[Federal Register Volume 64, Number 102 (Thursday, May 27, 1999)]
[Notices]
[Pages 28845-28847]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-13467]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-41423; File No. SR-AMEX-99-17]
Self-Regulatory Organizations; Notice of Filing and Immediate
Effectiveness of Proposed Rule Change by the American Stock Exchange
LLC Relating to the Listing and Trading of Term Notes Linked to an
Index of Select Sector SPDRs
May 18, 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 May 7, 1999, the American Stock Exchange Inc. (``Amex'' or
``Exchange'') filed with the Securities and Exchange Commission
(``SEC'' or ``Commission'') the proposed rule change as described in
Items I, II, and III below, which Items have been prepared by the
Exchange. The proposal was amended on may 10, 1999.\3\ The proposed
rule change has been filed by the Amex as a ``non-controversial'' rule
change under Rule 19b-4(f)(6) \4\ under the Act. 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.
\3\ See letter from Scott G. Van Hatten, Legal Counsel,
Derivative Securities, Amex, to Richard Strasser, Assistant
Director, Division of Market Regulation, SEC, dated May 10, 1999.
\4\ 17 CFR 240.19b-4(f)(6).
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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 the
Select Sector SPDR Fund Growth Portfolio Index. The text of the
proposed rule change is available at the Office of the Secretary, Amex
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 Amex Listing Standards, Policies and
Requirements (``Amex Listing Standards''), the Exchange may approve for
listing and trading securities that cannot be readily categorized under
the listing criteria for common and preferred stocks, bonds,
debentures, or warrants.\5\ In this proposal, the Exchange seeks to
list term notes (``Notes'') reflecting the performance of the Select
Sector SPDR Fund Growth Portfolio Index (``Index'') under Section 107A.
The eight Select Sector SPDRsSM included in the Index, to
which the notes will be linked, are shares issued by an open-end
management investment company registered under the Investment Company
Act of 1940 and have been approved for trading on the Exchange.\6\
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\5\ See Securities Exchange Act Release No. 27753 (March 1,
1990), 55 FR 8626 (March 8, 1990).
\6\ See Securities Exchange Act Release No. 40749 (December 4,
1998), 63 FR 68483 (December 11, 1998) (``Release No. 34-40749'').
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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 Commission approved the listing and
[[Page 28846]]
trading of: Select Sector SPDRs on December 4, 1998; \7\ notes linked
to individual Select Sector SPDRs on January 20, 1999; \8\ and options
overlying Select Sector SPDRs on July 1, 1998.\9\
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\7\ Id.
\8\ Securities Exchange Act Release No. 40956 (January 20,
1999), 64 FR 4480 (January 28, 1999) (``Release No. 34-40956'').
\9\ Securities Exchange Act Release No. 40157 (July 1, 1998), 63
FR 37426 (July 10, 1998) (``Release No. 34-40157'').
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The Notes will be senior, unsecured debt securities that will
conform to the listing guidelines of Section 107A of the Amex Listing
Standards.\10\ 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 value of the components of the Index.
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\10\ Section 107A of the Amex Listing Standards states that the
Exchange will consider listing any security not otherwise covered by
the Exchange's listing requirements, provided the security satisfies
the capitalization, distribution and other criteria described
therein.
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Merrill proposes to issue the Notes in an amount of between $10 and
$25 per unit with an aggregate offering in an amount equal to at least
$10 million. Merrill has prepared a preliminary prospectus for the
Notes which will be available for distribution to investors.
The Exchange believes that the Notes are appropriately linked to
the Index because the component Select Sector SPDRs are shares of an
open-end management investment company, and have been previously
approved to underlie notes similar to those being proposed. Further,
all the component Select Sector SPDRs are approved for options trading.
For these reasons, the Exchange believes that any concerns with respect
to potential manipulation or market impact upon settlement of the Notes
at maturity are minimized.\11\
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\11\ The risks associated with trading of the Index components
are discussed in detail in previous released. See Release Nos. 34-
40749, 34-40956 and 34-40157.
