[Federal Register Volume 63, Number 171 (Thursday, September 3, 1998)]
[Notices]
[Pages 47052-47056]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-23764]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-40367; File No. SR-Amex-98-24]


Self-Regulatory Organizations; American Stock Exchange, Inc.; 
Order Granting Approval to Proposed Rule Change and Notice of Filing 
and Order Granting Accelerated Approval to Amendment No. 1 Relating to 
the Listing and Trading of Merrill Lynch EuroFund Market Index Target 
Term Securities

August 26, 1998.

I. Introduction

    On June 30, 1998, the American Stock Exchange, Inc. (``Exchange'' 
or ``Amex'') submitted to the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change to approve for listing and trading under Section 
107A of the Exchange's Company Guide, Merrill Lynch EuroFund Market 
Index Target Term Securities SM (``MITTS 
Securities'') based in whole or in part on changes in the value of the 
Merrill Lynch EuroFund Index (``EuroFund Index'').\3\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ The Commission notes that the ``EuroFund Index'' (a term 
defined in the prospectus for the MITTS Securities) reflects the 
adjusted total return of Class B shares of the Merrill Lynch 
EuroFund, a mutual fund registered under the Investment Company Act 
of 1940. The EuroFund Index does not measure the performance of any 
securities other than Class B shares of the Merrill Lynch EuroFund.
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    The proposed rule change was published for comment in Securities 
Exchange Act Release No. 40228 (July 17, 1998), 63 FR 40145 (July 27, 
1998). No comment letters were received in response to the proposal. 
The Exchange submitted Amendment No. 1 to the proposed rule change on 
August 21, 1998.\4\ This order grants approval to the proposed rule 
change and accelerates approval of Amendment No. 1.
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    \4\ Amendment No. 1 discusses the surveillance procedures that 
the Exchange will undertake with regard to trading in the MITTS 
Securities. The Exchange represented that its Market Surveillance 
department will monitor trading in the MITTS Securities and shares 
of the EuroFund underlying the EuroFund Index. If the Market 
Surveillance department detects unusual trading activity in the 
MITTS Securities, it will examine, if necessary, trading activity in 
the EuroFund's component stocks and the redemption activity in 
shares of the EuroFund. See Letter to Sharon Lawson, Senior Special 
Counsel, Division of Market Regulation, Commission, from Claire P. 
McGrath, Vice President and Special Counsel, Exchange, dated August 
20, 1998.
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II. Description of the Proposal

a. Listing Requirements

    The Exchange seeks to list the MITTS Securities for trading under 
Section 107A of the Exchange's Company Guide. Section 107A provides for 
the listing and trading of securities that cannot be readily 
categorized under the listing criteria for common and preferred stocks, 
bonds, debentures, or warrants.\5\ The MITTS Securities are structured 
as senior, unsecured debt securities, the value of which will be 
linked, in whole or in part, to the adjusted total return value of 
Class B shares of the Merrill Lynch EuroFund (``EuroFund'').\6\ The 
EuroFund is an open-end mutual fund registered under the Investment 
Company Act of 1940 and is a ``diversified company'' as defined in 
Section 5(b)(1) of the Investment Company Act of 1940.\7\
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    \5\ See Securities Exchange Act Release No. 27753 (Mar. 1, 
1990), 55 FR 8626 (Mar. 8, 1990).
    \6\ According to the prospectus prepared by the underwriter, the 
EuroFund is a diversified, open-end management company that seeks to 
provide shareholders with capital appreciation primarily through 
investment in equities of corporations domiciled in European 
countries. While there are no prescribed limits on geographic 
distribution within the European community, it currently is 
anticipated that a majority of the EuroFund's assets will be 
invested in equity securities of issuers domiciled in Western 
European countries. Current income from dividends and interest will 
not be an important consideration in selecting portfolio securities. 
The EuroFund expects that under normal market conditions at least 
80% of its net assets will be invested in European corporate 
securities, primarily common stocks, and debt and preferred 
securities convertible into common stocks.
    \7\ See 15 U.S.C. 80a-5(b)(1). Section 5(b)(1) requires that at 
least 75% of the value of a diversified company's total assets must 
represent cash; cash items; government securities; securities of 
other investment companies; and other securities which, with respect 
to any single issuer, do not account for more than: (i) 5% of the 
value of the management company's total assets, and (ii) 10% of the 
outstanding voting securities of that issuer.
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    The Exchange has represented that both the issue (MITTS Securities) 
and the issuer (Merrill Lynch & Co., Inc.) will conform to and meet the 
listing guidelines set forth in Section 107A of the Exchange's Company 
Guide.\8\ In addition: (i) the issuer has a minimum

