[Federal Register Volume 64, Number 45 (Tuesday, March 9, 1999)]
[Notices]
[Pages 11520-11523]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-5722]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-41124; File No. SR-Amex-99-04]


Self-Regulatory Organizations; Notice of Filing an Immediate 
Effectiveness of Proposed Rule Change by the American Stock Exchange 
LLC Revising the Weighting Methodology of The Inter@ctive Week Internet 
Index

March 1, 1999.
    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 February 8, 1999, the American Stock Exchange LLC (``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 revise the weighting methodology of the 
Inter@ctive Week Internet Index (``Index''), a stock index jointly 
developed by the Exchange and Inter@ctive Week, a biweekly magazine 
published by Inter@ctive Enterprises LLC. The Index measures the 
performance of stocks (or ADRs thereon) of companies with business 
directly related to the internet. The Exchange's proposal would revise 
the Index by changing it from a market capitalization weighted index to 
a modified market capitalization weighted index.
    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

[[Page 11521]]

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
    In 1995, the Exchange received Commission approval to list and 
trade options on the Index.\3\ The Index currently consists of the 
stocks of fifty companies \4\ involved in the following industries: 
internet service providers, on-line service companies, internet tool 
developers, multimedia publishers, networking companies, 
videoconferencing companies, interactive television companies, software 
technology developers, and computer manufacturers. Each of the 
component securities trades on the Exchange, the New York Stock 
Exchange, or through the facilities of the Nasdaq Stock Market as 
national market securities. The Exchange believes that options on the 
revised Index will provide investors with a low-cost means to 
participate in the performance of the internet industry and an 
opportunity to hedge against the risk of investing in the industry.
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    \3\ See Securities Exchange Act Release No. 36163 (August 29, 
1995), 60 FR 45750 (September 1, 1995).
    \4\ Exhibit B to the Exchange's proposed rule change identifies 
the fifty companies making up the Index and lists them according to 
Index weighings, the companies are: Cisco Systems, America Online, 
Sun Microsystems, Yahoo!, Amazon.com, Qwest Communications 
International, Ascend Communications, 3Com, Level 3 Communications, 
At Home, eBay, Network Associates, Novell, Newbridge Networks, 
Netscape Communications, Intuit, E Trade Group, QUALCOMM, CMGI, 
Sterling Commerce, Inktomi Corporation, Excite, Adobe Systems, 
Network Solutions, Silicon Graphics, MindSpring Enterprises, 
broadcast.com, Infoseek, Earthlink Network, USWeb, GeoCities, Check 
Point Software Technologies, Cabletron Systems, Verisign, 
RealNetworks, PSINet, Macromedia, CheckFree Holdings, DoubleClick, 
CNET, Security Dynamics, ONSALE, BroadVision, Pairgain Technologies, 
SportsLine USA, Open Market, Harbinger, CyberCash, Spyglass, and 
VocalTec Communications.
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    Since the trading of options on the Index began in 1995, several 
component stocks have become more heavily weighted due to increases in 
their stock prices. Therefore, the Exchange seeks to revise the 
weighting methodology of the Index from market capitalization weighted 
to modified market capitalization weighted. The Exchange believes the 
change in weighting methodology will make options on the Index more 
attractive to investors because the revised Index will be less 
concentrated in relatively few component stocks.
    In addition, the Exchange has represented that with the exception 
of the modified market capitalization weighting methodology, the 
proposal meets all the criteria set forth in Exchange Rule 901C, 
Commentary .02 and the Commission's order approving that rule.\5\
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    \5\ Securities Exchange Act Release No. 34157 (June 3, 1994), 59 
FR 30062 (June 10, 1994).
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    a. Index calculation. 1. Current methodology. The Index currently 
is calculated using a market capitalization weighted methodology; 
