[Federal Register Volume 63, Number 216 (Monday, November 9, 1998)]
[Notices]
[Pages 60429-60430]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-29973]



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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-40626; File No. SR-Amex-98-37]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the American Stock Exchange, Inc., Relating to the Listing 
and Trading of Index-Linked Term Notes

November 2, 1998.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 under the Act, \2\ notice is hereby given 
that on October 13, 1998, the American Stock Exchange, Inc. 
(``Exchange'' or ``Amex'') 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 and trade separate Index-linked Term 
Notes (``Notes''). The value of each 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 Section 107A of the Exchange's Company Guide, the Exchange 
may approve for listing and trading securities that cannot be readily 
categorized under the Exchange's listing criteria for common and 
preferred stock, bonds, debentures, or warrants.\3\ The Exchange seeks 
to list Index-linked Term Notes, each of which shall be separately 
linked to a specified domestic mutual fund portfolio Index.\4\ The 
mutual fund portfolios underlying the Indexes will be registered under 
the Investment Company Act of 1940.
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    \3\ See Exchange Act Release No. 27753 (March 1, 1990), 55 FR 
8626 (March 8, 1990).
    \4\ The Exchange notes that the Commission recently approved a 
similarly structured product for listing and trading on the 
Exchange--Market Index Target Term Securities linked to the Merrill 
Lynch EuroFund Index. See Exchange Act Release No. 40367 (Aug. 26, 
1998), 63 FR 47052 (Sept. 3, 1998).
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    The Index-linked Term Notes will be senior, unsecured debt 
securities that will conform to the listing guidelines under Section 
107A of the Company Guide.\5\ Although a specific maturity date will 
not be established until the time of the offering, the Notes will 
provide for a maturity of between two and seven years from the date of 
issuance. Each 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 
Asset Value (``NAV'') of the corresponding mutual fund portfolio, plus 
any cash dividends and/or distributions paid on those shares.\6\
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    \5\ Section 107A of the Exchange's Company Guide states that the 
Exchange will consider listing any security not otherwise covered by 
the Exchange's listing requirements, provided the security is suited 
for auction market trading and satisfies 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 Section 101 (i.e., pre-tax income of at least 
$750,000 in its last fiscal year, or in two of its last three fiscal 
years), 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 with a minimum of 400 public shareholders, except, if 
traded in thousand dollar denominations, then no minimum number of 
holders.
    (c) Principal Amount/Aggregate Market Value: Not less than $4 
million.
    \6\ As discussed infra in Section II(A)(1)(c), ``Settlement of 
Index-linked Term 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 Notes will not receive any interest 
payments. However, holders of the Notes will receive 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 that is lower than what a holder of the corresponding mutual 
fund portfolio might receive during the same period. At maturity, 
holders of the Notes will not receive less than 100% of the initial 
issue price.
    a. Description of the Index-linked Term Notes and the Underlying 
Mutual Fund Portfolios. Similar to other notes linked to an index that 
trade on the Exchange, both the issue (Index-linked Term Notes) and the 
issuer will meet the general criteria set forth in Section 107A of the 
Exchange's Company Guide. Furthermore, the Exchange has represented 
that the issuer will have a minimum tangible net worth in excess of 
$100,000,000 and otherwise substantially exceeds the earnings 
requirements set forth in Section 101 of the Exchange's Company 
Guide.\7\ Each mutual fund portfolio underlying an Index will include 
hundreds of stocks from among a wide variety of industry groups. The 
underlying mutual fund portfolios will range in value from $900 million 
to over $2 billion in total net assets. The NAV of each mutual fund 
portfolio will be reported each business day through the facilities of 
the National Association of Securities Dealers Automated Quotation 
System (``Nasdaq'') and also will be reported in the Mutual Fund Tables 
of the Wall Street Journal and other newspapers. The Notes will be 
subject to the suspension and delisting policies of the Exchange set 
forth in Part 10 (Sections 1001-1011) of the Exchange's Company 
Guide.\8\
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    \7\ Section 101 of the Exchange's Company Guide requires that an 
issuer have pre-tax income of at least $750,000 in its last fiscal 
year, or in two of its last three fiscal years.
    \8\ Under Section 1003(b)(iii) of the Exchange's Company Guide, 
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

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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. If any mutual 
fund portfolio does not comply with Rule 22c-1 of the Investment 
Company Act of 1940,\9\ 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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    \9\ 17 CFR 270.22c-1.
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    c. Settlement of Index-linked Term Notes. The 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 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 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 \10\ reduced by an adjustment factor, if any, to be 
set forth in the prospectus.
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    \10\ 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 Applicable to Index-linked Term Notes. 
Because the Notes are linked to a portfolio of equity securities, the 
Exchange's existing equity floor trading rules and standard equity 
trading hours (9:30 A.M. to 4:00 P.M., Eastern Standard Time) will 
apply to the trading of the Notes. Further, the Notes will be subject 
to the equity margin rules of the Exchange.\11\
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    \11\ See Exchange Rule 462, ``Minimum Margins.''
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    Pursuant to Exchange Rule 411, ``Duty to Know and Approve 
Customers,'' the Exchange will impose a duty of due diligence on its 
members and member firms to learn the essential facts relating to every 
customer prior to trading the Notes. In addition, consistent with 
Exchange practices regarding other structured products, the Exchange 
will distribute an informational circular to its membership prior to 
the commencement of trading in the Notes to provide guidance regarding 
member firm compliance responsibilities, including appropriate 
suitability criteria and/or guidelines. The circular will state that 
before a member, member organization, or employee of such member 
organization undertakes to recommend a transaction in a Note, such 
member or member organization should make a determination that the 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 the special characteristics of the 
recommended transaction, including those highlighted, and that the 
customer is financially able to bear the risk of the recommended 
transaction. Lastly, as with other structured products, the Exchange 
will closely monitor trading activity in the Notes to identify and 
deter any potential improper trading activity in the Notes.
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 engaged in facilitating transactions in securities, and remove 
impediments to and perfect the mechanism of a free and open market and 
a national market system.
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    \12\ 15 U.S.C. 78f.
    \13\ 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 not 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 filing will also be available 
for inspection and copying at the principal office of the Exchange. All 
submissions should refer to File No. SR-Amex-98-37 and should be 
submitted by November 30, 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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Jonathan G. Katz,
Secretary.
[FR Doc. 98-29973 Filed 11-6-98; 8:45 am]
BILLING CODE 8010-01-M