[Federal Register Volume 65, Number 203 (Thursday, October 19, 2000)]
[Notices]
[Pages 62783-62785]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-26805]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-43427; File No. SR-AMEX-00-40]


Self-Regulatory Organizations; Notice of Filing and Order 
Granting Accelerated Approval of Proposed Rule Change by the American 
Stock Exchange LLC Relating to the Listing and Trading of Inflation 
Indexed Securities

October 10, 2000.
    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 August 3, 2000, the American Stock Exchange LLC (``Amex'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission'') the proposed rule change as described in 
Items I and II 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 and to grant accelerated 
approval to the proposed rule change.
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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 proposes to approve for listing and trading under 
Section 107A of the Amex Company Guide, index linked debt securities 
based in whole or in part on changes in the value of the U.S. Consumer 
Price 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 Company Guide, the Exchange may 
approve for listing and trading securities which cannot be readily 
categorized under the listing criteria for common and preferred stocks, 
bonds, debentures, or warrants.\3\ Under Section 107A, in March of 
1995, the Commission approved the Exchange's proposed rule change 
relating to the listing and trading of commodity linked notes 
(``COINS'').\4\ And in February of 1996, the Commission approved the 
Exchange's proposed rule change relating to the listing and trading of 
commodity indexed securities (``ComPS'').\5\ The Amex now proposes to 
list for trading under Section 107A of the Company Guide, indexed 
linked debt securities \6\ (``Securities'') whose value in whole or in 
part will be based upon the non-seasonally adjusted U.S. City Average 
All Items Consumer Price Index for All Urban Consumers (the ``CPI-U'' 
or ``Index''), published monthly by the U.S. Department of Labor Bureau 
of Labor Statistics (``BLS''). Holders of the Securities receive at 
maturity a payment linked to the value of the Index based on the 
following formula: Face Value + (Ending Index Value--Beginning Index 
Value), but not less than zero.
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    \3\ See Securities Exchange Act Release No. 27753 (March 1, 
1990), 55 FR 8626 (March 8, 1990).
    \4\ See Securities Exchange Act Release No. 35518 (March 21, 
1995), 60 FR 15804 (March 27, 1995).
    \5\ See Securities Exchange Act Release No. 36885 (February 26, 
1996), 61 FR 8315 (March 4, 1996).
    \6\ When the Amex originally filed its proposed rule change with 
the SEC, the Amex was uncertain as to whether the Securities would 
trade as preferred equity securities or debt securities. The Amex 
has since determined that the Securities will trade as debt 
securities. As per telephone conversation between Scott Van Hatten, 
Legal Counsel, Derivative Securities, and Heather Traeger, Attorney, 
Division of Market Regulation, SEC, on September 29, 2000.
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    The ``Beginning Index Value,'' which is approximately equal to the 
forward value of the CPI-U on the pricing date, will be announced at 
the time of the offering. The ``Ending Index Value'' will be equal to 
the ending level of the CPI-U, as published by the BLS and used by the 
U.S. Treasury for its Treasury Inflation Protected Securities 
(``TIPS'').
CPIS Description
    The Securities will be non-convertible and will conform to the 
listing guidelines under Section 107A of the Company Guide, which 
provide that such issues have: (1) Assets in excess of $100 million and 
stockholders' equity of at least $10 million; (2) a minimum public 
distribution of 1 million trading units with a minimum of 400 public 
shareholders; except, if traded in thousand dollar denominations, then 
no minimum number of holders; (3) a market value of not less than $4 
million.
    Although a specific maturity date will not be established until the 
time of the offering, the Securities will provide for maturity of not 
less than one year from the date of issue. The Securities may provide 
for periodic payments and/or payments at maturity based in whole or in 
part on changes in the value of the Index. At maturity holders of the 
Securities may receive less than 100% of the initial issue price.
    The redemption price of the Securities will be based on, in part, 
the ending Reference CPI-U level for the maturity date. At redemption, 
holders will receive Face Value plus (Ending Index Value minus 
Beginning Index Value); but not less than zero. Thus, at redemption, 
the holder could receive less than the Face Value or the Issue Price of 
the Securities, but never less than zero.\7\ The denomination will be 
at least $1000 and the redemption will be multiplied by a gross-up 
factor to produce a $1000 face value, i.e. Gross-up  x  Face Value plus 
(Ending Index Value minus Beginning Index Value). Equity margin rules 
will apply to the trading of the Securities. The Securities are 
designed to produce an ever-

