[Federal Register Volume 64, Number 104 (Tuesday, June 1, 1999)]
[Notices]
[Pages 29367-29370]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-13810]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-41436; File No. SR-Amex-99-15]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the American Stock Exchange LLC Relating to the Listing and 
Trading of Notes and Warrants on the 10 Uncommon Values Index of Lehman 
Brothers Inc.

May 21, 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 April 19, 1999, 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 self-regulatory organization. The 
Exchange filed Amendment No. 1 \3\ to the proposed rule change on May 
17, 1999. 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\ Letter from Scott Van Hatten, Amex to Richard Strasser, 
Division of Market Regulation, Commission, dated May 14, 1999 
(``Amendment No. 1''). Amendment No. 1 clarifies that the Notes (as 
hereinafter defined) will be principal protected if held to maturity 
or if called by the issuer. Amendment No. 1 also provides three 
sample calculations of payment amounts that investors holding Notes 
may receive.
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The Exchange proposes to approve for trading stock index warrants, 
pursuant to Section 106, and indexed term notes, pursuant to Section 
107, of the Amex Company Guide based upon the 10 Uncommon 
Values Index of Lehman Brothers Inc.

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 VI 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 Exchange proposes to trade stock index warrants, pursuant to 
Section 106, and indexed term notes, pursuant to Section 107, of the 
Amex Company Guide based upon Lehman Brothers' 10 Uncommon 
Values Index, an index consisting of ten actively traded 
equity securities (``Index''). The issuer of the Warrants (as 
hereinafter defined) and Notes (as hereinafter defined) will be

[[Page 29368]]

Lehman Brothers Holdings Inc. (``LB Holdings'').
    The securities to be included in the Index will be those selected 
annually by the Investment Policy Committee (``Committee'') of Lehman 
Brothers' Equity Research group, a division of Lehman Brothers Inc., 
and announced on or about July 1, as its selection of ten securities 
that the Committee believes will outperform the stock market during the 
succeeding twelve months. To determine the ten selections each year, 
various Lehman brothers' Equity Research analysits appear before the 
firm's Investment Policy Committee to present their proposed equity 
selections to be included in the Index for the next twelve months. The 
Committee analyzes and screens each proposal after which the list of 
stocks is reviewed to determine which ones offer the potential for 
market outperformance. The Committee then selects what it believes to 
be the best ideas for the next year's 10 Uncommon Values. Immediately 
thereafter, on or about July 1 of each year, the ten securities to be 
included in that year's Index are announced. Each subsequent year's 10 
Uncommon Value stocks (``New Components'') will replace the preceding 
year's 10 Uncommon Value stock (``Old Components'') in their entirety 
in the Index. The New Components will be added to the Index on or about 
July 1 (``Announcement Date'') each year, and the Old Components will 
be removed from the Index on the last business day immediately 
preceding the Announcement Date (``Closing Date'').
    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. Lastly, as with other structured products, the Exchange 
will closely monitor activity in the Notes and Warrants to identify and 
deter any potential improper trading activity in the Notes and 
Warrants.
    Description of Index Term Notes. Under Section 107 of the Amex 
Company Guide, 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.\4\ The Amex now proposes to list for trading under Section 
107 of the Amex Company Guide, indexed term notes (``Notes'') whose 
value in whole or in part will be based on the Index.
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    \4\ See Securities Exchange Act Release No. 27753 (March 1, 
1990), 55 FR 8626 (March 8, 1990).
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    The Notes will be debt securities and will conform to the listing 
guidelines under Section 107A of the Amex Company Guide. Although a 
specific maturity date will not be established until the time of the 
offering, the Notes will provide for maturity of not less than one nor 
more than ten years from the date of issue.
    The price of each Note may be par or less than par, in which case 
the Notes accrue original issue discount. The Notes may or may not 
provide for periodic coupon payments (at a fixed rate).
    Beginning on a specified date (``Conversion Date''), holders have 
the right to tender the Notes in exchange for the cash equivalent 
(``Exchange Amount'') of the current component securities in the Index 
in proportions equal to their weighting in the Index, according to the 
following formula:

Par/Strike  x  Indexf

Where:

Indexf: Index Closing Price of the Selected Index on the 
earlier of Conversion Date or Maturity Date
Indexi Initial Spot
Strike: --to be disclosed % of Indexi (e.g. 125%)

