[Federal Register Volume 61, Number 178 (Thursday, September 12, 1996)]
[Notices]
[Pages 48195-48198]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-23308]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37648; International Series Release No. 1016; File No.
SR-PSE-96-23]
Self-Regulatory Organizations; Notice of Filing and Order
Granting Accelerated Approval of a Proposed Rule Change by the Pacific
Stock Exchange Incorporated Relating to the Listing and Trading of
Equity-Linked Notes
September 5, 1996.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ notice is hereby given that on June 24, 1996, the Pacific
Stock Exchange Incorporated (``PSE'' or ``Exchange'') filed with the
Securities and Exchange Commission (``SEC'' or ``Commission'') the
proposed rule change as described in Items I and II below, which Items
have been prepared by the self-regulatory organization (``SRO''). On
July 25, 1996, the Exchange submitted Amendment No. 1 to the
Commission.\2\ On September 4, 1996, the Exchange submitted Amendment
No. 2 to the Commission.\3\ The Commission is publishing this notice to
solicit comments on the proposed rule change from interested persons
and to grant accelerated approval to the proposed rule change, as
amended.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ Amendment No. 1 clarified that the requisite trading volume
levels concerning the linked security must occur in the United
States. In addition, Amendment No. 1 removed the unnumbered
paragraph in proposed PSE Rule 3.1(j)(3)(D)(i) that referenced
proposed PSE Rule 3.1(j)(3)(C)(iii)(b)(2) because the language in
that paragraph did not take into consideration the provisions
contained in proposed PSE Rule 3.1(j)(3)(C)(iii)(b)(3). See letter
from Michael D. Pierson, Senior Attorney, Regulatory Policy, PSE, to
Anthony P. Pecora, Attorney, Office of Market Supervision, Division
of Market Regulation, SEC, dated July 24, 1996.
\3\ Amendment No. 2 conforms the definition of ELNs contained in
PSE Rule 3.1(b)(16) with the other rules in this proposal concerning
ELNs in that the use of American Depositary Receipts (``ADRs'') is
limited to sponsored ADRs. See letter from Michael D. Pierson,
Senior Attorney, Regulatory Policy, PSE, to Anthony P. Pecora,
Attorney, Office of Market Supervision, Division of Market
Regulation, SEC, dated September 3, 1996.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to amend its listing rules to provide for the
listing
[[Page 48196]]
and trading of Equity-Linked Notes (``ELNs''). The text of the proposed
rule change is available for inspection and copying at the PSE 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 self-regulatory organization
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 III below. The self-regulatory
organization 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
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange is proposing to list for trading Equity-Linked Notes,
which are notes that are linked, in whole or in part, to the market
performance of common stocks, non-convertible preferred stocks, or
sponsored ADRs \4\ overlying such equity securities. The proposal
states that the Exchange will consider for listing ELNs that meet the
Exchange's issuer listing standards, ELN listing standards, minimum
standards applicable to linked securities, and limits on the number of
ELNs linked to a particular security, as set forth below.
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\4\ ADR programs may be ``sponsored'' or ``unsponsored.'' A
sponsored ADR is established by a single U.S. depository bank at the
request, or with the consent, of the foreign issuer of the
underlying security.
With a sponsored ADR program, a single depository bank, working
closely with the issuer, acts as the central source of information
for buyers, sellers, and intermediaries. In addition, the depository
generally is required to distribute notices of shareholder meetings
and voting instructions to ADR holders, thereby ensuring the ADR
holders will be able to exercise voting rights through the
depository with respect to the underlying securities.
ELNs may be linked only to sponsored ADRs. Telephone
conversation between Michael D. Pierson, Senior Attorney, Regulatory
Policy, PSE, and Anthony P. Pecora, Attorney, Office of Market
Supervision, Division of Market Regulation, SEC (Sept. 3, 1996).