[[Page 62784]]

increasing return as inflation rises. The Exchange represents that 
because inflation returns historically have been negatively correlated 
with financial assets, the ownership of the Securities (although their 
return is uncertain) are intended to diversify a portfolio of financial 
instruments.
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    \7\ The underwriter has advised the Amex that the Securities 
will comply with the ``hybrid exemption'' of the Commodity Futures 
Trading Commission (``CFTC''), 17 CFR Part 34. The underwriter 
further advised that it has presented a description of the structure 
and sample termsheet of the Securities to the staff of the CFTC in 
order to facilitate the approval of the registration and listing of 
the Securities.
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Index Description
    The Securities will be linked to a 3-month lagged version of CPI 
referred to as ``Reference CPI-U.'' This is the same lagged version of 
CPI-U used by the U.S. Treasury for its TIPS. The CPI-U is the non-
seasonally adjusted U.S. City Average All Items Consumer Price Index 
for All Urban Consumers, published monthly by the BLS. The Index 
represents prices of all goods and services purchased for consumption 
by urban households. User fees (such as water and sewer service) and 
sales and excise taxes paid by the consumer are also included. Income 
taxes and investment items (such as stocks, bonds, and life insurance) 
are not included. The CPI-U includes expenditures by urban wage earners 
and clerical workers, professional, managerial, and technical workers, 
the self-employed, short-term workers, the unemployed, retirees and 
others not in the labor force. The CPI-U is widely disseminated by 
vendors of financial information and quoted in the financial press. It 
is also available at the BLS's website: http://www.bls.gov.
    If, while a U.S. Treasury TIPS is outstanding, the CPI-U is (1) 
discontinued, (2) in the judgment of the Secretary of the Treasury, 
fundamentally altered in a manner materially adverse to the interests 
of an investor in U.S. Treasury TIPS, or (3) in the judgment of the 
Secretary of the Treasury, altered by legislation or Executive Order in 
a manner materially adverse to the interests of an investor in U.S. 
Treasury TIPS, the Treasury, after consulting with the BLS, will 
substitute an appropriate alternative index. Such alternative index 
will also be used in the Securities.
    In calculating the Index, price changes for various items are 
averaged together with weights that represent their importance in the 
spending of urban households in the United States. The contents of the 
market basket of goods and services and the weights assigned to the 
various items are updated periodically to take into account changes in 
consumer expenditure patterns. The CPI-U is expressed in relative terms 
in relation to a time base reference period for which the level is set 
at 100 (currently the base reference period used by the BLS is 1982-
1984). For example, if the CPI-U for the 1982-84 reference period is 
100.0, an increase of 16.5 percent from that period would be shown as 
116.5.
    As a matter of policy the BLS has made numerous improvements and 
changes to the Index over the last 25 years and it is likely to do so 
in the future. Technical changes made by the BLS to the Index to 
improve its accuracy include, but are not limited to, changes in: (1) 
The specific items (e.g., apples or major appliances) to be priced for 
inclusion in the Index; (2) the way individual price quotations are 
aggregated to construct a component price index for these items; (3) 
the method for combining these component price indices to obtain the 
comprehensive, all-items CPI-U; and (4) the procedures for 
incorporating new goods into the Index and making adjustments for 
quality changes in existing goods. Examples of recent methodological 
improvements include use of regression models to adjust for the quality 
improvements in various goods (televisions, personal computers, etc.), 
introduction of geometric averages to account for consumer substitution 
within CPI-U categories, and changing the housing/shelter formula to 
improve rental equivalence estimation. These changes and changes in the 
future could reduce the level of increase in the CPI-U and could lower 
the redemption value of the Securities.
    Historically, the BLS rebases the CPI-U approximately every 10 
years. The current standard reference base period is 1982-1984 = 100. 
Prior to the release of the CPI-U for January 1988, the standard 
reference base was 1967 = 100. If the BLS rebases the CPI-U during the 
time the Securities are outstanding but continues to publish the old 
CPI-U, the Reference CPI-U for the Securities will continue to be 
calculated using the existing base period in effect for the CPI-U used 
at issuance of the Securities. Although numerical comparisons between 
indices with different base periods cannot be made, the conversion to a 
new reference base does not affect the measurement of the percent 
changes in a given index series from one time period to another, except 
for rounding differences. Thus rebasing will affect the published 
``headline'' number often quoted in the financial press; however, the 
Reference CPI-U calculation for the Securities should not be adversely 
affected by any such rebasing as the old-based CPI-U can be calculated 
by using the percent changes of the new rebased CPI-U to calculate the 
levels of the old CPI-U series (the two series should have the same 
percentage change, but at different levels). However, determinations of 
the Secretary of Treasury in regard to all reference CPI-U levels, and 
whether a rebasing constitutes an index contingency, and any index 
remedies implemented, will be final.
Reference CPI-U
    Reference CPI-U is a 3 month lagged version of CPI-U. Reference 
CPI-U for the first day of any calendar month is the CPI-U for the 
third preceding calendar month, as reported by BLS in the second 
preceding calendar month. For example, the Reference CPI-U applicable 
to April 1 in any year is the CPI-U for January of that year, which is 
reported by the BLS in February of that year. The Reference CPI-U for 
any date other than the first day of the month is the linear 
interpolation between the Reference CPI-U for the first day of such 
month and the first day of the immediately following month. Thus the 
Reference CPI-U for the stated maturity is lagged 3 months and should 
be determinable prior to stated maturity.
Index Contingencies
    The Securities will use the same index contingencies as the US 
Treasury for its TIPS.\8\ Index contingencies include how the Reference 
CPI-U will be affected by (1) revisions in previously reported CPI-U, 
(2) rebasing of the CPI-U by the BLS, (3) material adverse changes, in 
the judgment of the Treasury Secretary, to the CPI-U by legislation or 
Executive Order, or (4) delays in reporting CPI-U. The Securities will 
use the index contingency remedies as pronounced by the US Treasury. 
Determinations of the Secretary of Treasury in this regard will be 
final.
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    \8\ 31 CFR Part 356 ``Department of the Treasury Circular, 
Public Debt Series No. 1-93'', see http://www.publicdebt.treas.gov.
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    The Securities will be subject to the Exchange's equity margin 
rules and the Exchange's debt trading rules.
2. Statutory Basis
    The proposed rule change is consistent with Section 6(b) of the Act 
\9\ in general and furthers the objectives of Section 6(b)(5) \10\ in 
particular in that it is designed to prevent fraudulent and 
manipulative acts and practices, to promote just and equitable 
principles of 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