[[Page 47053]]

tangible net worth in excess of $250 million; (ii) the EuroFund has 
total net assets of approximately $2.16 billion; and (iii) the 
EuroFund's net asset value (``NAV'') \9\ is reported each day through 
the facilities of the National Association of Securities Dealers 
Automated Quotation System (``Nasdaq''). The Exchange's continued 
listing guidelines governing the MITTS Securities are set forth in 
Sections 1001 through 1003 of the Exchange's Company Guide. In 
particular, Section 1003(b) regarding suspensions and delistings with 
respect to limited distribution and reduced market value will apply to 
MITTS Securities.\10\
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    \8\ Specifically, the MITTS Securities must have: (i) a minimum 
public distribution of one million trading units; (ii) a minimum of 
400 public holders (if traded in thousand dollar denominations then 
no number of holders is required); and (iii) an aggregate market 
value not less than $4 million. In addition, the issuer of the MITTS 
Securities must have assets in excess of $100 million and 
stockholders' equity of at least $10 million, and must meet the 
earnings criteria set forth in Section 101 of the Exchange's Company 
Guide. If the issuer of the MITTS Securities did not have pre-tax 
income of at least $750,000 in its last fiscal year, or in two of 
its last three fiscal years, the issuer must have: (i) assets in 
excess of $200 million and stockholders' equity of at least $10 
million; or (ii) assets in excess of $100 million and stockholders' 
equity of at least $20 million.
    \9\ The EuroFund's prospectus states that the net asset value 
per share is computed by dividing the sum of the value of the 
securities held by the EuroFund plus any cash or other assets 
(including interest and dividends accrued but not yet received) 
minus all liabilities (including accrued expenses) by the total 
number of shares outstanding at such time, rounded to the nearest 
cent. Expenses, including the fees payable to the EuroFund's 
investment adviser and any account maintenance and/or distribution 
fees payable to the EuroFund's distributor, are accrued daily.
    \10\ Under Section 1003(b)(iii), the Exchange may consider 
suspending or delisting the MITTS Securities if: (i) the aggregate 
market value or the principal amount of the MITTS Securities 
publicly held is less than $400,000; or (ii) the issuer is unable to 
meet its obligations on the MITTS Securities.
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b. Description of MITTS Securities on the EuroFund

