[Federal Register Volume 63, Number 165 (Wednesday, August 26, 1998)]
[Notices]
[Pages 45539-45541]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-22879]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-40338; File No. SR-Amex-98-25]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change and Amendment No. 1 Thereto by the American Stock Exchange, Inc. 
Relating to the Listing and Trading of Stock Upside Note Securities on 
the Lehman Brothers' European Stock Basket

August 19, 1998.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notes is hereby given that 
on July 1, 1998, the American Stock Exchange, Inc. (``Amex'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission'') the proposed rule change as described in 
Items I, II, and III below, which Items have been prepared by the Amex. 
On August 3, 1998, the Exchange file with the Commission Amendment No. 
1 to the proposed rule change.\3\ The Commission is publishing this 
notice to solicit comments on the proposed rule change from interested 
persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See letter from Claire P. McGrath, Vice President and 
Special Counsel, Derivatives Legal Counsel, Amex, to Richard 
Strasser, Associate Director, Division of Market Regulation 
(``Division''), SEC, dated July 30, 1998 (``Amendment No. 1''). In 
Amendment No. 1, the Exchange makes several substantive changes to 
the filing.
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The Exchange proposes to list and trade Stock Upside Note 
Securities on the Lehman Brothers' European Stock Basket, a new stock 
basket developed by Lehman Brothers Holdings Inc. containing stocks of 
European companies.
    The test of the proposed rule change is available at the Office of 
the Secretary, Amex 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 Amex 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 
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 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Amex proposes to trade Stock Upside Note Securities (``SUNS'') 
on the Lehman Brothers' European Stock Basket (the ``Basket''), a new 
basket of stocks developed by Lehman Brothers Holdings, Inc. (``Lehman 
Brothers'') based entirely on the shares of European companies. SUNS on 
the Basket are designed to allow investors to combine the protection of 
a portion of the principal amount of the SUNS with a potential 
additional payment based upon the performance of a portfolio of highly 
capitalized European stocks. In particular, the proposed European Stock 
Basket will provide at least 90% principal protection with the 
opportunity to participate in any upside appreciation of the Basket, 
subject to any cap on appreciation that may be include by the issuer.

Criteria Under Section 107A of the Amex Company Guide

    Under Section 107A of the Amex Company Guide, the Exchange may 
approve for listing and trading securities that can be readily 
categorized under the listing criteria for common and preferred stocks, 
bonds, debentures or warrants.\4\ SUNS issues on the Basket will 
conform to the listing guidelines under Section 107A of the Amex 
Company Guide, which provide, among other things, that the issuer shall 
satisfy the earnings criteria set forth in Section 101 \5\ of the Amex 
Company Guide and have assets in excess of $100 million and 
stockholders' equity of at least $10 million. Where the issuer does not 
satisfy the earnings criteria set forth in Section 101 of the Amex 
Company Guide, the issuer must have assets in excess of $200 million 
and stockholders' equity of at least $10 million; or have assets in 
excess of $100 million and stockholders' equity of at least $20 
million. Further, SUNS will have a minimum public distribution of 
1,000,000 units with a minimum of 400 public shareholders, except, if 
traded in thousand dollar denominations, then no minimum number of 
holders will be required. SUNS will have a principal amount/aggregate 
market value of not less than $4 million. In addition, Amex will apply 
the continued listing

[[Page 45540]]