specifically, the Index value is calculated by multiplying the primary 
exchange regular way last sale price of each component stock by its 
number of shares outstanding, adding the sums, and dividing by the 
current index divisor.
    2. Proposed methodology. The Exchange proposes to use a modified 
market capitalization weighted methodology for the Index. Similar to 
the methodology currently used, the Index value will be calculated by 
multiplying the primary exchange regular way last sale price of each 
component stock by its adjusted number of shares outstanding, adding 
the sums, and dividing by the current index divisor. The weighting of 
the component stocks will be based on their market capitalizations and 
adjusted number of shares outstanding, subject to the following 
diversification requirements: (1) the weight of any single component 
stock may not account for 25% or more of the total value of the Index; 
(2) the five highest component stocks in the Index may not in aggregate 
account for more than 50% of the weight of the Index; and (3) the 
aggregate weight of those component stocks which individually represent 
less than 5% of the total value of the Index must account for at least 
50% of the total Index value.
    To ensure these diversification requirements are observed when the 
Exchange rebalances the Index each quarter (on or around the third 
Friday in March, June, September, and December), the Exchange will take 
into account component changes and scheduled share adjustments and also 
will adjust the weights of the component stocks according to the three 
``Rules'' discussed below. The application of the Rules yields an 
adjusted share weight for the component stocks; this adjusted share 
weight is used to calculate the Index.
    A. Rule 1: Reweighting of Index due to single component stock 
exceeding 20% of the total Index value. If the weighting of any 
component stock exceeds 20% of the total weighted value of the Index, 
then all stocks having weightings greater than 15% of the Index will be 
reduced in weight so that each represents 15% of the total weighted 
value of the Index. The aggregate amount by which each component stock 
is reduced (i.e., the amount exceeding 15%) will be redistributed 
proportionately across the remaining component stocks that have 
weightings less than 15% of the total weighted value of the Index. If 
this redistribution causes any other component stock to have a 
weighting that exceeds 15%, the weighting of that component stock also 
will be reduced to 15% of the total Index value and the excess will be 
redistributed proportionately across other component stocks that have 
weightings less than 15% of the total weighted value of the Index.
    Exhibit B to the Exchange's proposal demonstrates that the 
application of Rule 1 to the Index as of January 15, 1999, would cause 
the weighting of Cisco Systems to drop from 31.84% to 15%. The 
redistribution of the ``excess'' weight of Cisco Systems (approximately 
16.84%) across the remaining 49 Index components with weights less than 
15% would cause America Online to also exceed 15%. As a result, America 
Online would likewise be capped at 15% and its excess weight would be 
distributed across the remaining 48 Index components.
    B. Rule 2: Reweighting of Index due to five largest component 
stocks exceeding 50% of the total Index value. If the aggregate weight 
of the five largest component stocks (following any necessary 
adjustments made according to Rule 1) is greater than 50% of the total 
weighted value of the Index, then the weight of each of the five 
largest stocks will be reduced proportionately so that the aggregate 
weight of those five component stocks will amount to 45% of the total 
weighted value of the Index. The amount by which the aggregate weight 
of the five largest stocks exceeds 45% will be redistributed 
proportionately to those stocks which are not among the five largest 
component stocks. If because of this redistribution the weight of any 
component stock exceeds the lesser of (i) 4.0%, and (ii) the scaled 
down weight of the fifth largest stock, then the weight of that 
component stock will be reduced to equal the lesser of 4.0% and the 
scaled down weight of the fifth largest stock. The excess weight will 
be allocated to the remaining component stocks until amount has been 
redistributed.
    Exhibit B to the Exchange's proposal demonstrates that the 
application of