    The MITTS Securities will provide for payment at maturity based in 
whole or in part on changes in the value of the EuroFund Index, an 
index based on the adjusted total return of the Class B shares of the 
EuroFund.\11\ The total return value reflects the change in the NAV of 
Class B shares of the EuroFund, plus cash dividends and distributions 
paid on those shares. After the Exchange calculates the EuroFund Index 
based on changes in the total return value, the Exchange will reduce 
the EuroFund Index value each day by a percentage equal to the pro rata 
portion of an annual reduction factor. The annual reduction factor is 
expected to be between 2.50% and 2.75% of the value of the EuroFund 
Index and will be determined on the date that the MITTS Securities are 
priced for initial sale to the public.\12\ The EuroFund Index, as 
adjusted by the annual reduction factor, will be calculated by the 
Exchange once a day after the EuroFund's NAV has been determined. After 
calculation, the EuroFund Index value will be disseminated over the 
Consolidated Tape Association's Network B and updated again after the 
next close of trading and reporting of the EuroFund's NAV.\13\ 
Likewise, the EuroFund's NAV will be disseminated through the 
facilities of Nasdaq subsequent to calculation. If the EuroFund does 
not comply with the Rule 22c-1 under the Investment Company Act of 
1940,\14\ which requires daily computation of a fund's current NAV, the 
Exchange will use the last available price in its calculation.
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    \11\ The EuroFund consists of Class A, Class B, Class C, and 
Class D shares. Each class of shares represents an identical 
interest in the investment portfolio of the EuroFund and has the 
same rights. However, each class of shares varies with regard to: 
(i) sales charges; (ii) account maintenance fees; (iii) distribution 
fees; and (iv) conversion features.
    \12\ Holders of Class B shares receive the value of their shares 
plus cash dividends and distributions paid on those shares less 
fees. Holders of the MITTS Securities receive at maturity the 
principal amount of their investment plus a Supplemental Redemption 
Amount in the form of Class D shares (see Section II(c) infra, 
``Maturity and Settlement of MITTS Securities'') based on the 
adjusted total return of Class B shares of the EuroFund which may be 
lower, due to the annual reduction factor, than what a holder of 
Class B EuroFund shares might receive. The Exchange has represented 
that an explanation of the annual reduction factor will be included 
in any marketing materials, fact sheets, or any other materials 
circulated to investors regarding the trading of MITTS Securities.
    \13\ The EuroFund Index is updated only at the close of trading 
each day because that is the only time when the EuroFund's NAV is 
determined and disseminated. The Exchange believes this should not 
pose an obstacle to the trading of the MITTS Securities, anymore 
than it prevents investors from entering intra-day orders to 
purchase or redeem shares of the EuroFund itself at a closing NAV 
that is unknown at the time the orders are entered.
    \14\ 17 CFR 270.22c-1.
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c. Maturity and Settlement of MITTS Securities

    A specific maturity date will not be established until the time of 
the offering, however, the underwriter's preliminary prospectus 
indicates that the MITTS Securities are expected to mature sometime in 
February, 2006. Although the value of the MITTS Securities will be 
derived from the performance of Class B shares of the EuroFund, the 
MITTS Securities will settle in Class D shares of the EuroFund.\15\ 
Specifically, the MITTS Securities will guarantee holders 100% of 
principal return plus any additional amount that may be due as a result 
of appreciation of the adjusted total return of Class B shares to be 
paid in either the value of Class D shares of the EuroFund or, if such 
shares are unavailable, cash. the MITTS Securities will settle by 
delivery of the number of Class D shares of the EuroFund equal in value 
to the principal amount ($10 per MITTS Security) plus the Supplemental 
Redemption Amount,\16\ if any, based on the NAV for Class D shares 
determined on a specified date prior to the stated maturity of the 
MITTS Securities.\17\ If the issuer is unable to deliver the Class D 
shares because the EuroFund is not issuing Class D shares to new 
investors in the EuroFund as of the date immediately prior to the 
stated maturity date, it will pay the equivalent amount in cash.
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    \15\ See supra note 11.
    \16\ The Supplemental Redemption Amount, which may not be less 
than zero, will equal the principal amount ($10) multiplied by the 
percentage difference between the ending value of the EuroFund Index 
and the starting value [$10 ((ending EuroFund Index value--starting 
EuroFund Index value)/starting EuroFund Index value)]. The ending 
and starting EuroFund Index values used to calculate the 
Supplemental Redemption Amount shall reflect the application of the 
annual reduction factor.
    \17\ The specified date shall be two business days prior to the 
stated maturity of the MITTS Securities. Telephone conversation 
between Sharon Lawson, Senior Special Counsel, Division of Market 
Regulation, Commission; Claire McGrath, Vice President and Special 
Counsel, Exchange; and Thomas Lee, Vice President of Customized 
Investments, Merrill Lynch & Co. (July 16, 1998).
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d. Exchange Rules Applicable to MITTS