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a. Issuer Listing Standards
Under the proposal, the issuer of ELNs must be an entity that: (a)
Is listed on a national securities exchange or the Nasdaq National
Market or is an affiliate of a company listed on a national securities
exchange or the Nasdaq National Market; and (b) has a minimum net worth
of $150 million. In addition, the market value of an ELN offering, when
combined with the market value of all other ELN offerings previously
completed by the issuer and currently traded on a national securities
exchange or the Nasdaq National Market, may not be greater than 25% of
the issuer's net worth at the time of issuance.
b. ELN Listing Standards
The proposal states that the issue must have: (a) A minimum public
distribution of one million ELNs; (b) a minimum of 400 holders of the
ELNs (provided, however, that if the ELN is traded in $1,000
denominations, there is no minimum number of holders); (c) a minimum
market value of $4 million; and (d) a term of two to seven years,
provided that if the issuer of the underlying security is a non-U.S.
company, or if the underlying security is a sponsored ADR, the issue
may not have a term of more than three years.
c. Minimum Standards Applicable to the Linked Security
The proposed new rules state that the underlying security must
have: (a) A market capitalization of at least $3 billion and trading
volume in the United States of at least 2.5 million shares in the one-
year period preceding the listing of the ELNs; or (b) a market
capitalization of at least $1.5 billion and trading volume in the
United States of at least 10 million shares in the one-year period
preceding the listing of the ELNs; or (c) a market capitalization of at
least $500 million and trading volume in the United States of at least
15 million shares in the one-year period preceding the listing of the
ELNs.\5\
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\5\ If an issuer proposes to list an offering of ELNs that does
not satisfy the market capitalization or trading volume requirements
discussed above, the PSE, with the concurrence of the staff to 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. However, depending
on the proposed facts, the Commission may require the PSE to submit
a rule filing pursuant to Section 19(b) of the Act that addresses
the pertinent regulatory issues. In this regard, the Commission
notes that any proposal to list an ELN that is 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. See Securities Exchange Act Release No.
34758 (Sept. 30, 1994), 59 FR 50943 (approving listing of Selected
Equity-Linked Debt Securities (``SEEDS'') by the National
Association of Securities Dealers, Inc. (``NASD'')).
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In addition, the notes must be issued by a company that has a
continuous reporting obligation under the Act, as amended, and the
security must be listed on a national securities exchange or the Nasdaq
National Market and be subject to last sale reporting.
Furthermore, the notes must be issued by either: (a) A U.S.
company; or (b) a non-U.S. company \6\ (including a company that is
traded in the United States through sponsored ADRs) provided that one
of the following three criteria is met: First, the Exchange must have a
comprehensive surveillance sharing agreement in place with the primary
exchange in the country where the linked security is primarily traded
(in the case of an ADR, the primary exchange on which the security
underlying the ADR is traded).
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\6\ For the purposes of this rule, a non-U.S. company is any
company formed or incorporated outside of the United States.
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Second, as an alternative, the combined trading volume of the non-
U.S. security (a security issued by a non-U.S. company) and other
related non-U.S. securities occurring in the U.S. market and in markets
with which the Exchange has in place a comprehensive surveillance
sharing agreement must represent (on a share equivalent basis for any
ADRs) at least 50% of the combined world-wide trading volume in the
non-U.S. security, other related non-U.S. securities, and other classes
of common stock related to the non-U.S. security over the six month
period preceding the date of listing.
Third, an alternate trading volume test would permit an ELN on a
non-U.S. security if: (a) The combined trading volume of the non-U.S.
security and other related non-U.S. securities occurring in the U.S.
market represents (on a share equivalent basis) at least 20% of the
combined world-wide trading volume in the non-U.S. security and in
other related non-U.S. securities over the six-month period preceding
the date of listing of the non-U.S. security for an ELN listing; (b)
the average daily trading volume for the non-U.S. security in the U.S.
markets over the six-month period preceding the date of listing of the
non-U.S security for an ELN listing is 100,000 or more shares; and (c)
the trading volume for the non-U.S. security in the U.S. market is at
least 60,000 shares per day for a majority of the trading days for the
six-month period preceding the date of selection of the non-U.S.
security for an ELN listing.\7\
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\7\ The Commission notes that volume in foreign markets with
which the Exchange has a comprehensive surveillance information
sharing agreement in place is not included in these calculations.
See Securities Exchange Act Release no. 37405 (July 7, 1996), 61 FR
36596, at n.8.
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In addition, if the underlying security to which the ELN is to be
linked is the stock of a non-U.S. company that is traded in the U.S.
market as a sponsored
[[Page 48197]]
ADR, ordinary shares or otherwise, then the minimum number of holders
of the underlying security shall be 2,000.
d. Limits on the Number of ELNs Linked to a Particular Security
The proposal provides that 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. In addition, the
issuance of ELNs relating to any underlying non-U.S. security or
sponsored ADR may not exceed: (a) Two percent of the total shares
outstanding worldwide if at least 20 percent of the worldwide trading
volume in such security occurs in the U.S. market during the six-month
period preceding the date of listing; or (b) three percent of the total
shares outstanding worldwide if at least 50 percent of the worldwide
trading volume in such security occurs in the U.S. market during the
six-month period preceding the date of listing; or (c) five percent of
the total shares outstanding worldwide if at least 70 percent of the
worldwide trading volume in such security occurs in the U.S. market
during the six-month period preceding the date of listing.\8\
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\8\ Id. at n.9.
