[Federal Register Volume 64, Number 18 (Thursday, January 28, 1999)]
[Notices]
[Pages 4480-4482]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-2003]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-40956; File No. SR-Amex-98-48]


Self-Regulatory Organizations; Notice of Filing of Immediate 
Effectiveness of Proposed Rule Change by the American Stock Exchange 
LLC Relating to the Listing and Trading of Term Notes Linked to Select 
Sector SPDRSM

January 20, 1999.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that on 
December 21, 1998, the American Stock Exchange LLC (``Amex'' or 
``Exchange'') filed with the Securities and Exchange Commission the 
proposed rule change as described in Items I, II, and III below, which 
Items have been prepared by the Amex. 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 term notes linked to Select 
Sector SPDRSM,\3\ traded on the Amex (the ``Notes''). Each 
Note issuance will be linked to a separate Select Sector 
SPDRSM approved for trading on the Amex. The text of the 
proposed rule change is available at the Office of the Secretary, Amex 
and at the Commission
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    \3\ The Select Sector SPDRsSM, to which the Notes 
will be linked, comprise liquid and highly capitalized stocks 
included in the S&P 500 Index. The nine Select Sector 
SPDRsSM currently approved for trading on the Exchange 
are the Basic Industries, Consumer Services, Consumer Staples, 
Cyclical/Transportation, Energy, Financial, Industrial, Technology 
and Utilities Select Sector SPDRsSM. Each is offered by 
the Select Sector SPDRsSM Trust (``Fund''), an open-end 
management investment company registered under the Investment 
Company Act of 1940 and has been approved for trading on the Amex 
pursuant to Amex Rules 1000A through 1003A (Index Fund Shares 
Rules). Securities Exchange Act Release No. 40749 (December 4, 
1998), 63 FR 68483 (December 11, 1998). In addition, Select Sector 
SPDRsSM may underlie options pursuant Securities Exchange 
Act Release No. 40157 (July 1, 1998), 63 FR 37426 (July 10, 1998).
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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 
text of these statements may be examined at the places specified in 
Item IV below. 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 the 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The purpose of the proposed rule change is to permit the Amex to 
list term notes, each of which shall be separately linked to one of 
nine Select Sector SPDRSM approved for trading on the Amex. 
Under Section 107A of the Amex Company Guide, the Exchange may approve 
for listing and trading securities which cannot be readily

[[Page 4481]]