[[Page 11522]]

Rule 2 to the Index as of January 15, 1999, would cause the weightings 
of Cisco Systems and America Online to each drop from 15% to 12.67%, 
the weighting of Sun Microsystems would drop from 9.69% to 8.19%, the 
weighting of Yahoo! would drop from 7.93% to 6.70%, and the weighting 
of Amazon.com would drop from 5.63% to 4.76%. The second element of 
Rule 2 would cause the weightings of Qwest Communications 
International, Ascend Communications, 3Com, and Level 3 Communications 
to each change to 4.00%.
    C. Rule 3: Reweighting of Index if more than 45% of the total Index 
value is comprised of stocks with weightings greater than 4.5%. If the 
aggregate weight of stocks having weightings of more than 4.5% of the 
total weighted value of the Index (i.e., the ``Large Stocks'') is 
greater than 45% of the total Index value, then the weight of those 
component stocks will be scaled down proportionately to represent in 
aggregate 40% of the total weighted value of the Index. The amount by 
which these Large Stocks in aggregate exceed 40% will be redistributed 
proportionately to those stocks having weightings less than 4.5% of the 
total Index value. If because of this redistribution the weight of any 
component stock exceeds the lesser of (i) the weight of the smallest 
Large Stock, and (ii) 4.5%, then the weight of that component stock 
will be set to equal the lesser of the weight of the smallest Large 
Stock and 4.5%. The excess weight will be allocated to the remaining 
component stocks until the entire amount has been redistributed.
    Because the component stocks having weightings of more than 4.5% do 
not in the aggregate represent more than 45% of the total weighted 
value of the Index, Rule 3 is not applicable. Therefore, as of January 
15, 1999, the weightings of all component stocks would remain unchanged 
from the weightings derived from Rule 2.
    3. Compliance with maintenance criteria. Exchange Rule 901C, 
Commentary .01, which requires that at least 90% of the subject index's 
numerical value be accounted for by stocks that meet the criteria and 
guidelines set forth in Exchange Rule 915, will continue to apply to 
the revised Index. The Exchange shall not open for trading any 
additional option series if the Index fails to satisfy any of the 
maintenance criteria set forth above unless such failure is determined 
by the Exchange not to be significant and the Commission concurs in 
writing with the Exchange's determination, or unless the continued 
listing of the Index option has been approved by the Commission 
pursuant to Section 19(b)(2) of the Act.\6\
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    \6\ 15 U.S.C. 78s(b)(2).
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    4. Index split. The initial value of the revised Index will be set 
at approximately \1/3\ the value of the market capitalization version 
of the Index at that time (i.e., the Exchange will split the Index 3:1 
when options on the revised Index are introduced). Similar to other 
stock index values published by the Exchange, the value of the revised 
Index will be calculated continuously and disseminated every 15 seconds 
over the Consolidated Tape Association's Network B.
    5. Calculation and maintenance of Index. Like the current version, 
the revised Index will be calculated and maintained by the Exchange. A 
committee consisting of two representatives from the Exchange, two 
representatives from Inter@ctive Week, and one representative from the 
internet industry will be available to advise the Exchange when, 
pursuant to Exchange Rule 901C(b), the Exchange substitutes stocks, or 
adjusts the number of stocks included in the Index, based on changing 
conditions in the internet industry or in the event of certain types of 
corporate actions such as a merger or takeover which warrant the 
removal of a component stock from the Index. The Exchange anticipates 
that the committee will meet on a quarterly basis to review possible 
candidates for removal from or inclusion in the Index, which will be 
publicly announced as far in advance of the occurrence as practicable. 
In selecting stocks to be included in the Index, the Exchange, in 
conjunction with the committee, will be guided by a number of factors 
including market value of outstanding shares, trading activity, and the 
criteria in Exchange Rule 901C, Commentary .02.
    b. Phase-out of option contracts based on existing capitalization 
weighted index. Upon issuance of a release regarding this proposed rule 
change, the Exchange will provide for the phase-out of all outstanding 
option contracts based on the existing market capitalization weighted 
version of the Index. In particular, the Exchange will assign a new 
symbol to all outstanding Index option series and will prohibit the 
opening of any additional new series that are based on the market 
capitalization weighted version of the Index. Further, the Exchange 
will assign the existing symbol (IIX) to the modified market 
capitalization weighted version of the Index; this will allow the 
introduction of series based on the revised version of the Index. 
Lastly, the Exchange will issue an Information Circular describing the 
change in weighting methodology and other relevant information 
concerning the revised Index.
    c. Compliance with Commission's previous approval order. With the 
exception of the revisions set forth above, the Exchange does not seek 
to alter or amend any term or condition of the previous Commission 
order that approved the listing and trading of options on the Index. 
Specifically, the Exchange represents that the revised Index and all 
Exchange-listed option contracts on the revised Index shall continue to 
comply with the requirements and conditions in the Commission's 
previous approval order, including for example, the requirements set 
forth under the headings: (i) Eligibility Standards for Index 
Components, (ii) Maintenance of the Index, (iii) Expiration and 
Settlement, and (iv) Exchange Rules Applicable to Stock Index Options.
2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
Section 6(b) of the Act,\7\ in general, and furthers the objectives of 
Section 6(b)(5),\8\ 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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    \7\ 15 U.S.C. 78f(b).
    \8\ 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 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

    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

    Because the foregoing proposed rule change: (1) does not 
significantly affect the protection of investors or the public 
interest; (2) does not impose any significant burden on competition; 
(3) does not become operative for 30 days from February 8, 1999, the 
date on

[[Page 11523]]

which it was filed; and because the Exchange provided the Commission 
with written notice of its intent to file the proposed rule change at 
least five business days prior to the filing date, the proposed rule 
change has become effective pursuant to Section 19(b)(3)(A) of the Act 
\9\ and Rule 19b-4(f)(6) thereunder.\10\ 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 furtherance of the purposes of 
the Act.
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    \9\ 15 U.S.C. 78s(b)(3)(A).
    \10\ 17 CFR 240.19b-4(f)(6).
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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 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, NW, 
Washington, DC 20549. Copies of such filing will also be available for 
inspection and copying at the principal office of the Exchanger. All 
submissions should refer to File No. SR-Amex-99-4 and should be 
submitted by March 24, 1999.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\11\
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    \11\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-5722 Filed 3-8-99; 8:45 am]
BILLING CODE 8010-01-M