guidelines for the proposed SUNS as set forth in Sections 1001 through 
1003 of the Amex Company Guide. In particular, Section 1003(b)(iii) \6\ 
regarding suspensions and delistings with respect to limited 
distribution and reduced market value will apply to the SUNS.
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    \4\See Exchange Act Release No. 27753 (March 1, 1990), 55 FR 
8626 (March 8, 1990).
    \5\ Section 101 of the Amex Company Guide requires issuers to 
have pre-tax earnings of at least $750,000 in the fiscal year of two 
of the last three fiscal years.
    \6\ See Amendment No. 1, supra note 3.
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    The SUNS are non-convertible debt securities of Lehman Brothers and 
will conform to the above listing standards. Although the specific 
maturity date will be established until immediately prior to the time 
of the offering, the SUNS will provide for maturity within a period of 
not less than two years and not more than seven years from the date of 
issue. The SUNS will provide for a single payment a maturity, and will 
bear no periodic payments of interest. The European Stock Basket SUNS 
will be denominated in U.S. dollars and will entitle the owner at 
maturity to received an amount based on the percentage change between 
the ``Original Portfolio Value'' and the ``Ending Average Portfolio 
Value'', provided: (1) The amount payable at maturity will not be less 
than 90% of the principal amount of the SUNS; and (2) the issuer may 
place a cap on the amount to be paid on the SUNS at maturity. Thus, 
holders of the SUNS may not receive the full amount of the appreciation 
of the Ending Portfolio Value over the Original Portfolio Value. For 
example, Lehman Brothers may place a cap on the amount to be received 
at maturity as a stated percentage of the issuance price, e.g., 150% of 
the issuance price. Alternatively, a cap could be in the form of 
participation rate whereby a holder of the SUNS would participate in a 
stated percentage of the total percentage change between the Ending 
Portfolio Value and the Original Portfolio Value, e.g., 80% of the 
total appreciation of the European Stock Basket during the term of the 
SUNS. The Original Portfolio Value is the value of the European Stock 
Basket on the date on which the issuer prices the SUNS for the initial 
offering to the public. The Ending Average Portfolio Value is the 
average of the closing prices of the European Stock Basket securities 
for a ten-day period beginning on the twelfth trading day prior to 
maturity of the SUNS.\7\ The European Stock Basket SUNS will be cash-
settled and will not give holders any right to receive any Basket 
security or any other ownership right or interest in such security even 
though the return on the investment is based on the value of the 
Basket.
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    \7\ Id.
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The SUNS Basket and Components

    The European Stock Basket will consist of not less than ten nor 
more than thirty stocks of highly capitalized European companies.\8\ 
Each stock included in the Basket will meet the following criteria: (1) 
A market capitalization in excess of $75 million; alternatively, the 
lowest weighted securities in the Basket that do not account for more 
than 10% of the weight of the Basket, may have a market capitalization 
of $50 million or greater; (2) the trading volume of each component in 
the Basket will be at least one million shares during each of the six 
months preceding the listing of the SUNS; alternatively, the lowest 
weighted securities in the Basket that do not account for more than 10% 
of the weight of the Basket, may have a volume of at least 500,000 
shares during each of the six months preceding the listing of the SUNS; 
(3) the market price for each component stock used for the calculation 
of the Basket will be obtained from the stock's primary market; and (4) 
the market price for each component will be at least $5 for the 
majority of business days during the three calendar months preceding 
the listing of the SUNS.\9\
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    \8\ Id.
    \9\ Id.
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Basket Calculation

    The Basket will be calculated using the modified equal-dollar 
weighting methodology. Thus, prior to the issuance of the SUNS, Lehman 
Brothers will establish a weighting for each of the securities in the 
Basket.\10\ Specifically, each security included in the Basket will be 
assigned a multiplier so that the security represents the established 
percentage of the value of the entire Basket on the date of issuance. 
The multiplier indicates the number of shares (or fraction of one 
share) of a security, given its market price, to be included in the 
calculation of the Basket. The weightings established for each security 
will assure that: (1) No single stock will represent more than 25% of 
the weight of the Basket; (2) the five highest weighted stocks will 
represent no more than 50% of the weight of the Basket; (3) foreign 
country securities that are not subject to comprehensive surveillance 
agreements will not in the aggregate represent more than 40% of the 
weight of the index; (4) stocks for which the primary market is in any 
one country that is not subject to a comprehensive surveillance 
agreement do not represent 20% or more of the weight of the index; and 
(5) stocks for which the primary market is in any two countries that 
are not subject to the comprehensive surveillance agreements do not 
represent 33% or more of the weight of the index.
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    \10\ Id.
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    The multiplier of each security of the Basket will generally remain 
unchanged except for adjustments that may be necessary as a result of 
stock splits or stock dividends. There will be no adjustments to the 
multipliers to reflect cash dividends paid with respect to a portfolio 
security. In addition, no adjustments of any multiplier of a portfolio 
security will be made unless such adjustment would require a change of 
at least 1% in the multiplier then in effect. If the issuer of a 
security included in the Basket no longer exists, whether for reason of 
a merger, acquisition or similar type of corporate control transaction, 
Lehman Brothers will assign to that security a value equal to the 
security's final value for the purposes of calculating portfolio 
values.
    If the issuer of a European Stock Basket security is in the process 
of liquidation or subject to a bankruptcy proceeding, insolvency, or 
other similar adjudication, such security will continue to be included 
in the Basket so long as a market price for such security is available. 
If such a market price is no longer available for a Basket security due 
to a liquidation, bankruptcy, insolvency, or any other similar 
proceeding, the value of the security will be zero in connection with 
calculating the daily Basket value and the Ending Average Portfolio 
Value, for so long as no such market price exists for that security. 
Lehman Brothers will not attempt to find a replacement stock, or to 
compensate in a manner other than what is set forth above, for the 
extinction of a security due to a bankruptcy or similar event.
    The value of the Basket will be calculated and disseminated every 
15 seconds from 9:30 a.m. until 4:00 p.m. each trading day by the 
Exchange or by an independent calculation agent appointed by Lehman 
Brothers. The Basket value will be calculated based on real-time prices 
during the hours the European markets overlap trading hours at the 
Exchange. The Basket will be calculated using the last sale value for 
each component security from its primary market place. The Exchange 
rate for each currency represented in the Basket will be from one of 
two sources: (i) The WM/Reuter closing value reported in London at 
about 12:00 (New York time) each trading day or, (ii) the best bid and 
offer price posted by one or more contributing banks as provided by 
Bridge/Telesphere. If the market place for any one of the securities