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In addition, if an issuer proposes to issue ELNs that relate to
more than the allowable percentages of the underlying security
specified above, then the Exchange, with the concurrence of the staff
of the Division of Market Regulation of the SEC, will evaluate the
maximum percentage of ELNs that may be issued on a case-by-case
basis.\9\
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\9\ As with the market capitalization and trading volume
requirements, the Commission notes that the Exchange 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 Exchange
proposal to list an ELN related to more than the allowable
percentages of outstanding shares of the underlying security. See
supra note 4.
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Finally, the proposed rule states that prior to the commencement of
trading of particular ELNs listed pursuant to PSE Rule 3.1(j)(3), the
Exchange will distribute a circular to its membership providing
guidance regarding member firm compliance responsibilities (including
suitability recommendations and account approval) when handling
transactions in ELNs.
2. Statutory Basis
The Exchange believes the proposed rule change is consistent with
Section 6(b) \10\ of the Act in general and furthers the objectives of
Section 6(b)(5) \11\ in particular in that it is designed to promote
just and equitable principles of trade, to prevent fraudulent and
manipulative acts and practices, and, in general, to protect investors
and the public interest.
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\10\ 15 U.S.C. 78f(b).
\11\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange believes the proposed rule change will impose no
burden on competition that is not necessary or appropriate in
furtherance of the purposes of the Act.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
The Exchange has neither solicited nor received written comments.
III. 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
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, N.W.,
Washington, D.C. 20549. Also, copies of such filing will be available
for inspection and copying at the principal office of the PSE. All
submissions should refer to File No. SR-PSE-96-23 and should be
submitted by October 3, 1996.
IV. Commission's Findings and Order Granting Accelerated Approval of
the Proposed Rule Change
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.\12\
Specifically, the Commission believes that providing for the listing
and trading of ELNs will offer a new and innovative means for investors
to participate in the securities markets. In particular, the Commission
believes that the availability of ELNs will permit investors to more
closely approximate their desired investment objectives through, for
example, shifting some of the opportunity for upside gain in return for
additional income.\13\ Accordingly, for these reasons, as well as for
the reasons stated in the Commission's prior approval orders concerning
equity-linked debt securities,\14\ the Commission finds that the PSE's
standards for the listing and
[[Page 48198]]
trading of ELNs are consistent with the Act.
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\12\ 15 U.S.C. 78f(b)(5).
\13\ Pursuant to Section 6(b) of the Act, the Commission must
predicate approval of trading for new products upon a finding that
the introduction of the product is in the public interest. Such a
finding would be difficult with respect to a product that served no
investment, hedging, or other economic function because any benefits
that might be derived by market participants would likely be
outweighed by the potential for manipulation, diminished public
confidence in the integrity of the markets, and other valid
regulatory concerns.
\14\ The Commission notes that it previously has approved the
listing of equity-linked debt securities by the American Stock
Exchange, Inc. (``Amex''), the Chicago Board Options Exchange,
Incorporated (``CBOE''), the NASD, the New York Stock Exchange, Inc.
(``NYSE''), and the Philadelphia Stock Exchange, Inc. (``Phlx'').