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The Index, to which the Notes will be linked, comprises eight
Select Sector SPDRs which are shares of a management investment company
holding liquid and highly capitalized stocks included in the S&P 500
Index. A comprehensive discussion of the composition and maintenance of
each of the Select Sector SPDRs in the Index is contained in the order
approving their listing and trading on the Amex.\12\ In addition,
copies of the prospectus pertaining to the Select Sector SPDRs are
available.
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\12\ The nine Select Sector SPDRs currently approved for trading
on the Exchange include the Basic Industries, Consumer Services,
Consumer Staples, Cyclical/Transportation, Energy, Financial,
Industrial, Technology and Utilities Select Sector SPDRs. See
Release No. 34-40749. The Utilities Select Sector SPDR will not be a
component security of the Notes.
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Index Calculation. The Index will be calculated by the Amex based
on fixed component weightings. The following is a description of the
methodology. Each of the Select Sector SPDR components will account for
the following percentage of the Index's value:
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Initial
Select sector SPDR weight
(percent)
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Technology................................................. 25
Consumer Services.......................................... 18
Consumer Staples........................................... 16
Financials................................................. 15
Energy..................................................... 8
Industrials................................................ 7
Basic Industries........................................... 6
Cyclical/Transportation.................................... 5
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Although the foregoing weightings may be revised, all such
revisions to Index component weightings, in the aggregate, will not
exceed 5% of the value of the Index (e.g., the initial weighting for
Basic Industries may be revised to 8% and for Cyclical/Transportation
to 3%). A multiplier will be determined for each Select Sector SPDR
based on the initial weights set forth above and the then current sale
prices of each Select Sector SPDR so that the Index value on the
pricing data equals 100 and the Index value at any time will equal the
sum of the Select Sector SPDRs' last sale prices multiplied by the
number of shares in the Index for each Select Sector SPDR. There will
be no periodic rebalancing of the Index to reflect changes in relative
performance among the Select Sector SPDRs. Because the Notes are
designed to provide investors with a percentage of the appreciation in
the Index as measured over a specified period of time, and are
essentially a passive investment, the Index will not be actively
maintained like other derivatively-based index products, except as
discussed below. The shares for each component Select Sector SPDR
remain fixed during the life of the Note, except in the event of
certain actions, taken by the management investment company, such as
anti-dilution events including a split in the value of the Select
Sector SPDR or capital gains distributions. In the event the Index is
adjusted for a dilution event, the Amex will adjust the multiplier of
the affected Select Sector SPDR in the Index so that the Index value
remains unchanged after the share price is adjusted to reflect the
distribution. In the event a Select Sector SPDR ceases to trade, the
Exchange may determine to replace it with a substitute Sector SPDR or a
successor Sector SPDR (if available), or undertake to include the index
value relating to the former Select Sector SPDR's value.
Dissemination of Index. Similar to other index values which
underlie exchange-traded products, the value of the Index will be
calculated continuously and disseminated every 15 seconds over the
Consolidated Tape Association's Network B.
Surveillance. Surveillance procedures similar to those in pace and
used to surveil the trading in Merrill Lynch Euro Fund MITTS \13\
(``Eurofund MITTS'') and notes linked to individual Select Sector SPDRs
\14\ will be used to surveil trading in the term notes linked to the
Index. Accordingly, the Exchange will monitor trading in the Notes and
in the Select Sector SPDRs. Similar to the Euro Fund MITTS and the
notes linked to individual Select Sector SPDRs, if the Exchange detects
unusual activity in the Notes, it will examine, if necessary, activity
in the stocks held by the Select Sector SPDRs as well as the redemption
activity in the SPDRs themselves. As discussed in the order approving
the trading of Select Sector SPDRs, Merrill currently has in place
procedures to prevent the misuse of material, non-public information
regarding changes to component stocks in the component Select Sector
SPDRs.\15\
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\13\ Securities Exchange Act Release No. 40367 (August 26,
1998), 63 FR 47052 (September 3, 1998).