[[Page 45541]]

constituting the European Stock Basket has not opened for trading on 
any given business day, the previous closing value will be used in the 
calculation. The Basket value, for any day, will equal the sum of the 
products of the most recently available market prices, expressed in 
U.S. dollars and the applicable multipliers for the Basket securities. 
Lehman Brothers will undertake to implement certain surveillance and 
compliance procedures with respect to the dissemination of the Basket 
value, requiring that the Basket value be announced only through public 
dissemination and restricting the access of the Lehman Brothers trading 
desk to the Basket value determined by the calculation agent until 
after public dissemination of the value.\11\
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    \11\ Id.
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Exchange Rules Applicable to SUNS

    The Exchange's equity trading rules will apply to the trading of 
SUNS linked to the European Stock Basket. Those rules include Rule 411, 
which requires members to use due diligence to learn the essential 
facts relative to every customer to every order or account accepted; 
and Rule 462 which requires that application of equity margin rules to 
the trading of indexed term notes. The Exchange will, prior to trading 
the proposed SUNS, distribute an Information Circular to the 
membership: (1) Highlighting the essential features of the SUNS product 
including, but not limited to, the less than 100% principal protection 
feature and the fact that the issuer has placed a cap on the amount to 
be paid on the SUNS at maturity; \12\ and (2) providing guidance with 
regard to member firm compliance responsibilities (including 
suitability recommendations) when handling transactions of the SUNS and 
highlighting their special risks and characteristics. The circular will 
state that before a member, member organization, or employee of such 
member organization undertakes to recommend a transaction in the 
security, such member or member organization should make a 
determination that the security is suitable for such customer and the 
person making the recommendation should have a reasonable basis for 
believing at the time of making the recommendation, that the customer 
has such knowledge and experience in financial matters that they may be 
capable of evaluating the risks and the special characteristics of the 
recommended transaction, including those highlighted, and is 
financially able to bear the risks of the recommended transaction.
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    \12\ Id.
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2. Statutory Basis
    The Basis under the Act for the proposed rule change is the 
requirement under Section 6(b)(5)\13\ that an exchange have rules that 
are designed to prevent fraudulent and manipulative acts and practices, 
to promote just and equitable principles of trade, to remove 
impediments to and perfect the mechanism of a free and open market and 
a national market system, and, in general, to protect investors and the 
public interest.
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    \13\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any 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 on 
the proposed rule change.

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

    Within 35 days of the 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 the 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, including whether the proposed rule 
change is consistent with the Act. 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 Room. 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-98-25 and should 
be submitted by September 16, 1998.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\14\
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    \14\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-22879 Filed 8-25-98; 8:45 am]
BILLING CODE 8010-01-M