    Because the MITTS Securities are linked to the EuroFund, which 
holds a portfolio of equity securities, the Exchange has decided to 
apply its equity floor trading rules. Regular equity trading hours 
(9:30 A.M. to 4:00 P.M. Eastern Standard Time) will govern the trading 
of the MITTS Securities. In addition, the MITTS Securities will be 
subject to the equity margin rules of the Exchange.\18\
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    \18\ See Exchange Rule 462, ``Minimum Margins.''
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    In accordance with Exchange Rule 411,\19\ the Exchange shall impose 
a duty of due diligence on its members and member firms to determine 
the essential facts relating to customers prior to their purchasing and 
trading MITTS Securities. Furthermore, consistent with the offering of 
other structured products, the Exchange will distribute a circular to 
its membership prior to the commencement of trading in the MITTS 
Securities to provide guidance regarding member firm compliance 
responsibilities, including appropriate suitability criteria and/or 
guidelines. The circular shall require that before an Exchange member, 
member organization, or employee of such member organization, 
undertakes to recommend a transaction in the MITTS Securities, such 
member or member organization should make a determination that the 
MITTS Securities are suitable for such customer. As part of that 
determination, the person making the recommendation should have a 
reasonable basis for believing at

[[Page 47054]]

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 that the 
customer is financially able to bear the risks of the recommended 
transaction. Lastly, as with other structured products, the Exchange 
has stated that it will monitor closely the trading activity in the 
MITTS Securities to identify and deter any potential improper trading 
activity. In this regard, the Exchange has submitted an amendment that 
discusses in more detail surveillance for the MITTS Securities.\20\
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    \19\ Exchange Rule 411, ``Duty to Know and Approve Customers,'' 
requires every Exchange member or member organization to ``use due 
diligence to learn the essential facts relative to every customer 
and to every order or account accepted.''
    \20\ See Amendment No. 1 supra note 4, and discussion infra.
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III. Discussion