\14\ Release No. 34-40956.
\15\ See Release No. 34-40749.
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Settlement. 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,
if any, in the Index value from the starting value to the adjusted
ending value.
The starting value will equal the value of the Index at the close
of business on the pricing date and the adjusted ending value will
equal the average value of the closing Index value on five consecutive
trading days shortly prior to maturity,\16\ as reduced by an annual
adjustment factor. The adjustment factor, generally in an amount
between .5% to 3%, will be applied to the Index value on a pro rata
basis each day for purposes of determining the adjusted ending value.
The actual adjustment factor will be
[[Page 28847]]
determined on the pricing date and disclosed in the prospectus to
investors. Upon maturity, the Notes will be cash settled. The Exchange
notes that the formula may produce a total return at maturity that is
lower than the return a holder of all of the corresponding Select
Sector SPDRs might receive during the same period. At maturity, holders
of the Notes will not receive less than 100% of the initial issue
price.
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\16\ This five day period is described in the prospectus.
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Similar to other Exchange traded index-linked notes, both the issue
and the issuer will meet the general criteria set forth in Section 107A
of the Amex Listing Standards. 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 Listing Standards.\17\
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\17\ Section 101 of the Amex Listing Standards 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.
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Exchange Rules Applicable to the Notes. Because the Notes are
linked to a portfolio of Select Sector SPDRs, which are subject to the
Exchange's equity floor trading rules, 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, the Notes will be
subject to the equity margin rules of the Exchange.\18\ 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 recommendation transaction,
including those highlighted, and is financially able to bear the risks
of the recommended transaction. Lastly, as with other structured
products, the Exchange will closely monitor activity in the Notes to
identify and deter any potential improper trading activity in the
Notes.
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\18\ See Amex Rule 462.
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2. Statutory Basis
The proposed rule change is consistent with Section 6(b) \19\ of
the Act in general and furthers the objectives of Section 6(b)(5) \20\
in particular in that is it designed to prevent fraudulent and
manipulative acts and practices, to promote just and equitable
principles of trade, 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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\19\ 15 U.S.C. 78f.
\20\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange represents that the proposed rule change will impose
no 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 proposed rule change has become effective pursuant to
Section 19(b)(3)(A) of the Act \21\ and Rule 19b-4(f)(6) thereunder
\22\ because the 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 the date of filing, or such shorter time that the
Commission may designate if consistent with the protection of investors
and the public interest; and (4) Amex 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. At any time within 60 days
of the filing of the proposed rule change, the Commission may summarily
abrogate such rule change it 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.\23\
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\21\ 15 U.S.C. 78s(b)(3)(A).
\22\ 17 CRF 240.19b-4(f)(6). In reviewing this proposal, the
Commission has considered the proposed rule's impact on efficiency,
competition, and capital formation. 15 U.S.C. 78c(f).
\23\ 15 U.S.C. 78s(b)(3)(C).
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The Exchange has requested that the rule change be accelerated to
become operative fifteen days from filing of the proposal, because such
proposal contemplates a hybrid derivative product that changes only the
composition of the underlying securities without raising new regulatory
issues. Since the proposed derivative product is sufficiently similar
to previously approved and currently traded products, the Commission
finds that accelerating the operative date of the rule change is
consistent with the protection of investors and the public interest,
and thus designates May 25, 1999 as the operative date of this filing.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
auguments 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-
0609. 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 ralating 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 at the
Commission's Public Reference Room. 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-99-17 and
should be submitted by June 17, 1999.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\24\
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\24\ 17 CFR 200.30-3(a)(12).
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Jonathan G. Katz,
Secretary.
[FR Doc. 99-13467 Filed 5-26-99; 8:45 am]
BILLING CODE 8010-01-M