[[Page 62785]]

open market and a national market system.
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    \9\ 15 U.S.C. 78f(b).
    \10\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition.

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

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

III. 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 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-00-40 and 
should be submitted by November 9, 2000.

IV. Commission's Findings and Order Granting Accelerated Approval 
of Proposed Rule Change

    The Commission finds that the proposed rule change is consistent 
with the requirements of Section 6(b)(5) of the Act \11\ and the rules 
and regulations thereunder applicable to a national securities 
exchange. In particular, the Commission believes that the availability 
of the Securities will provide an instrument for investors to achieve 
desired investment objectives through the purchase of an exchange-
traded debt product linked to the CPI-U. These objectives include 
receipt of an increasing real rate of return if inflation rises and the 
ability for investors to hedge against unanticipated inflation. For the 
reasons discussed below, the Commission has concluded that the Amex 
listing standards applicable to the Securities are consistent with the 
Act.
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    \11\ 15 U.S.C. 78f(b)(5).
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    The Securities are index-linked debt securities whose value in 
whole or in part will be based upon the non-seasonally adjusted CPI-U. 
The Securities are non-convertible and will conform to the Amex listing 
guidelines under Section 107A of the Company Guide. The specific 
maturity date will not be established until the time of the offering, 
but will be not less than one year from the date of issue. The 
Securities may provide for periodic payments and/or payment at maturity 
based in while or in part on changes in the value of the Index. Holders 
of the Securities will receive at maturity a payment linked to the 
value of the Index based on the following formula: Face Value + (Ending 
Index Value--Beginning Index Value), but not less than zero. The 
denomination will be at least $1000. In structure, the Commission finds 
that the proposed Securities are similar to previously approved 
exchange-traded index-linked securities.\12\
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    \12\ See, e.g., Securities Exchange Act Release No. 41546 (June 
22, 1999), 64 FR 35222 (June 30, 1999).
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    In addition, the Amex equity margin rules and debt trading rules 
will apply to the Securities. The Commission believes that the 
application of these rules should strengthen the integrity of the 
Securities. The Commission also believes that the Amex has appropriate 
surveillance procedures in place to detect and deter potential 
manipulation for similar index-linked products. By applying these 
procedures to the Securities, the Commission believes that the 
potential for manipulation of the Securities is minimal, thereby 
protecting investors and the public interest. The Commission further 
notes that the underlying Index is managed by the BLS, an entity 
independent of both the Exchange and the Issuer, and thus, a factor 
which the Commission believes should act to minimize the possibility of 
manipulation. In addition, the CPI-U is widely disseminated by vendors 
of financial information, quoted in the financial press, and available 
at the BLS's website.
    The Commission also notes that the Amex will issue a circular on 
the Securities. The circular should include, among other things, a 
discussion of the risks which may be associated with the Securities in 
addition to details on the composition of the Index and how the rates 
of return will be computed. Further, 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 Securities.
    Based on these factors, the Commission finds that the proposal to 
trade the Securities is consistent with Section 6(b)(5) of the Act.\13\
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    \13\ 15 U.S.C. 78s(b)(5).
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    Amex has requested that the Commission find good cause for 
approving the proposed rule change prior to the thirtieth day after the 
date of publication of notice in the Federal Register. The Commission 
believes that the proposal raises no new regulatory issues that were 
not addressed in similar filings for index-linked products. 
Furthermore, the Commission believes that it is appropriate to permit 
investors to benefit from the flexibility afforded by Securities by 
trading them as soon as possible. Accordingly, the Commission finds 
good cause to accelerate approval of the proposed rule change, as 
amended.
    It is Therefore Ordered, pursuant to Section 19(b)(2) of the 
Act,\14\ that the proposed rule change (SR-AMEX-00-40) is hereby 
approved on an accelerated basis.
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    \14\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\15\
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    \15\ 17 CFR 200.30-3(a)(12).
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Jonathan G. Katz,
Secretary.
[FR Doc. 00-26805 Filed 10-18-00; 8:45 am]
BILLING CODE 8010-01-M