[Federal Register Volume 64, Number 125 (Wednesday, June 30, 1999)]
[Notices]
[Pages 35222-35228]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-16645]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-41546; File No. SR-Amex-99-15]


Self-Regulatory Organizations; Order Granting Accelerated 
Approval to Proposed Rule Change and Amendment Nos. 1 and 2 Thereto, 
and Notice of Filing of Amendment No. 2, 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.

June 22, 1999.

I. Introduction

    On April 19, 1999, the American Stock Exchange LLC (``Exchange'' or

[[Page 35223]]

``Amex''), submitted to the Securities and Exchange Commission 
(``Commission'' or ``SEC''), pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change relating to the listing and 
trading of notes and warrants on the 10 Uncommon Values Index of Lehman 
Brothers Inc. (``Lehman''). The Exchange filed Amendment No. 1 \3\ to 
the proposed rule change on May 17, 1999. The proposed rule change, as 
amended, was published for comment in the Federal Register on June 1, 
1999.\4\ The Commission received no comments on the proposal. On June 
21, 1999, the Exchange submitted Amendment No. 2 to the proposed rule 
change.\5\ This order approves the proposal, as amended.
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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 (``Division''), 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.
    \4\ See Securities Exchange Act Release No. 41436 (May 21, 
1999), 64 FR 29367.
    \5\ Letter from Scott Van Hatten, Amex to Nancy Sanow, Division, 
Commission, dated June 21, 1999 (``Amendment No. 2''). Amendment No. 
2 clarifies that the Index will be defined as a Stock Index Industry 
Group, commonly referred to as a narrow-based index, under Amex Rule 
900C(b)(1) and that LB Holdings satisfies the net worth and earnings 
requirements set forth in Sections 106 and 107 of the Amex Company 
Guide. The Exchange also represents that if the Index is comprised 
of foreign securities or American Depository Receipts (``ADRs''), at 
any time during the term of the proposed Warrants, that: (i) Are not 
subject to comprehensive surveillance agreement, and (ii) have less 
than 50% of their global trading volume in dollar value within the 
United States, those foreign securities or ADRs will not, in the 
aggregate, represent more than 20% of the weight of the Index, 
unless the index is otherwise approved for warrant or option 
trading. Lastly, Amendment No. 2 clarifies the procedures for 
valuing foreign securities.
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II. Description of the Proposal

    The Exchange proposes to trade stock index warrants, pursuant to 
Section 106, and index term notes, pursuant to Section 107, of the Amex 
Company Guide based upon Lehman's 10 Uncommon Values Index, 
an index consisting of ten actively traded equity securities 
(``Index''). The Warrants (as hereinafter defined) and Notes (as 
hereinafter defined) will be cash-settled. The Index will be equal-
dollar weighted with respect to the ten component stocks and, under 
Amex rules, is considered a narrow-based stock index. The issuer of the 
Warrants and Notes will be Lehman Brothers Holdings Inc. (``LB 
Holdings'').

A. Index Design and Stock Selection Criteria

    The securities comprising the Index will be selected annually by 
the Investment Policy Committee (``Committee'') of Lehman's Equity 
Research group, a division of Lehman, and announced on or about July 1 
of each year. The Committee will select ten securities that it believes 
will outperform the stock market during the succeeding twelve months. 
To determine the ten selections each year, various Lehman's Equity 
Research analysts 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 those 
stocks that offer the best potential to outperform the market. The 
Committee then selects those stocks that it believes will be the best 
ten stocks for the next twelve months' 10 Uncommon Values Index. 
Immediately thereafter, on or about July 1 of each year, the ten 
securities to be included in the Index for a twelve month period are 
announced. Each subsequent year's 10 Uncommon Value stocks (``New 
Components'') will replace the preceding year's 10 Uncommon Value 
stocks (``Old Components'') in their entirety in the Index.\6\ The New 
Components will be added to the Index on or about July 1 
(``Announcement Date'') of each year, and the Old Components will be 
removed from the Index on the last business day immediately preceding 
the Announcement Date (``Closing Date'').
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    \6\ The Committee may select an Old Component to be a New 
Component, but the Old Component would be reevaluated and would have 
to satisfy the eligibility standards for index components outlined 
infra in Section 11.C.
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    Consistent with other structured products, the Exchange will 
distribute a circular to its membership, prior to the commencement of 
trading of the Notes and Warrants, providing guidance on 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.
1. Description of the Index 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.\7\ 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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    \7\ 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. Consistent 
with Section 107A of the Amex Company Guide, the Notes will provide for 
a maturity of not less than one nor more than ten years from the date 
of issue. LB Holdings anticipates that the Notes will provide for a 
maturity of five years. The price of each Note may be par or less than 
par, in which case the Notes will 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 proportion equal to their weighting in the Index, according to the 
following formula:

(Par/Strike  x  Indexf)

Where:

Indexf: Closing Price of the Index on the earlier of 
Conversion Date or Maturity
Indexi: Initial Index Value (i.e., 100)
Strike: Specified % of Indexi (anticipated by LB Holdings to 
be 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 payment amounts that 
investors holding the Notes may receive.\8\
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    \8\ 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 of 100 are assumed. The maturity of the Notes is 
assumed to be five 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 three 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)


[[Page 35224]]


    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 ealry conversion is determined by the following 
formula:

(Par/Strike  x  Current Index Value)

    3. The issuer has the right to call the notes at any point 
beginning three years after the trade date by publishing such call with 
30-days notice to investors. If the issuer calls the notes, the 
investor will receive the greater of Par and the Exchange Amount.
    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 ($1000/125 x 150)]=$1,200
2. ($1000/125 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. The 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 
prices 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 issue 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.
    LB Holdings, the issuer of the Notes, satisfies the criteria of 
Section 107 of the Amex Company Guide. Specifically, LB Holdings has 
assets in excess of $100 million and stockholders' equity of at least 
$10 million and satisfies the earnings criteria set forth in Section 
101 of the Amex Company Guide. If LB Holdings is unable to satisfy the 
minimum earnings requirements of Section 101 prior to issuance of the 
proposed warranties and notes, the Exchange generally will require LB 
Holdings 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.
2. Exchange Rules Applicable to the 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 effecting a 
transaction in the Notes. Further, the Notes will be subject to the 
equity margin rules of the Exchange.\9\
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    \9\ See Exchange Rule 462.
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B. Description of Index Warrants

    Under Section 106 of the Amex Company Guide, the Exchange may 
approve for listing and trading index warrants. The Amex 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. Specifically, the Warrants 
will have a term of between one and five years from date of issuance 
(LB Holdings anticipates a term of three years), a minimum public 
distribution of 1,000,000 Warrants together with a minimum of 400 
public Warrantholders, and an aggregate market value of $4,000,000. The 
Warrant will be cash-settled in U.S. dollars. Further, pursuant to 
Section 106(e), the Exchange expects that the terms of the Warrants for 
which 25% or more of the value of the Index is represented by 
securities that are traded primarily in the United States must provide 
that opening prices of the stocks traded primarily in the United States 
which comprise the Index will be used to determine: (i) The final 
settlement value (i.e., the settlement value for Warrants that are 
exercised at expiration), and (ii) the settlement value for such 
Warrants that are exercised on either of the two business days 
preceding the day on which the final settlement value is to be 
determined. Under Section 106(f) the Warrants must include in their 
terms provisions specifying: (i) The time by which all exercise notices 
must be submitted, and (ii) that all unexercised Warrants that are in 
the money will be automatically exercised on their expiration date or 
on or promptly following the date on which such Warrants are delisted 
by the Exchange (if the Warrant have not been listed on another 
organized securities market in the United States).
    Under Section 106(g), at any time during the term of the Warrants, 
if the Index is comprised of foreign securities or ADRs that: (i) Are 
not subject to a comprehensive surveillance agreement, and (ii) have 
less than 50% of their global trading volume in dollar value within the 
United States, those foreign securities or ADRs shall not, in the 
aggregate, represent more than 20% of the weight of the Index, the 
Index is otherwise approved for warrant or option trading.
    Under Section 106(h), the Exchange expects that the issuer of the 
Warrants either will make arrangements with transfer agents to advise 
the Exchange immediately of any change in the number of Warrants 
outstanding due to the early exercise of the Warrants or will provide 
this information themselves. If 25% or more of the value of the Index 
is represented by securities traded primarily in the United States, 
such notice shall be filed with the Member Firm Regulation Division of 
the Exchange no later than 4:30 p.m. New York City time, on the date 
when the settlement value for such Warrants is determined. Such notice 
shall be filed in such form and manner as may be prescribed by the 
Exchange from time to time.
1. 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). LB Holdings 
anticipates that the Warrants will be American style. Upon exercise, or 
at the Warrant's expiration date (if not exercised prior to such date), 
the holder of a Warrant structured as a ``put'' will 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'' will, 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 will 
expire worthless. In addition, the Amex,

