[Federal Register Volume 65, Number 242 (Friday, December 15, 2000)]
[Notices]
[Pages 78523-78525]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-31994]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-43690; File No. SR-Phlx-00-90]


Self-Regulatory Organizations; Notice of Filing and Order 
Granting Accelerated Approval of Proposed Rule Change by the 
Philadelphia Stock Exchange, Inc. Relating to the Listing and Trading 
of Basket Linked Notes

December 7, 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 October 16, 2000, the Philadelphia Stock Exchange, Inc. (``Phlx'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I and 
II below, which Items have been prepared by the Exchange. On November 
27, 2000, Phlx filed Amendment No. 1 to the proposed rule change.\3\ 
The Commission is publishing this notice to solicit comments on the 
proposed rule change and Amendment No. 1 from interested persons, and 
to grant accelerated approval to the proposed rule change, as amended.

I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ In Amendment No. 1, Phlx amended the text and description of 
the proposed rule change to require a one-year minimum term for the 
securities described herein. See letter from Carla Behnfeldt, 
Director, New Product Development Group, Legal Department, Phlx, to 
Nancy Sanow, Assistant Director, Division of Market Regulation, 
Commission, dated November 21, 2000.
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    The Phlx proposes to amend its rules to permit the listing and 
trading, or the trading pursuant to unlisted trading privileges, of 
Basket Linked Notes (``BLNs''), hybrid instruments whose values are 
linked to the performance of two or more highly capitalized, actively 
traded equity securities. New Section (k) of Rule 803 would provide 
listing standards for BLNs. Below is the text of the proposed rule 
change. Proposed new language is italicized.
* * * * *

Philadelphia Stock Exchange, Inc. Criteria for Listing--Tier 1

    Rule 803. Unchanged.
    (a)-(j) Unchanged.

(k) Basket Linked Notes (``BLNs'').

    Income instruments which are linked, in whole or in part, to the 
market performance of more than one common stock or non-convertible 
preferred stock will be considered for listing provided:
    (1) Both the issue and the issuer of such security meet the 
criteria established in Rule 803(f) and the issue has a minimum term of 
one year.
    (2) The issuer of such security will be expected to have a minimum 
tangible net worth in excess of $250,000,000, and to otherwise 
substantially exceed the earnings requirement set forth in Rule 803(a). 
In the alternative, the issuer will be expected: (i) to have a minimum 
tangible net worth of $150,000,000 and to otherwise substantially 
exceed the earnings requirements set forth in Rule 803(a), and (ii) not 
to have issued such securities where the original issue price of all 
the issuer's other equity and basket linked note offerings (combined 
with equity and basket linked note offerings of the issuer's 
affiliates) listed on a national securities exchange or traded through 
the facilities of Nasdaq exceeds 25% of the issuer's net worth.
    (3) Each underlying linked stock either: (i) has a minimum market 
capitalization of $3 billion and during the 12 months preceding listing 
is shown to have traded at least 2.5 million shares, (ii) has a minimum 
market capitalization of $1.5 billion and during the 12 months 
preceding listing is shown to have traded at least 10 million shares; 
or (iii) has a minimum market capitalization of $500 million and during 
the 12 months preceding listing is shown to have traded at least 15 
million shares.
    (4) Each issuer of an underlying stock to which the instrument is 
to be linked shall be a 1934 Act reporting company which is listed on a 
national securities exchange or is traded through the facilities of a 
national securities system and is subject to last sale reporting. In 
addition, if any underlying security to which the instrument is to be 
linked is the stock of a non-U.S. company which is traded in the U.S. 
market as sponsored American Depository Shares (``ADS''), ordinary 
shares or otherwise, then for each such security the Exchange shall 
either: (i) have in place a comprehensive surveillance sharing 
agreement with the primary exchange on which each non-U.S. security is 
traded, (in the case of an ADS, the primary exchange on which the 
security underlying the ADS is traded); or (ii) the combined trading 
volume of each non-U.S. security and other related non-U.S. securities 
occurring in the U.S. market or in markets with which the Exchange has 
in place a comprehensive surveillance sharing agreement represents (on 
a share equivalent basis for any ADS) at least 50% of the combined 
worldwide trading volume in each non-U.S. security, other related non-
U.S. securities, and other classes of common stock related to each non-
U.S. security over the six month period preceding the date of listing; 
or (iii)(a) the combined trading volume of each non-U.S. security and 
other related non-U.S. securities occurring in the U.S. market 
represents (on a share equivalent basis) at least 20% of the combined 
world-wide trading volume in each non-U.S. security and in other 
related non-U.S. securities over the six month period preceding the 
date of selection of the non-U.S. security for a BLN listing, (b) the 
average daily trading volume for each non-U.S. security in the U.S. 
markets over the six months preceding the selection of each non-U.S. 
security for a BLN listing is 100,000 or more shares, and (c) the 
trading volume is at least 60,000 shares per day in the U.S. markets on 
a majority of the trading days for the six months preceding the date of 
selection of each non-U.S. security for a BLN listing.
    (5) Each underlying linked stock to which the instrument relates 
may not exceed 5% of the total outstanding common shares of such 
entity, provided however, if any underlying linked stock is a non-U.S. 
security represented by ADSs, common shares, or otherwise, then for 
each such linked security the instrument may not exceed: (i) 2% of the 
total shares outstanding worldwide provided at least 20% of the 
worldwide trading volume in each non-U.S. security and related security 
during the six month period preceding the date of listing occurs in the 
U.S. market; (ii) 3% of the total worldwide shares outstanding provided 
at least 50% of the worldwide trading volume in each non-U.S. security 
and related non-U.S. security during the six month period preceding the 
date of listing occurs in the U.S. market; and (iii) 5% of the total 
shares outstanding worldwide provided at least 70% of the worldwide 
trading volume in each non-U.S. security and related non-U.S. security 
during the six month period preceding the date of listing occurs in the 
U.S. market. If any non-U.S. security and related securities has less 
than 20% of the worldwide trading volume occurring in the U.S. market 
during the six month period