categorized under the listing criteria for common and preferred stocks, 
bonds, debentures, or warrants.\4\ Similar to other Exchange traded 
Index-linked Notes, the Amex represents that both the issues and the 
issuer will meet the general criteria set forth in Section 107A of the 
Amex Company Guide. Furthermore, the issuer will have a minimum 
tangible net worth in excess of $100,000,000 and otherwise 
substantially exceed the earnings requirements set forth in Section 101 
of the Amex Company Guide.\5\
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    \4\ Securities Exchange Act Release No. 27753 (March 1, 1990), 
55 FR 8626 (March 8, 1990). Section 107A of the Amex Company Guide, 
states that the Exchange will consider listing any security not 
otherwise covered by the Exchange's listing requirements, provided 
the security satisfies the following criteria: 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 $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 either assets 
in excess of $200 million and stockholders' equity of at least $10 
million or assets in excess of $100 million and stockholders' equity 
of at least $20 million; 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; and Principal Amount/Aggregate 
Market Value--not less than $4 million.
    \5\ Section 101 of the Amex Company Guide, requires, among other 
things, that an issuer have stockholders' equity of at least $4 
million and pre-tax income of $750,000 in its last fiscal year, or 
in two of its last three fiscal years.
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    The Notes will be issued by Merrill Lynch & Co., Inc. (``Merrill'') 
and underwritten by Merrill Lynch Pierce Fenner & Smith Incorporated. 
The Notes will be senior, unsecured debt securities. 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 will provide for 
payment at maturity based in whole or in part on changes in the net 
asset value of the corresponding Select Sector SPDRSM. The 
Amex represents that Merrill will issue the Notes in various amounts, 
between $10 and $25 per unit, with aggregate offerings in an amount 
equal to between $15 and $100 million. The Amex represents that Merrill 
is currently undertaking to prepare a preliminary prospectus for the 
Notes which will be available for distribution to investors.
    The Exchange believes the Notes are appropriately linked to Select 
Sector SPDRsSM because Select Sector SPDRsSM are 
open-ended investment companies. For this reason, the Exchange believes 
that any concerns with respect to potential manipulation or market 
impact upon settlement of the Notes at maturity are minimized. Similar 
to the exercise of an option overlying a Select Sector 
SPDRSM, which would require physical delivery of the 
underlying Select Sector SPDRSM, and as was discussed in the 
order approving the trading of options on Select Sector 
SPDRsSM \6\ concerns with respect to potential manipulation 
or market impact upon settlement are minimized because Select Sector 
SPDRsSM even though some or all of the necessary securities 
needed to be deposited are not available, the Exchange believes that 
the underlying Select Sector SPDRsSM will be available in 
the secondary market upon settlement. Further, although there is no 
absolute assurance that market participants will create Select Sector 
SPDRsSM, it is likely that arbitrage opportunities will 
create an incentive to do so.
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    \6\ Supra note 3.
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    Surveillance procedures similar to those in place and used to 
surveil the trading in Merrill Lynch Euro Fund MITTS \7\ (``Euro Fund 
MITTS'') will be used to surveil trading in the term notes linked to 
the various Select Sector SPDRsSM. Accordingly, the Exchange 
will monitor trading in the Notes and in the Select Sector 
SPDRsSM. And similar to the Euro Fund MITTS, if the Exchange 
detects unusual activity in the Select Sector SPDRSM Notes, 
it will examine, if necessary, activity in the stocks held by the 
Select Sector SPDRSM as well as the redemption activity in 
the Select Sector SPDRSM itself. The net asset values of the 
Select Sector SPDRsSM will be calculated continuously by 
Amex and disseminated every 15 seconds on Network B of the Consolidated 
Tape Association (``CTA''). As discussed in the order approving the 
trading of Select Sector SPDRsSM, Merrill currently has in 
place procedures to prevent the misuse of material, non-public 
information regarding changes to component stocks in the Select Sector 
SPDRsSM.\8\
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    \7\ Securities Exchange Act Release No. 40367 (August 26, 1998), 
63 FR 47052 (September 3, 1998).
    \8\ Supra note 3.
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    Holders of the Notes will not receive any interest payments. 
However, holders of the Notes will receive at maturity settlement 
payment equal to the principal amount of the notes plus a 
``Supplemental Redemption Amount'', based on the percentage increase in 
the Select Sector SPDRSM from the starting value to the 
adjusted ending value. The starting value will equal the net asset 
value of the Select Sector SPDRSM on or prior to the pricing 
date, the adjusted ending value will equal the average value of the 
Select Sector SPDRSM on five consecutive trading days 
shortly prior to maturity, as reduced by an adjustment factor and as 
adjusted for certain anti-dilution events. The annual adjustment 
factor, generally in an amount between 0.5% and 3%, will be applied to 
the net asset value of the Select Sector SPDRSM on a pro 
rata basis each day for purposes of determining the adjusted ending 
value. The actual adjustment factor will be determined on the pricing 
date. Upon maturity, at Merrill's option, the Notes will settle into 
either shares of the Select Sector SPDRSM or cash. The 
exchange notes that the formula may produce a total return at maturity 
which is lower than the return a holder of the corresponding Select 
Sector SPDRsSM might receive during the same period. At 
maturity, holders of the Notes will not receive less than 100% of the 
initial issue price.
    Because the Notes are linked to a portfolio of equity securities, 
the Amex'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. Pursuant to Amex Rule 411, 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. Further, pursuant to Amex Rule 462, the Notes will be 
subject to the equity margin rules of the Exchange. In addition, 
consistent with other structured products, the Exchange will distribute 
a circular to its membership, prior to the commencement of trading, 
providing guidance with regard to 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 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 recommend transaction, including 
those highlighted, and is financially able to bear the risks of the 
recommended transaction. Lastly, as with other

[[Page 4482]]

structured products, the Exchange will closely monitor activity in the 
Notes to identify and deter any potential improper trading activity in 
the Notes.
2. Basis
    The proposed rule change is consistent with Section 6(b)\9\ of the 
Act in general and furthers the objectives of Section 6(b)(5)\10\ in 
particular in that it is designed to prevent fraudulent and 
manipulative acts and practices, to promote just and equitable 
principles of change, to foster cooperation and coordination with 
persons engaged in facilitating transactions in securities, and to 
remove impediments to and perfect the mechanism of a free and open 
market and a national market system.
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    \9\ 15 U.S.C. 78f.
    \10\ 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.

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

    No written comments were solicited or received with respect to the 
proposed rule change.

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

    The foregoing rule change has become effective pursuant to Section 
19(b)(3)(A)\11\ and Rule 19b-4(e)(6)\12\ of the Act. The proposed rule 
change does not significantly affect the protection of investors or the 
public interest, does not impose any significant burden on competition; 
and does not become operative prior to 30 days after the date the 
proposed rule change was filed with the Commission.
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    \11\ 15 U.S.C. 78s(b)(3)(A).
    \12\ 17 CFR 240.19b-4(e)(6).
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    Rule 19b-4(e)(6) also provides that the SRO provide the Commission 
with written notice of its intent to file the proposed rule change, 
along with a brief description and text of the proposed rule change, at 
least five business days prior to the date of filing the proposed rule 
change, or such shorter time as designated by the Commission. The Amex 
requested that the Commission waive the notification period in order to 
expedite the listing and trading of term notes linked to Select Sector 
SPDRsSM. The Commission finds good cause to waive the 
notification period because it previously reviewed and approved the 
composition and maintenance of the nine Select Sector 
SPDRsSM underlying the term notes.\13\
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    \13\ Supra note 3.
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission may summarily abrogate such rule change if it 
appears to the Commission that such action is necessary or appropriate 
in the public interest, for the protection of investors, or otherwise 
in the furtherance of the purposes of the Act.

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 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 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 Amex. All 
submissions should refer to file number SR-Amex-98-48 and should be 
submitted by February 18, 1999.

    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. 99-2003 Filed 1-27-99; 8:45 am]
BILLING CODE 8010-01-M