[Federal Register Volume 63, Number 193 (Tuesday, October 6, 1998)]
[Notices]
[Pages 53737-53739]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-26661]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-40481; File No. SR-CBOE-98-38]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Chicago Board Options Exchange, Incorporated Relating to 
the Listing and Trading of Principal-Protected Notes

September 25, 1998.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on September 14, 1998, the Chicago Board Options Exchange, Incorporated 
(``Exchange'' or ``CBOE'') filed with the Securities and Exchange 
Commission (``Commission'') the proposed rule change as described in 
Items I, II, and III below, which Items have been prepared by the 
Exchange. 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.
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The Exchange seeks to list the trade four separate Principal-
Protected Notes. The value of each Principal-Protected Note will be 
linked to an index comprised of a single specified domestic mutual fund 
portfolio (``Index'' or collectively ``Indexes'').
    The text of the proposed rule change is available at the Office of 
the Secretary, the Exchange, 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 Exchange 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 IV below. The Exchange 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
    Under Exchange Rule 31.5(F), the Exchange may approve for listing 
and trading securities which cannot be readily categorized under the 
Exchange's listing criteria for preferred stock, bonds and debentures, 
or warrants. The Exchange seeks to list four Principal-Protected Notes, 
each of which shall be separately linked to a specified domestic mutual 
fund portfolio Index.\3\ The four mutual fund portfolios underlying the 
Indexes are registered under the Investment Company Act of 1940.
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    \3\ The Exchange notes that the Commission recently approved a 
similarly structured product for listing and trading on the American 
Stock Exchange--Market Index Target Term Securities linked to the 
Merrill Lynch EuroFund Index. See Securities Exchange Act Release 
No. 40367 (Aug. 26, 1998), 63 FR 47052 (Sept. 3, 1998).
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    The Principal-Protected notes will be senior, unsecured debt 
securities that will conform to the listing guidelines under Exchange 
Rule 31.5(F) in all respects.\4\ Although a specific maturity date will 
not be established until the

[[Page 53738]]