[[Page 35225]]

prior to the commencement of trading, will distribute a circular to its 
membership calling attention to the specific risks associated with the 
Warrants.
2. 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 limits 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 deemed to be a Stock Index Industry Group (defined below) 
under Exchange Rule 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.

C. Eligibility Standards for Index Components

    Components stocks of the Index will be required to meet the 
following criteria: (1) A minimum market value of at least $75 million, 
except that the lowest weighted components 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 weight of the Index 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 by listed on the Amex, the New York Stock 
Exchange (``NYSE''), or traded through the facilities of the Nasdaq 
Stock Market (``Nasdaq'') and reported National Market System 
securities (``Nasdaq/NMS securities''); and (5) if the Index is 
comprised of foreign securities or ADRs, at any time during the term of 
the Warrants, that: (i) Are not subject to a comprehensive surveillance 
agreement, and (ii) have less than 50% of their global trading volume 
in dollar value within the United States, those foreign securities or 
ADRs will not, in the aggregate, represent more than 20% of the weight 
of the Index, unless such index is otherwise approved for warrant or 
option trading.

D. 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 LB Holdings 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 proceeding the establishment of the Index.
    Lehman will serve as calculation agent (``Calculation Agent'') for 
the Notes and Warrants. As Calculation Agent for the Notes, Lehman will 
determine the amount investors receive at the stated maturity of the 
Notes or on their earlier redemption of repurchase by LB Holdings. As 
calculation Agent for the Warrants, Lehman will determine the amount 
investors receive on exercise of the Warrants by determining the cash 
settlement amount.
    The Exchange will calculate the value of 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.

III. Commission Findings and Conclusions

    The Commission finds that the proposed rule change is consistent 
with the requirements of the Act and the rules and regulations 
thereunder applicable to a national securities exchange, and in 
particular, the requirements of Section 6(b)(5) of the Act \10\ 
Specifically, the Commission finds that the listing and trading of 
Warrants and Notes on the Index will promote the public interest and 
help to remove impediments to a free and open securities market by 
providing investors with a means to hedge exposure to market risk 
associated with a portion of the equity markets \11\ and promote 
efficiency, competition and capital formation.\12\
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    \10\ 15 U.S.C. 78f(b)(5).
    \11\ Pursuant to Section 6(b)(5) of the Act, the Commission must 
predicate approval of any new securities product upon a finding that 
the introduction of such product is in the public interest. Such a 
finding would be difficult for a warrant that served no hedging or 
other economic function, because any benefits that might be derived 
by market participants likely would be outweighted by the potential 
for manipulation, diminished public confidence in the integrity of 
the markets, and other valid regulatory concerns.
    \12\ See 15 U.S.C. 78c(f).
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    Nevertheless, the trading of Warrants and Notes on the Index raised 
several concerns related to the design and maintenance of the Index, 
customer protections, surveillance and market impact. The Commission 
believes, however, for the reasons discussed below, that the Amex has 
adequately addressed these concerns.

A. Design and Maintenance of the Index

    The Commission finds that it is appropriate and consistent with the 
Act for the Amex to consider the Index as a stock index industry group 
(``Stock Index Industry Group'') under Rule 900C(b)(1) (i.e., a 
``narrow-based'' stock index) for purposes of margin requirements for 
the Notes and Warrants as well as for other purposes under the 
Exchange's rules. The Index will be composed of ten actively traded 
common stocks that will be listed on the Amex or NYSE or through the 
facilities