    Investors in the Notes may receive varying payment amounts 
depending upon whether the notes are held to maturity, called by the 
issuer prior to maturity or redeemed by the investor prior to maturity. 
Below are examples of calculations of payments amounts that investors 
holding the Notes may receive.\5\
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    \5\ See Amendment No. 1, supra n.3.
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    To determine payment amounts given each of the three separate 
events, a Par value (Issue Price) of $1000, Strike of 125, and Initial 
Value of the Index 100 are assumed. The maturity of the notes are 
assumed to be 5 years and the issuer may not call the notes prior to 
three years after their issuance (i.e., the notes will have a non-call 
life of 3 years).
    1. The investor holds the Notes until maturity. At maturity, the 
investor will receive the greater of:

Par ($1000), and
(Par/Strike  x  Final Index Value)

    2. The investor converts the Notes prior to maturity. Investors may 
convert their Notes at any time after the one-month anniversary of the 
issue date in exchange for cash. The amount the investor would receive 
in the event of early conversion is determined by the following 
formula:

(Par/Strike  x  Current Index Value)

    3. The issuer has the right to call the notes at Par at any point 
beginning three years after the trade date by publishing such call with 
30-days notice to investors. Once the issuer calls the Notes, its 
holders may convert it by giving the issuer at least 20-days notice. If 
the investors convert, they receive:

(Par/Strike  x  Current Index Value)

    Otherwise, should the holder fail to convert, the Notes will be 
called by the issuer and the investor will receive the Par Value 
($1,000).
    Example 1: Assume an Index value equal to 150 (i.e, greater than 
the initial Index value of 100). Payment to investors under the above 
three events would be as follows:

1. Greater of [$1000 and ($1,000/125 x 150)] = $1,200
2. ($1,000/125  x  150) = $1,200
3. ($1,000/125  x  150) = $1,200

    Example 2: Assuming an Index value of 90 (i.e., less than the 
initial index value of 100). Payment to investors under the above three 
events would be as follows:

1. Greater of [$1,000 and ($1,000 / 125  x  90)] = $1,000
2. ($1,000 / 125  x  90) = $720
3. Note may or may not be called by the issuer in this case. If the 
Note is called, payment would equal Par ($1,000).

    Beginning on a specified date the issuer may or may not have the 
right to call all of the Notes at a call price equal to the issue price 
of the Notes plus accrued original issue discount, if any, to the call 
date. If the market value of the basket of component securities on the 
last trading before the issuer sends its call notice is equal to or 
greater than the call price, the issuer will deliver to holders the 
Exchange Amount instead. If the issuer notifies holders it will be 
calling the Notes for the Exchange Amount, a holder may still exercise 
its exchange right on any day prior to the call date.
    If the Notes have not been exchanged or called prior to maturity, 
they will be paid in cash at maturity in an amount equal to par plus 
accrued interest, if any.
    Exchange Rules Applicable to Index Notes. Because the Notes are 
linked to a basket 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 Time) will apply to the trading of the Notes. 
Pursuant to Exchange 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

[[Page 29369]]