    For the reasons discussed below, 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, with the requirements of 
Section 6(b)(5) \21\ that the rules of an exchange market be designed 
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.\22\ The Commission believes providing for exchange-
trading of the MITTS Securities will offer investors a new and 
innovative means of participating in a mutual fund that invests in 
foreign securities. Specifically, the Commission believes that the 
MITTS Securities will permit investors to gain equity exposure in 
European exchange markets \23\ while at the same time limiting the down 
side risk of their original investment as a result of the issuer's 100% 
principal guarantee.
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    \21\ 15 U.S.C. 78f(b)(5).
    \22\ In approving this proposed rule change, the Commission 
notes that it has considered the proposal's impact on efficiency, 
competition, and capital formation. 15 U.S.C. 78c(f).
    \23\ The EuroFund can invest in Western or Eastern European 
exchange markets. According to information provided by Amendment No. 
1, the five most recent semi-annual reports filed by the EuroFund 
pursuant to Section 30(e) of the Investment Company Act of 1940 
indicate that on average, 96.38% of the EuroFund's assets were 
invested in Western European countries.
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    The Commission recognizes that the MITTS Securities have certain 
characteristics that are similar to previously approved hybrid products 
linked to individual and/or indexes of securities. For example, like 
other market index target term securities, the MITTS Securities are not 
leveraged instruments.\24\ Nevertheless, the Commission has not 
previously approved for listing and trading a hybrid product like the 
MITTS Securities that is physically settled and linked to a single, 
open-end investment company. In addition, the MITTS Securities linked 
to the EuroFund Index are unlike other previously approved market index 
target term securities because the final rate of return of the MITTS 
Securities is derivatively priced based upon the performance of a 
generally undisclosed portfolio of securities. Finally, the Commission 
notes that the MITTS Securities have raised potential conflict of 
interest concerns because the issuer of the MITTS Securities is an 
affiliate of the investment adviser to the EuroFund. The Commission 
believes that these factors, along with certain other features of the 
MITTS Securities, raise unique and novel issues.\25\ As discussed in 
more detail below, the Commission believes that the Exchange and the 
issuer have adequately addressed these issues.
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    \24\ Certain characteristics of the MITTS Securities being 
approved herein more closely resemble equity linked notes under 
Section 107B of the Exchange's Company Guide rather than market 
index target term securities listed under Section107A for ``Other 
Securities.'' Generally, equity linked notes are based on the 
performance of one security, either a common stock or non-
convertible preferred stock, and are settled in the underlying 
linked security. Market index target term securities, on the other 
hand, have traditionally measured the performance of a known 
portfolio of securities and are generally cash settled. Because 
equity linked notes listed under Section 107B of the Exchange's 
Company Guide can only overlie common stock or non-convertible 
preferred stock, the Exchange has appropriately relied on its 
broader ``Other Securities'' listing standard for the listing of the 
MITTS Securities.
    \25\ For example, the settlement value of the MITTS Securities 
is based on changes in one class of EuroFund shares while the holder 
will receive settlement in another class.
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    First, the Commission notes that the Exchange's rules and 
procedures addressing the special concerns attendant to the trading of 
hybrid securities will be applicable to the MITTS Securities. In 
particular, by imposing the hybrid listing standards, heightened 
suitability for recommendations in MITTS Securities, disclosure, and 
compliance requirements noted above, the Commission believes that the 
Exchange has adequately addressed the potential problems that could 
arise from the hybrid nature of the MITTS Securities. In addition, the 
Exchange will distribute an information circular to its membership 
calling attention to the specific risks associated with the MITTS 
Securities, as well as suitability requirements and compliance 
responsibilities. The circular also will highlight certain unusual 
features of the MITTS Securities including the annual reduction factor, 
the relationship between the issuer of the MITTS Securities and the 
investment adviser to the EuroFund, and the physical settlement in a 
class of shares different than the class underlying the EuroFund 
Index.\26\
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    \26\ Telephone conversation between Sharon Lawson, Senior 
Special Counsel, Division of Market Regulation, Commission; and 
Scott Van Hatten, Legal Counsel, Exchange (Aug. 24, 1998).
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    Second, the MITTS Securities remain a non-leveraged product with 
the issuer guaranteeing 100% of principal return. The Commission 
realizes that the final payout on the MITTS Securities is dependent in 
part upon the individual credit of the issuer. To some extent, however, 
this credit risk is minimized by the Exchange's hybrid listing 
standards in Section 107A of the Company Guide which provide that only 
issuers satisfying substantial asset and equity requirements may issue 
securities such as MITTS Securities.\27\ In addition, these standards 
require that the MITTS Securities have at least $4 million in aggregate 
market value. Furthermore, financial information regarding the issuer, 
as well as the MITTS Securities and the underlying EuroFund, that is 
required to be disclosed under the federal securities laws will be 
publicly available to investors.
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    \27\ See supra note 8.
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    Third, the history and performance of the EuroFund should be 
available through a variety of public sources. In particular, the 
EuroFund's NAV will be disseminated through the facilities of Nasdaq 
after the close of trading each business day. The Commission believes 
this information will be useful and beneficial for investors in the 
MITTS Securities. The Commission notes that the Exchange has 
represented that the value of the EuroFund Index will be calculated by 
the Exchange once each business day after the close of trading and 
after the NAV for the EuroFund has been reported. This value will be 
disseminated over the Consolidated Tape Association's Network B 
throughout the trading day and shall be updated again after the next 
close of trading when a new NAV is calculated and reported. The result 
of this is that the EuroFund Index value disseminated during the 
trading day is based on the prior day's NAV. The Commission generally 
believes that updating values on a real-time basis throughout the 
trading day is essential to any securities