[[Page 35226]]

of Nasdaq and reported as Nasdaq/NMS securities.
    The Commission notes that the Amex has implemented several 
safeguards in connection with the listing and trading of the Warrants 
and Notes that will serve to ensure that the Index's component 
securities are relatively highly capitalized and actively traded. In 
this regard, the Amex represents that the Index and its component 
stocks will meet the criteria of Sections 106 and 107 of the Amex 
Company Guide and the generic criteria for the component securities of 
a Stock Index Industry Group prior to trading.
    The Commission further notes that the issuer, LB Holdings, 
satisfies the net worth and earnings requirements set forth in Sections 
106 and 107 of the Amex Company Guide. Specifically, for purposes of 
the proposed Warrants and with respect to Section 106, LB Holdings 
satisfies subparagraph (a), governing the size and earnings 
requirements of the Warrant's issuer. Pursuant to paragraph (a) of 
Section 106, LB Holdings possesses a minimum tangible net worth in 
excess of $250,000,000, and otherwise substantially exceeds the 
earnings requirements set forth in Section 101(A) of the Amex Company 
Guide.\13\ In the event that the issuer's minimum tangible net worth 
changes prior to the issuance of the Warrants, or, in the alternative, 
prior to the Exchange's listing of the Warrants, LB Holdings will be 
required to have: (i) A minimum tangible net worth of $150,000,000 and 
to otherwise substantially exceed the earnings requirements set forth 
in Section 101(A), and (ii) not to have issued warrants where the 
original issue price of all of its index and currency warrant offerings 
(combined with index and currency offerings of its affiliates) listed 
on a national securities exchange or traded through the facilities of 
Nasdaq exceeds 25% of its net worth.
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    \13\ The earnings requirements set forth in Section 101A of the 
Amex Company Guide require that the issuer have pre-tax income of 
least $750,000 in its last fiscal year, or in two of its last three 
fiscal years.
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    Moreover, the Commission notes that the Exchange has represented 
that the Warrants will conform to the listing guidelines under Section 
106 of the Amex Company Guide. Specifically, the Warrants will have a 
term of between one and five years from the date of their issuance, a 
minimum public distribution of 1,000,000 Warrants together with a 
minimum of 400 public Warrantholders, and an aggregate market value of 
$4,000,000. The Warrants will be cash-settled in U.S. dollars. Further, 
pursuant to Section 106(e), the Exchange expects that the terms of the 
Warrants for which 25% or more of the value of the Index is represented 
by securities that are traded primarily in the United States must 
provide that opening prices of the stocks traded primarily in the 
United States that comprise the Index will be used to determine: (i) 
The final settlement value (i.e., the settlement value for Warrants 
that are exercised at expiration), and (ii) the settlement value for 
such Warrants that are exercised on either of the two business days 
preceding the day on which the final settlement value is to be 
determined. Under Section 106(f), all Warrants will be required to 
include in their terms provisions specifying: (i) The time by which all 
exercise notices must be submitted, (ii) that all unexercised Warrants 
that are in the money will be automatically exercised on their 
expiration date or on or promptly following the date on which such 
Warrants are delisted by the Exchange (if the Warrants have not been 
listed on another organized securities market in the United States).
    With respect to the listing of the Notes, the Commission also notes 
that LB Holdings satisfies the requirements of Section 107 of the Amex 
Company Guide. Specifically, LB Holdings has assets in excess of $100 
million and stockholders' equity of at least $10 million and satisfies 
the earnings criteria set forth in Section 101 of the Amex Company 
Guide. Should LB Holdings be unable to satisfy the minimum earnings 
requirements of Section 101 prior to issuance of the proposed Warrants 
and Notes, the Exchange generally will require LB Holdings 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.
    In addition, the Exchange has indicated that the Index's component 
stocks must 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 weight of the Index 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 NYSE, or traded through the facilities of 
the Nasdaq and reported as Nasdaq/NMS securities; and (5) if the Index 
is comprised of foreign securities or ADRs, at any time during the term 
of the Warrants, that: (i) Are not subject to a comprehensive 
surveillance agreement, and (ii) have less than 50% of their global 
trading volume in dollar value within the United States, those foreign 
securities or ADRs will not, in the aggregate, represent more than 20% 
of the weight of the index, unless such Index is otherwise approved for 
Warrant or option trading.
    The Commission notes that the Index will be calculated using 
``equal-dollar'' weighting methodology designed to ensure that each 
component security is represented in an approximately ``equal'' dollar 
amount in the Index. Although the Index will not be rebalanced 
quarterly,\14\ the Commission notes that the component securities are 
replaced entirely each year. In the unusual situation where a component 
stock is carried over to the following year's Index, that security most 
again meet the eligibility criteria for component stocks.
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    \14\ See Commentary .02(b) to Amex Rule 901(C), which requires 
that, for the Amex to list options on Stock Index Industry Groups 
under Rule 19b-4(e) under the Act, 17 CFR 240.19b-4(e) an equal-
dollar weighted index must be rebalanced quarterly.
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B. Customer Protection

