
Second, Amendment No. 2 provides that all components of the REIT50
Index are and will continue to be reported securities, as defined in
Rule 11Aa3-1 of the Act, that are traded on the Amex, NYSE, or are
National Market securities traded through Nasdaq. This requirement
serves to further minimize any concerns regarding potential
manipulation of the REIT50 Index.
Third, Amendment No. 2 alters the maintenance criteria for the
REIT50 Index concerning average monthly trading volume to make the
requirement over a three month rather than a six month period. As
discussed above, this requirement is still significantly higher than
the Exchange's initial trading volume listing criteria for options on
individual securities. Moreover, the original proposal, as it was
published in the Federal Register, contemplated that the Exchange would
be able to add REITs to the REIT50 Index that have been listed and
trading for a minimum of three months. As a result, the Commission
believes this amendment was necessary in order to eliminate the
inconsistency that existed in the original proposal. Furthermore, the
Commission notes that the original proposal appeared in the Federal
Register for the full 21-day comment period and that no comments were
received by the Commission regarding the proposal in general, or, the
issue of including in the REIT50 Index REITs that have been trading for
no less than three months, in particular.
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 Amendment No. 2 to the proposal on an accelerated
basis.
Interested persons are invited to submit written data, views and
arguments concerning Amendment No. 2. 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 the
[[Page 44921]]
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 September 19, 1995.
It therefore is ordered, pursuant to Section 19(b)(2) of the
Act,\30\ that the proposed rule change (SR-Amex-95-05), as amended, is
approved.
\30\15 U.S.C. Sec. 78s(b)(2) (1988).
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For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\31\
\31\17 CFR 200.30-3(a)(12) (1994).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-21358 Filed 8-28-95; 8:45 am]
BILLING CODE 8010-01-M