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product.\28\ Nevertheless, the Commission believes that disseminating 
the static value of the EuroFund Index is acceptable because the 
EuroFund's NAV is only available once a day after the close of trading, 
and the portfolio of securities held by the EuroFund is not publicly 
available and is not disclosed on a real-time, intra-day basis.\29\
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    \28\ See e.g., Securities Exchange Act Release Nos. 38940 (Aug. 
15, 1997), 62 FR 44735 (Aug. 22, 1997); 38819 (July 7, 1997), 62 FR 
37320 (July 11, 1997); and 37744 (Sept. 27, 1996), 61 FR 52480 (Oct. 
7, 1996).
    \29\ As discussed in its order approving the listing and trading 
of options on the Lipper Analytical/Salomon Brothers Growth and 
Growth & Income Fund Indexes, the Commission recognizes that only an 
investment adviser should have knowledge of a fund's component 
securities and their values on a regular basis throughout the 
trading day. In accordance with the Investment Company Act of 1940, 
we note that information regarding the securities held by the 
EuroFund will only be generally available to the public on a semi-
annual basis and all investors should have equal access to this 
information when it is disseminated. See discussion infra on 
informational barriers. Unless certain factors are present, the 
Commission may determine it is not appropriate to allow a product to 
trade without real-time dissemination of values. See Securities 
Exchange Act Release No. 39244 (Oct. 15, 1997), 62 FR 55289 (Oct. 
23, 1997).
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    Fourth, as discussed above, the settlement value of the MITTS 
Securities is based on changes in one class of EuroFund shares while 
the holder will receive physical settlement in another class. This is 
an unusual feature of the MITTS Securities. Nevertheless, because the 
differences among the EuroFund classes are not related to the portfolio 
held by the EuroFund, but instead appear to be related to differences 
in fees and this fact has been disclosed and will be highlighted in the 
Exchange's information circular to members, the Commission believes any 
concerns about this feature have been adequately addressed.
    Finally, the Commission believes that the Exchange and the issuer 
of the MITTS Securities have adequately addressed the potential 
manipulation concerns raised by the listing and trading of the MITTS 
Securities.\30\ First, as previously noted, the issuer of the MITTS 
Securities is an affiliate of the investment adviser to the underlying 
EuroFund. The Commission believes that the Exchange, the issuer of the 
MITTS Securities, and the investment adviser to the EuroFund have 
established adequate safeguards to ensure the integrity of the MITTS 
Securities and the EuroFund. In particular, Merrill Lynch & Co. has 
represented that its wholly owned affiliate, Merrill Lynch Asset 
Management (the investment adviser to the EuroFund), does not provide 
information with respect to the investments contained in the EuroFund 
to any proprietary trading operations of its Merrill Lynch affiliates 
or employees engaged in such trading operations, except at such time as 
such information is disseminated to the public-at-large. Further, any 
such dissemination is effected in compliance with applicable laws 
including the Investment Company Act of 1940. Merrill Lynch & Co. has 
also represented that Merrill Lynch Asset Management maintains adequate 
procedures to assure compliance with this policy. These informational 
barrier procedures, as represented, should help prevent and deter the 
misuse of any informational advantages with respect to changes in the 
securities held by the EuroFund.
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    \30\ The Commission notes that by approving this proposed rule 
change the Commission is not approving the EuroFund Index for 
options or warrants trading.
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    Secondly, the Exchange has developed surveillance procedures to 
monitor trading activity in the MITTS Securities and EuroFund shares 
and will examine trading activity in the component stocks of the 
EuroFund if necessary. In this regard, the Exchange has noted that 
based on previous disclosure, the EuroFund invests a substantial 
percentage of its assets in companies that are domiciled in countries 
with which the Exchange or the Commission has information sharing 
agreements.\31\ Further, the Commission notes that the size of the 
EuroFund in comparison to the MITTS Securities offering, coupled with 
the fact that the securities held by the EuroFund are only disclosed 
semi-annually and the EuroFund is a diversified investment company 
under the Investment Company Act of 1940,\32\ reduces concerns that the 
EuroFund's underlying portfolio would be manipulated to affect the 
MITTS Securities.\33\ Nevertheless, the Exchange has states it will be 
able to monitor activity in the securities held by the EuroFund if 