    The Commission notes that the rules and procedures of the Exchange 
adequately address the special concerns relating to the trading of 
Warrants and Notes on the Index. Specifically, the applicable 
suitability, account approval, disclosure and compliance requirements 
of the Amex listing standards governing warrants and notes 
satisfactorily address potential concerns. Moreover, the Amex plans to 
distribute a circular to its membership calling attention to specific 
risks associated with Warrants and Notes on the Index. Further, 
pursuant to sections 106 and 107 of the Amex Company Guide, only those 
issuers capable of meeting the Amex's issuer standards are be eligible 
to issue Warrants and Notes. These standards, among other things, help 
to ensure that the issuer is sufficiently creditworthy to be able to 
meet its obligations at the expiration of the Warrants and Notes.

C. Surveillance

    In evaluating new derivative instruments, the Commission, 
consistent with the protection of investors, considers the degree to 
which the exchange sponsoring the derivative instrument has the ability 
to obtain

[[Page 35227]]

information necessary to detect and deter market manipulation and other 
trading abuses. It is for this reason that the Commission requires that 
there be a comprehensive surveillance agreement in place between an 
exchange listing or trading a derivative product and the primary 
exchanges trading the stocks underlying the derivative instrument to 
enable regulators to monitor and surveil trading in the derivative 
product and its underlying stocks.\15\ Such agreements facilitate the 
availability of information needed to fully investigate a potential 
manipulation if it were to occur. In this regard, the Commission notes 
that the Exchange and the other markets for the stocks underlying the 
Index--the NYSE and the NASDR (the self-regulatory organization that 
oversees Nasdaq)--are members of the Intermarket Surveillance Group, 
which provides for the sharing of all necessary surveillance 
information among members.
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    \15\ The Commission believes that the ability to obtain relevant 
surveillance information, including, among other things, the 
identity of the ultimate purchasers and sellers of securities, is an 
essential and necessary component of a comprehensive surveillance 
agreement. A comprehensive surveillance agreement should provide its 
parties with the ability to obtain information necessary to detect 
and deter market manipulation and other trading abuses. 
Consequently, the Commission generally requires that a comprehensive 
surveillance agreement stipulate that the parties to the agreement 
provide each other, upon request, information about market trading 
activity, clearing activity and customer identity. See Securities 
Exchange Act Release No. 31529 (Nov. 27, 1992), 57 FR 57248 (Dec. 3, 
1992).
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    In addition, the Exchange has represented that if any foreign 
securities or ADRs represented in the Index are not subject to a 
comprehensive surveillance agreement, those foreign securities or ADRs 
will not, in the aggregate, represent more than 20% of the weight of 
the Index.
    The Commission notes that certain concerns are raised when a 
broker-dealer, such as Lehman, is involved in the development, 
maintenance, and calculation of a stock index that underlies an 
exchange-traded derivative product. In this case, not only is LB 
Holdings the issuer of the Notes and Warrants, but also its affiliate, 
Lehman, will develop the Index, replace component stocks annually, and 
serve as Calculation Agent. For several reasons, however, the 
Commission believes that the Exchange has adequately addressed these 
concerns with respect to Warrants and Notes on the Index.
    First, Lehman has established informational barriers around the 
Lehman personnel who have access to information regarding changes and 
adjustments to the Index.\16\ The Commission believes that these 
barriers will help prevent the improper use of material non-public 
information concerning the Index and strengthen the proposal by 
maintaining the integrity of changes made to the Index. Second, Lehman 
currently has in place internal review procedures to monitor trading 
activity in Index component securities, particularly prior to the 
announcement of New Component Stocks. Finally, the Exchange's existing 
surveillance procedures will apply to the Warrants and Notes on the 
Index and should provide the Exchange with adequate information to 
detect and deter trading abuses.
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    \16\ Details of the Lehman informational barriers have been 
submitted to the Commission under separate cover. See Letter from 
John R. Wickman, Equity Derivatives Managing Director, Lehman, to 
Nancy J. Sanow, Assistant Director, Division, Commission, dated June 
18, 1999.