Notes will be subject to the equity margin rules of the Exchange.\6\
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    \6\ See Exchange Rule 462.
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    Description of Index Warrants. Under Section 106 of the Amex 
Company Guide, the Exchange may approve for listing and trading index 
warrants. The Amex now proposes to list for trading, under Section 106 
of the Amex Company Guide, index warrants (``Warrants'') whose value in 
whole or in part will be based upon the Index. The Warrants will 
conform to the listing guidelines under Section 106 of the Amex Company 
Guide.
    Although a specific maturity date will not be established until the 
time of the offering, the Warrants will have a term of between one and 
five years from the date of issuance. The Warrants will be cash-settled 
in U.S. Dollars.
    Expiration and Settlement of Index Warrants. The Warrants will be 
direct obligations of their issuer, LB Holdings, subject to cash-
settlement during their term, and either exercisable throughout their 
life (i.e., American style) or exercisable only on their expiration 
date (i.e., European style). Upon exercise, or at the warrant 
expiration date (if not exercised prior to such date), the holder of a 
warrant structured as a ``put'' would receive payment in U.S. dollars 
to the extent that the Index has declined below a pre-stated index 
level (i.e., the put strike). Conversely, holders of a warrant 
structured as a ``call'' would, upon exercise or at expiration, receive 
payment in U.S. dollars to the extent that the Index has increased 
above the pre-stated index level (i.e., the call strike). If ``out-of-
the-money'' at the time of expiration, then the Warrants would expire 
worthless. In addition, the Amex, prior to the commencement of trading, 
will distribute a circular to its membership calling attention to 
specific risks associated with the Warrants on the Index.
    Exchange Rules Applicable to Index Warrants. The listing and 
trading of Warrants on the Index will comply in all respects with 
Exchange Rules 1100 through 1110 for the trading of stock index and 
currency warrants. These rules cover issues such as exercise and 
position and reporting requirements. Surveillance procedures currently 
used to monitor trading in each of the Exchange's other index warrants 
will also be used to monitor trading in the Warrants. The Index will be 
deemed to be a Stock Index Industry Group under Amex Exchange 
900C(b)(1). The Exchange expects that the review required by Exchange 
Rule 1107(b)(ii) will result in a position limit of 9,000,000 Warrants.
    Eligibility Standards for Index Components. Components of the Index 
approved pursuant to this filing will meet the following criteria: (1) 
a minimum market value of at least $75 million, except that the lowest 
weighted component security in the Index may have a market value of $50 
million; (2) trading volume in each of the last six months of not less 
than 1,000,000 shares, except that the lowest weighted component 
security in the Index may have a trading volume of 500,000 shares or 
more in each of the last six months; (3) 90% of the Index's numerical 
Index value and at least 80% of the total number of component 
securities will meet the then current criteria for standardized option 
trading set forth in Exchange Rule 915; (4) all component stocks will 
either be listed on the Amex, the New York Stock Exchange, or traded 
through the facilities of the Nasdaq Stock Market and reported National 
Market System securities; and (5) if any foreign securities or American 
Depositary Receipts represented in the Index cause a particular foreign 
country's weight in the Index to initially exceed 20% of the Index's 
numerical Index value, the Exchange will have in place a surveillance 
sharing agreement with the appropriate regulatory organization in that 
country.
    Index Calculation. The Index will be calculated using an ``equal-
dollar weighting'' methodology designed to ensure that each of the 
component securities is represented in an approximately ``equal'' 
dollar amount in the Index. To create the Index, a portfolio of equity 
securities will be established by the issuer representing an investment 
of $10,000 in each component security (rounded to the nearest whole 
share). The value of the Index will equal the current market value of 
the sum of the assigned number of shares of each of the component 
securities divided by the current index divisor. The Index divisor will 
initially be set to provide a benchmark value of 100.00 at the close of 
trading on the day preceding the establishment of the Index.
    The Exchange will calculate the Index and, similar to other stock 
index values published by the Exchange, the value of the Index will be 
calculated continuously and disseminated every 15 seconds over the 
Consolidated Tape Association's Network B.
    The number of shares of each component stock in the Index will 
remain fixed between Announcement Dates except in the event of certain 
types of corporate actions such as the payment of a dividend other than 
an ordinary cash dividend, a stock distribution, stock split, reverse 
stock split, rights offering, distribution, reorganization, 
recapitalization, or similar event with respect to the component 
stocks. The number of shares of each component stock may also be 
adjusted, if necessary in the event of a merger, consolidation, 
dissolution or liquidation of an issuer or in certain other events such 
as the distribution of property by an issuer to shareholders, the 
expropriation or nationalization of a foreign issuer or the imposition 
of certain foreign taxes on shareholders of a foreign issuer. Shares of 
a component stock may be replaced (or supplemented) with other 
securities under certain circumstances, such as the conversion of a 
component stock into another class of security, the termination of a 
depositary receipt program or the spin-off of a subsidiary. If the 
stock remains in the Index, the number of shares of that security in 
the portfolio may be adjusted, to the nearest whole share, to maintain 
the component's relative weight in the Index at the level immediately 
prior to the corporate action. In all cases, the divisor will be 
adjusted, if necessary, to ensure Index continuity.
    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. lastly, as with other structured products, the Exchange 
will closely monitor activity in the Notes and Warrants to identify and 
deter any potential improper trading activity in the Notes and 
Warrants.
2. Statutory Basis
    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 designated 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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    \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 that the proposed rule change will 
impose any burden on competition.

[[Page 29370]]

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

    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 such proposed rule change, or
    (B) institute proceeding 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-
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 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 Room. 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 No. SR-Amex-99-15 and should 
be submitted by June 22, 1999.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\9\
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    \9\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-13810 Filed 5-28-99; 8:45 am]
BILLING CODE 8010-01-M