necessary.
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    \31\ According to information provided by Amendment No. 1, the 
five most recent semi-annual reports filed by the EuroFund pursuant 
to Section 30(e) of the Investment Company Act of 1940 indicate that 
on average, 77.46% of the EuroFund's assets were invested in 
countries where the Exchange or the Commission has in place a 
comprehensive surveillance sharing agreement.
    \32\ With respect to 75% of its assets, the EuroFund is 
prohibited from investing more than 5% of its assets in the 
securities of a single issuer. In addition, Amendment No. 1 notes 
that based on the EuroFund's most recent semi-annual disclosures, it 
appears the EuroFund held between 106 to 138 securities, and that 
each quarter the make-up of the EuroFund's portfolio changed between 
22% to 50%.
    \33\ See Amendment No. 1 supra note 4.
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    The Commission has also been concerned that the price of the MITTS 
Securities may be improperly influenced by large redemptions or 
purchases of shares in the EuroFund, especially near the date of 
settlement and valuation. The Commission believes that this concern has 
been reduced by certain factors such as the size of the EuroFund in 
relation to the MITTS Securities offering, and the EuroFund's practice 
of maintaining a cash position to avoid having to immediately liquidate 
assets to cover redemptions.\34\ Nevertheless, the Exchange has 
committed to monitor trading activity in the MITTS Securities and 
shares of the EuroFund, and has stated it will be able to obtain, if 
necessary, the identity of investors who have made EuroFund redemptions 
if it detects unusual trading activity in the MITTS Securities.
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    \34\ Id.
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    Based on the above, the Commission believes the Exchange has 
developed adequate surveillance procedures to monitor trading activity 
in the MITTS Securities and shares of the EuroFund. The Exchange's 
surveillance procedures, in combination with the policies outlined by 
Merrill Lynch & Co., should help to deter and detect any potentially 
inappropriate or manipulative trading activity in the MITTS Securities, 
or in the EuroFund shares or the securities held by the EuroFund that 
affects the MITTS Securities.\35\
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    \35\ The Commission notes that its conclusions on the MITTS 
Securities are based on a variety of factors including the size of 
the MITTS Securities offering in relation to the size of the 
underlying EuroFund. A similar type of market index target term 
security on a different open-end mutual fund may raise new or novel 
issues and may have to be separately reviewed under Section 19(b) of 
the Act.
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    The Commission finds good cause to approve Amendment No. 1 to the 
proposed rule change prior to the thirtieth day after the date of 
publication of notice of filing thereof in the Federal Register. 
Amendment No. 1 provides additional information concerning the 
surveillance procedures the Exchange will employ to monitor trading 
activity in the MITTS Securities and shares of the EuroFund. The 
information provided by Amendment No. 1 strengthens the Exchange's 
proposal and indicates the Exchange is committed to monitoring trading 
activity in the MITTS Securities and EuroFund shares and has 
implemented procedures capable of detecting unusual trading activity 
that is designed to affect the price of such securities. Accordingly, 
the Commission believes that it is consistent with Section 6(b)(5)

[[Page 47056]]

of the Act \36\ to approve Amendment No. 1 to the proposed rule change 
on an accelerated basis.
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    \36\ 15 U.S.C. 78f(b)(5).
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    Interested persons are invited to submit written data, views, and 
arguments concerning Amendment No. 1 to the proposal, including whether 
the proposed rule change as supplemented by Amendment No. 1 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 
submissions, 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 persons, 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, NW, Washington, DC 20549. 
Copies of such filing also will be available for inspection and copying 
at the principal office of the Exchange. All submissions should refer 
to File No. SR-Amex-98-24 and should be submitted by September 24, 
1998.

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\37\ that the proposed rule change (SR-Amex-98-24), as supplemented 
by Amendment No. 1, is approved.

    \37\ 15 U.S.C. 78s(b)(2).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\38\
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    \38\ 17 CFR 200.30-3(a)(12).
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Jonathan G. Katz,
Secretary.
[FR Doc. 98-23764 Filed 9-2-98; 8:45 am]
BILLING CODE 8010-01-M