See Securities Exchange Act Release Nos. 32343 (May 20, 1993), 58 FR
30833 (order originally approving the listing of ELNs by the Amex);
33328 (Dec. 13, 1993), 58 FR 66041 (approving revised market
capitalization and trading volume requirements for the listing of
ELNs by the Amex); 33468 (Jan. 13, 1994), 59 FR 3387 (order
originally approving the listing of Equity-Linked Debt Securities
(``ELDS'') by the NYSE); 34545 (Aug. 18, 1994), 59 FR 43877 (order
approving the listing of ELDS by the NYSE linked to securities
issued by non-U.S. companies); 34549 (Aug. 18, 1994), 59 FR 43873
(order approving the listing of ELNs by the Amex linked to
securities issued by non-U.S. companies); 34758 (Sept. 30 1994), 59
50943 (order originally approving the listing of SEEDS by the NASD);
34759 (Sept. 30, 1994), 59 FR 50939 (order originally approving the
listing of ELNs by the CBOE); 34765 (Sept. 30, 1994), 59 FR 51220
(approving revised market capitalization and trading volume
requirements for the listing of ELNs by the Amex); 34766 (Sept. 30,
1994), 59 FR 51220 (approving revised market capitalization and
trading volume requirements for the listing of SEEDS by the NASD);
34985 (Nov. 18, 1994), 59 FR 60860 (order approving alternative
market capitalization and trading volume requirements for the
listing of ELDS by the NYSE); 35479 (Mar. 13, 1995), 60 FR 14993
(order originally approving the listing of ELNs by the Phlx); 36578
(Dec. 13, 1995), 60 FR 65700 (approving revised market
capitalization and trading volume requirements for the listing of
ELNs by the Amex); 36990 (Mar. 20, 1996), 61 FR 13545 (approving
revised market capitalization and trading volume requirements for
the listing of ELNs by the Amex); 36993 (Mar. 20, 1996), 61 FR 13557
(approving revised market capitalization and trading volume
requirements for the listing of ELDS by the NYSE); 36994 (Mar. 20,
1996), 61 FR 13553 (approving revised market capitalization and
trading volume requirements for the listing of SEEDS by the NASD);
36995 (Mar. 20, 1996), 61 FR 13550 (approving revised market
capitalization and trading volume requirements for the listing of
ELNs by the CBOE); 37405 (July 3, 1996), 61 FR 36596 (approving
revised market capitalization and trading volume requirements for
the listing of ELDS by the NYSE) (collectively, ``Equity-Linked Note
Approval Orders''). The discussions articulated in the Equity-Linked
Note Approval Orders are incorporated herein.
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As with previously approved ELNs, ELDS, and SEEDS, the ELNs, the
PSE is proposing to trade are not leveraged instruments. Their price,
however, will be derived and based upon the underlying linked security.
Accordingly, the level of risk involved in the purchase and sale of an
ELN is similar to the risk involved in the purchase or sale of
traditional common stock. Nonetheless, in considering other SROs'
respective proposals to list and trade ELNs, ELDS, and SEEDS, the
Commission had several specific concerns with this type of product
because the final rate of return of an ELN is derivately priced (i.e.,
based on the performance of the underlying security). The concerns
included: (1) Investor protection concerns, (2) dependence on the
credit of the issuer of the instrument, (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 security.\15\ The Commission concluded, however, that
the SROs' proposals adequately addressed each of these issues such that
the Commission's regulatory concerns were minimized adequately.\16\
Similarly, in this proposal, the PSE has proposed safeguards, as
described above, that the Commission finds to be equivalent to those
approved for the trading of equity-linked debt securities in other
markets. In particular, by imposing the listing standards, suitability,
disclosure, and compliance requirements noted above, the PSE has
adequately addressed the potential public customer concerns that could
arise from the hybrid nature of ELNs. Further, the Commission believes
that the listing standards and issuance restrictions should help to
reduce the likelihood of any adverse market impact on the securities
underlying the ELNs.
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\15\ See Equity-Linked Note Approval Orders, supra note 14.
\16\ See Equity-Linked Note Approval Orders, supra note 14.
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The Commission finds good cause for approving the amended proposed
rule change prior to the thirtieth day after the date of publication of
notice thereof in the Federal Register in order to allow the PSE to
begin listing ELNs without delay. As discussed above, the proposal
merely provides the PSE with the ability to list equity-linked debt
securities on the same basis as other SROs. Moreover, the Commission
notes that the prior proposals by other SROs to list and trade equity-
linked debt securities were published by the Commission for the full
statutory comment period without any comments being received by the
Commission. In light of the Commission's approval of the listing and
trading equity-linked debt securities by other SROs, accelerating
approval of this proposal does not raise any new regulatory issues and
will allow the PSE to compete on an equal basis with other markets with
regard to these equity-linked products.\17\ Therefore, the Commission
there is good cause to grant accelerated approval to the proposed rule
change, as amended, consistent with Section 6(b)(5) and Section
19(b)(2) of the Act.\18\
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\17\ See Equity-Lined Note Approval Orders, supra note 14.
\18\ 15 U.S.C. 78f(b)(5) and 78s(b)(2).
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V. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\19\ that the proposed rule change (SR-PSE-96-23), as amended, is
hereby approved on an accelerated basis.
\19\ 15 U.S.C. 78s(b)(2).
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For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\20\
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\20\ 17 C.F.R. 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-23308 Filed 9-11-96; 8:45 am]
BILLING CODE 8010-01-M