[[Page 78524]]

preceding the date of listing, then the instrument may not be linked to 
that non-U.S. security. If an issuer proposes to list a BLN that 
relates to more than the allowable percentages set forth above, the 
Exchange, with the concurrence of the staff of the Division of Market 
Regulation of the Securities and Exchange Commission, will evaluate the 
maximum percentage of BLNs that may be issued on a case-by-case basis.
    (6) BLNs will be treated as equity instruments.
    (7) If any underlying security to which the instrument is to be 
linked is the stock of a non-U.S. company which is traded in the U.S. 
market as a sponsored ADS, ordinary shares or otherwise, then the 
minimum number of holders of such underlying linked security shall be 
2,000.
* * * * *

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 III 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
    Exchange Rule 803(h) currently provides listing standards for 
equity linked notes (``ELNs''), hybrid instruments whose values are 
linked to the performance of a single highly capitalized, actively 
traded equity security. ELNs are non-convertible debt securities whose 
value is derived from the value of another issuer's common stock on 
non-convertible preferred stock.
    The Exchange is now proposing to adopt Rule 803(k), separate 
listing standards for BLNs. BLNs are nonconvertible debt securities 
that are linked to more than one underlying equity security, each of 
which would be required to meet the listing standards set forth in the 
proposed rule. Proposed Rule 803(k) is substantially similar to 
American Stock Exchange (``Amex'') Rule 107B as it applies to ELNs 
which are linked to two or more securities.\4\
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    \4\ See Securities Exchange Act Release No. 42582 (March 27, 
2000), 65 FR 17685 (April 4, 2000) (granting accelerated approval of 
the Amex proposal to list and trade notes linked to a basket of 
equity securities). Amex Rule 107B applies both to ELNs linked to a 
single security and to ELNs linked to a basket of securities. Phlx 
is retaining its separate ELNs rule, Rule 803(h), applicable to 
hybrid securities linked to a single security. Proposed Rule 803(k) 
applies only in the case of multiple linked securities. Proposed 
Rule 803(k) does not include certain changes recently approved with 
respect to Amex Rule 107B that provide for ELNs linked to 
convertible bonds. See Securities Exchange Act Release No. 43162 
(August 16, 2000), 65 FR 51374 (August 23, 2000).
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    Proposed Rule 803(k) would permit the Exchange to consider for 
listing income instruments which are linked, in whole or in part, to 
the market performance of more than one common stock or non-convertible 
preferred stock. Proposed Rule 803(k) would require the issue and the 
issuer of BLNs to meet the minimum assets/equity, earnings, 
distribution and aggregate market value/principal amount criteria 
established in existing Exchange Rule 803(f).\5\
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    \5\ Exchange Rule 803(f) is the Exchange's listing standard for 
``Other Securities.''
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    Rule 803(k)(2) would establish a minimum tangible net worth 
requirement of at least $250,000,000 for issuers of securities to which 
BLNs will be linked, or an alternative minimum tangible net worth 
requirement of at least $150,000,000 if the issuer meets further 
financial requirements. In addition, issuers of BLNs and the underlying 
securities to which they are linked would be required to meet certain 
criteria which generally track those established in Amex Rule 107B for 
ELNs linked to more than one security. Rule 803(k)(3) would require 
each underlying linked stock to meet certain minimum market 
capitalization and trading volume tests. Rule 803(k)(4) would require 
each issuer of an underlying stock to which the BLN is linked to be a 
1934 Act reporting company listed on a national securities exchange or 
traded through the facilities of a national securities system and 
subject to last sale reporting. Rule 803(k)(4) would impose additional 
requirements with respect to any underlying linked security which is 
stock of a non-U.S. company traded in the U.S. market as sponsored 
American Depositary Shares (``ADS''), ordinary shares or otherwise 
(``Foreign Securities''). Specifically, the proposed rule would require 
either that the Exchange have in place a comprehensive surveillance 
sharing agreement with the primary exchange on which each such Foreign 
Security is traded, or that the Foreign Security meets additional 
trading volume requirements. Proposed Rule 803(k)(5) would limit each 
underlying linked stock to which the BLN relates to 5% of the total 
common shares of such entity, with stricter requirements applicable to 
underlying linked stocks which are Foreign Securities. Proposed Rule 
803(k)(6) provides that BLNs will be treated as equity instruments. 
Finally, Rule 803(k)(7) would require underlying linked securities 
which are Foreign Securities to have a minimum of 2,000 holders.
    The Exchange will apply to BLNs a one-year minimum term 
requirement. The Exchange will put in place appropriate surveillance 
procedures for BLNS, and will cap the number of underlying securities 
that may be linked to a BLN at twenty. The trading rules and procedures 
established by the Exchange for ELNs will apply equally to BLNs.
2. Statutory Basis
    The proposed rule change is consistent with Section 6(b) of the Act 
\6\ in general, and furthers the objectives of Section 6(b)(5) \7\ in 
particular, in that it is designed to promote just and equitable 
principles of trade, to foster cooperation and coordination with 
persons engaged in regulating, clearing, settling, processing 
information with respect to, and facilitating transactions in 
securities, to remove impediments to and perfect the mechanism of a 
free and open market and a national market system, and, in general, to 
protect investors and the public interest, and is not designed to 
permit unfair discrimination between customers, issuers, brokers or 
dealers.
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    \6\ 15 U.S.C. 78f(b).
    \7\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Phlx does not believe that the proposed rule change will impose 
any inappropriate 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 either solicited or received.

III. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule 
change, as amended, is consistent with the Act. Persons making written 
submissions should file six copies

[[Page 78525]]

thereof with the Secretary, 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 
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 Phlx. All 
submissions should refer to File No. SR-Phlx-00-90 and should be 
submitted by January 5, 2001.

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

    After careful consideration, the Commission finds that the 
proposal, as amended, is consistent with the requirements of the Act 
and the rules and regulations thereunder applicable to a national 
securities exchange. Specifically, the Commission finds that the 
proposal is consistent with Section 6(b)(5) of the Act,\8\ which 
requires that the rules of a national securities exchange be designed 
to prevent fraudulent and manipulative acts and practices, promote just 
and equitable principles of trade, foster cooperation and coordination 
with persons engaged in facilitating transactions in securities, and 
remove impediments to and perfect the mechanism of a free and open 
market and a national market system.
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    \8\ 15 U.S.C. 78f(b)(5).
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    The Commission notes that it has previously approved similar 
listing standards for equity linked products.\9\ The proposed rule 
change will permit the Exchange to list and trade BLNs, thereby 
providing investors with an additional marketplace in which to trade 
these products. Thus, the proposal should bring increased efficiency, 
price competition, and greater liquidity to the markets for these 
products. The Commission believes that this proposal is also consistent 
with Section 6(b)(5) of the Act \10\ because requiring each of the 
underlying securities linked to the BLNs to meet the established 
listing standards should strengthen the integrity of the security and 
reduce the susceptibility of BLNs to manipulation.\11\
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    \9\ See supra note 4.
    \10\ 15 U.S.C. 78f(b)(5).
    \11\ In approving this proposal, the Commission has considered 
its impact on efficiency, competition, and capital formation. 15 
U.S.C. 78c(f).
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    The Commission finds good cause for approving the proposed rule 
change prior to the 30th day after the date of publication of notice 
thereof in the Federal Register. As noted above, the listing 
requirements for these instruments will be substantially similar to 
those of the Amex, which the Commission approved in the past.\12\ The 
proposal thus concerns issues that already have been the subject of a 
full comment period pursuant to Section 19(b) of the Act.\13\ The 
Commission does not believe that the proposed rule change raises novel 
regulatory issues that have not been addressed already. Therefore, the 
Commission finds good cause for approving the proposed rule change on 
an accelerated basis.
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    \12\ See supra note 4.
    \13\ 15 U.S.C. 78s(b).
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V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\14\ that the proposed rule change (SR-Phlx-00-90), as amended, 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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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-31994 Filed 12-14-00; 8:45 am]
BILLING CODE 8010-01-M