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    With respect to Lehman's serving as Calculation Agent, the 
Commission indicates that the prospectuses for the Notes and Warrants 
will inform investors of the formulas used to calculate the payout on 
the conversion, redemption, repurchase, maturity of the Notes, or on 
the exercise of the Warrants. Moreover, the Exchange has represented 
that Lehman or the Exchange will, upon request, provide investors with 
the values used in the formula to determine payout amounts.\17\ 
Finally, the Commission notes that the Exchange is responsible for 
monitoring and surveilling trading in the Index and component stocks to 
detect and deter trading abuses, including at the time of the 
derivative instrument's stated maturity. In sum, the Commission 
believes that the procedures discussed above will help to ensure that 
Lehman does not unfairly use any information regarding the Index that 
it obtained through its role in developing and maintaining the Index or 
does not unfairly administer calculating the Index.
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    \17\ Telephone conversation between Nancy J. Sanow, Senior 
Special Counsel, Division, Commission and Scott Van Hatten, Amex, on 
June 22, 1999.
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    For the reasons discussed above, the Commission finds good cause to 
approve the proposed rule change and Amendment Nos. 1 and 2 thereto 
prior to the thirtieth day after the date of publication of notice of 
their filing in the Federal Register. Specifically, Amendment No. 2 
clarifies (i) the method by which foreign components will be valued; 
(ii) that LB Holdings, the issuer, satisfies all the net worth and 
earnings requirements set forth in Section 106 and 107 of the Amex 
Company Guide; (iii) that the Warrants will conform to the listing 
guidelines of Section 106 of the Amex Company Guide; and (iv) the 
procedures by which component securities will be replaced or 
supplemented in the event of a merger, consolidation, spin-off, 
termination of an ADR program, or conversion into another class of 
securities.\18\ Amendment No. 2 also states that the Index will not be 
rebalanced on a quarterly basis. The Commission believes that 
completely reconstituting the Index each year results in an annual 
rebalancing and that quarterly rebalancing is not practicable or in the 
public interest given the nature of the Index. The Commission received 
no comments on the proposed rule change as originally published and 
believes that no new regulatory issues are presented in Amendment No. 
2.
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    \18\ The Exchange will adhere to the following procedures: (i) 
In the event of a merger or consolidation (whether between component 
stocks or between one component stock and one non-component stock), 
the original component stock will be replaced by the new security; 
(ii) in the event of a conversion into another class of security, 
the original component stock will be replaced by the new security; 
(iii) in the event of a spin-off of a subsidiary, both the 
subsidiary issue and the original parent security will be included 
in the Index; and (iv) should a depositary receipt program be 
terminated, for any reason, after an ADR had already been included 
in the Index, the underlying foreign stock will be included in the 
Index. No attempt will be made to find a replacement stock or to 
otherwise compensate for a stock which is extinguished due to a 
bankruptcy or similar circumstances.
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    Accordingly, the Commission believes that it is consistent with 
Sections 6(b)(5) and 19(b)(2) \19\ of the Act, to find good cause 
exists to approve the proposed rule change and Amendment Nos. 1 and 2 
on an accelerated basis.
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    \19\ 15 U.S.C. 78s(b)(2).
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning Amendment No. 2, including whether the proposed 
rule change is consistent with the Act. Persons making written 
submissions should file six copies thereof with the Security, 
Securities and Exchange Commission, 450 Fifth Street, NW, Washington, 
DC 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

[[Page 35228]]

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 Amex. All submission 
should refer to File No. SR-Amex-99-15 and should be submitted by July 
21, 1999.
    For the foregoing reasons, the Commission finds that the Amex's 
proposal to list and trade Warrants and Notes on the Index is 
consistent with the requirements of the Act and the rules and 
regulations thereunder.
    It is therefore ordered, pursuant to Section 19(b)(2) of the Act, 
that the proposed rule change (SR-Amex-99-15), as amended, is approved.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\20\
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    \20\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-16645 Filed 6-29-99; 8:45 am]
BILLING CODE 8010-01-M