time of the offering, the Principal-Protected Notes will provide for a 
maturity of between two and seven years from the date of issuance. Each 
Principal-Protected Note may provide for payments at maturity based in 
whole or in part on changes in the value of the corresponding Index. 
Each Index will measure the total return of the corresponding mutual 
fund portfolio. The total return value shall reflect the Changes in the 
Net Value (``NAV'') of the corresponding mutual fund portfolio, plus 
any cash dividends and/or distributions paid on those shares.\5\
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    \4\ Exchange Rule 31.5(F) states that the Exchange will consider 
listing any security not otherwise covered by the Exchange's listing 
requirements, provided the security satisfied the following 
criteria:
    (a) Assets/Equity--The issuer shall have assets in excess of 
$100 million and stockholders' equity of at least $10 million. In 
the case of an issuer which is unable to satisfy the earnings 
criteria set forth in paragraph (A) (i.e., pre-tax income of 
$750,000 in its last fiscal year, or in two of its last three fiscal 
years and net income of at least $400,000), the Exchange generally 
will require the issuer to have the following: (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.
    (b) Distribution--Minimum public distribution of $1,000,000 
trading units including a minimum of 400 holders or, if traded in 
thousand dollar denominations, no minimum number of holders.
    (c) Principal Amount/Aggregate Market Value--Not less than $4 
million.
    \5\ As discussed infra in Section II(A)(1)(c), ``Settlement of 
Principal Protected Notes,'' the total return value may be reduced 
by an adjustment factor.
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    The Exchange will calculate the value of each Index once each 
business day. Holders of the Principal-Protected Notes will not receive 
any interest payments. However, holders of the Principal-Protected 
Notes will received at maturity the full principal amount of their 
Notes, plus a ``Supplemental Redemption Amount,'' if any, based on a 
formula to be set forth in the Prospectus. The Exchange notes that the 
formula may produce a total return at maturity which is lower than what 
a holder of the corresponding mutual fund portfolio might receive 
during the same period. At maturity, holders of the Principal-Protected 
Notes will not receive less than 100% of the initial issue price.
    a. Description of Principal-Protected Notes and the Underlying 
Mutual Funds. Similar to other Exchange traded index-linked notes, both 
the issues (Principal-Protected Notes) and the issuer meet the general 
criteria set forth in Exchange Rule 31.5(F). Furthermore, the Exchange 
has represented that the issuer has a minimum tangible net worth in 
excess of $100,000,000 and otherwise substantially exceeds the earnings 
requirements set forth in Exchange Rule 31.5(A).\6\ Each mutual fund 
portfolio underlying an Index includes several hundred stocks from 
among a wide variety of industry groups. As of the latest reporting 
period, the underlying mutual fund portfolios ranged in value from $900 
million to $2.1 billion in total net assets. The NAV of each mutual 
fund portfolio is reported each business day through the facilities of 
the National Association of Securities Dealers Automated Quotation 
System (``Nasdaq'') and also is reported in the Mutual Fund Tables of 
the Wall Street Journal and other newspapers. The Principal-Protected 
Notes will be subject to the suspension and delisting policies of the 
Exchange set forth in Exchange Rule 31.94.\7\
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    \6\ Exchange Rule 31.5(A), ``Equity Securities,'' requires that 
an issuer have pre-tax income of $750,000 in its last fiscal year, 
or in two of its last three fiscal years and net income of at least 
$400,000.
    \7\ Under Exchange Rule 31.94(C)(b)(iii), the Exchange may 
consider delisting debt securities if the aggregate market value or 
the principal amount of debt securities publicly held is less than 
$400,000 or, the issuer is not able to meet its obligations on the 
listed debt securities.
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    b. Calculation and Dissemination of Net Asset Values and Index 
Values. Each Index will measure the total return of its underlying 
mutual fund portfolio. Such amount shall be equal to the change in the 
mutual fund's NAV, plus any cash dividends and/or distributions paid on 
the mutual fund portfolio shares. The value for each Index will be 
disseminated once a day over the Consolidated Tape Association's 
Network B or through the Option Price Reporting Authority (``OPRA''). 
If any mutual fund portfolio does not comply with Rule 22c-1 of the 
Investment Company Act of 1940,\8\ which requires daily computation of 
a fund's current NAV, the Exchange will use the last available NAV in 
its calculation of the Index.
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    \8\ 17 CFR 270.22c-1.
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    c. Settlement of Principal-Protected Notes. The Principal-Protected 
Notes will be settled at maturity by either a cash payment or by 
delivering shares in the corresponding mutual fund portfolio, at the 
determination of the Issuer. The value of the Principal-Protected Notes 
at maturity will be equal to the principal amount of such Notes plus a 
Supplemental Redemption Amount. The Supplemental Redemption Amount, 
which may not be less than zero, will equal the principal amount of 
such Principal-Protected Note multiplied by the percentage difference 
between the Adjusted Ending Index Value and the Starting Index Value. 
The Adjusted Ending Index Value means the ending value of the Index \9\ 
reduced by an adjustment factor, if any, to be set forth in the 
prospectus.
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    \9\ The ending value of the Index shall represent the average of 
the values of the Index during a period prior to the stated maturity 
as specified in the prospectus.
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    d. Other Exchange Rules. Trading in Principal-Protected Notes will 
be governed by Chapter XXX of the Exchange's Rules.\10\ The Principal-
Protected Notes will trade during the normal trading hours for Chapter 
XXX securities, 8:30 A.M. to 3:00 P.M. Central Standard Time. The 
Principal-Protected Notes also will be subject to the equity margin 
rules of the Exchange.\11\ Consistent with the Exchange's practice with 
respect to the offering of structured products, the Exchange will 
distribute an informational circular to its membership prior to the 
commencement of trading in the Principal-Protected Notes to provide 
guidance regarding member firm compliance responsibilities, including 
appropriate suitability criteria and/or guidelines. The circular shall 
require that before a member, member organization, or employee of such 
member organization, undertakes to recommend a transaction in a 
Principal-Protected Note, such member or member organization should 
make a determination that the Principal-Protected Note is suitable for 
such customer. As part of that determination, 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 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 
similarly structured products, the Exchange will closely monitor 
trading activity in Principal-Protected Notes to identify and deter any 
potential improper trading activity in such securities.
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    \10\ See Exchange Rules, Chapter XXX, ``Trading in Stocks, 
Warrants and Other Securities.''
    \11\ See Exchange Rules, Chapter XII, ``Margins.''
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2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
Section 6 of the Act,\12\ in general, and furthers the objectives of 
Section 6(b)(5),\13\ in particular, in that it is designed to prevent 
fraudulent and manipulative acts and practices; promote just and 
equitable principles of trade; foster cooperation and coordination with 
persons facilitating transactions in securities; remove impediments to 
and perfect the mechanism of a free and open market and a national 
market system; and protect investors and the public interest. The 
Exchange further believes the listing and trading of the Principal-
Protected Notes will provide investors an opportunity to invest in a 
mutual fund portfolio without being subject to the risk of principal 
loss.
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    \12\ 15 U.S.C. 78f.
    \13\ 15 U.S.C. 78f(b)(5).

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[[Page 53739]]

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe the proposed rule change will impose 
any inappropriate burden on competition.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants or Others

    The Exchange did not solicit or receive written comments with 
respect to the proposed rule change.

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

    Within 35 days of the date of 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 Exchange 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, N.W., Washington, D.C. 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 in the 
Commission's Public Reference Section, 450 Fifth Street, N.W., 
Washington, D.C. 20549. Copies of such filings will also be available 
for inspection and copying at the principal office of the Exchange. All 
submissions should refer to File No. SR-CBOE-98-38 and should be 
submitted by October 27, 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. 98-26661 Filed 10-5-98; 8:45 am]
BILLING CODE 8010-01-M