[Federal Register Volume 66, Number 130 (Friday, July 6, 2001)]
[Notices]
[Pages 35677-35681]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-16885]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-44483; File No. SR-Amex-2001-40]


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

June 27, 2001.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that on June 12, 2001, the American Stock Exchange LLC (``Amex'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I, II, 
and III below, which Items have been prepared by the Annex. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons, and is approving this 
proposal on an accelerated basis.
---------------------------------------------------------------------------

    \1\ 15 U.S.C 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The Amex proposes to approve for listing and trading notes, the 
return on which is based upon an equal-dollar weighted portfolio of 
twenty securities chosen from the Amex Institutional Index pursuant to 
the methodology set forth below (the ``Institutional Holdings 
Index'').\3\
---------------------------------------------------------------------------

    \3\ As of May 31, 2001, the portfolio of securities comprising 
the Institutional Holdings Index would be: Abbott Laboratories; 
American Home Products Corporation; Anheuser-Busch Companies, Inc.; 
Bank of America Corporation; The Bank of New York Company, Inc.; 
Bank One Corporation; The Boeing Company; Citigroup, Inc.: Colgate-
Palmolive Company; Eli Lilly and Company; Emerson Electric Co.; 
Exxon Mobil Corporation; Federal Home Loan Mortgage Corporation; 
Federal National Mortgage Association; Microsoft Corporation; 
Minnesota Mining and Manufacturing Company; PepsiCo, Inc.; Philip 
Morris Companies Inc.; Tyco International Ltd.; United Technologies 
Corporation. The actual initial securities will be selected based on 
this methodology on a date specified in the prospectus supplement.
---------------------------------------------------------------------------

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 IV 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 
Statutory Basis for, the Proposed Rule Change

(1) Purpose
    Under Section 107A of the Amex Company Guide (``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.\4\ The Amex proposes 
to list for trading under Section 107A of the Company Guide notes based 
on the Institutional Holdings Index (the ``Institutional Holding 
Notes'' or ``Notes''). The Institutional Holdings Index will be 
determined, calculated and maintained solely by the Amex.\5\
---------------------------------------------------------------------------

    \4\ See Securities Exchange Act Release No. 27753 (March 1, 
1990), 55 FR 8626 (March 8, 1990) (order approving File No. SR-Amex-
89-29) (``Hybrid Approval Order'').
    \5\ Subject to the criteria in the prospectus regarding the 
construction of the Institutional Holdings Index, the Exchange has 
sole discretion regarding changes to the Institutional Holdings 
Index due to annual reconstitutions and adjustments to the 
Institutional Holdings Index and the multipliers of the individual 
components.
---------------------------------------------------------------------------

    The Institutional Holdings notes will conform to the initial 
listing guidelines under Section 107A \6\ and continued listing 
guidelines under Sections 1001-1003 \7\ of the Company Guide. The 
Institutional Holdings Notes are senior non-convertible debt securities 
of Merrill Lynch & Co., Inc. (``Merrill Lynch''). The Notes will have a 
term of not less than one, nor more than ten years. The Institutional 
Holdings Notes will entitle the owner at maturity to receive an amount 
based upon the percentage change between the ``Starting Index Value'' 
and the ``Ending Index Value'' (the ``Redemption Amount''). The 
``Starting Index Value'' is the value of the Institutional Holdings 
Index on the date the issuer prices the Institutional Holdings Notes 
for the initial sale to the public. The ``Ending Index Value'' is the 
value of the Institutional Holdings Index over a period shortly prior 
to the expiration of the Notes. The Ending Index Value will be used in 
calculating the amount owners will receive upon maturity. The 
Institutional Holdings Notes will not have a minimum principal amount 
that will be repaid and, accordingly, payments on the Institutional 
Holdings Notes prior to or at the maturity may be less than the 
original issue price of the Notes. During a two week period in the 
designated month each year, investors will have the right to require 
the issuer to repurchase the Institutional Holdings Notes at a 
redemption amount based on the value of the Institutional Holdings 
Index at such repurchase date. The Institutional Holdings Notes are not 
callable by the issuer.
---------------------------------------------------------------------------

    \6\ The initial listing standards for the Notes require: (1) A 
minimum public distribution of one million units; (2) a minimum of 
400 shareholders; (3) a market value of at least $4 million; and (4) 
a term of at least one year. In addition, the listing guidelines 
provide that the issuer have assets in excess of $100 million, 
stockholder's equity of at least $10 million, and pre-tax income of 
at least $750,000 in the last fiscal year or in two of the three 
prior fiscal years. In the case of an issuer which is unable to 
satisfy the earning criteria stated in Section 101 of the Company 
Guide, the Exchange will require the issuer to have the following: 
(1) Assets in excess of $200 million and stockholders' equity of at 
least $10 million; or (2) assets in excess of $100 million and 
stockholders' equity of at least $20 million.
    \7\ The Exchange's continued listing guidelines are set forth in 
Sections 1001 through 1003 of Part 10 to the Exchange's Company 
Guide. Section 1002(b) of the Company Guide states that the Exchange 
will consider removing from listing any security where, in the 
opinion of the Exchange, it appears that the extent of public 
distribution or aggregate market value has become so reduced to make 
further dealings on the Exchange inadvisable. With respect to 
continued listing guidelines for distribution of the Notes, the 
Exchange will rely, in part, on the guidelines for bonds in Section 
1003(b)(iv). Section 1003(b)(iv)(A) provides that the Exchange will 
normally consider suspending dealings in, or removing from the list, 
a security if the aggregate market value or the principal amount of 
bonds publicly held is less than $400,000.
---------------------------------------------------------------------------

    The Institutional Holdings Notes are cash-settled in U.S. dollars 
and do not give the holder any right to receive a portfolio security or 
any other ownership right or interest in the portfolio of securities 
comprising the Institutional Holdings Index.
    The Institutional Holdings Index will consist of twenty qualifying 
stocks (``Qualifying Stocks'') selected using the methodology presented 
below from the Amex Institutional Index (excluding utilities, if any, 
and the common stock of Merrill Lynch) which is a capitalization-
weighted index of seventy-five (75) widely held stocks

[[Page 35678]]

among institutional equity portfolios with market values in excess of 
$100,000,000. ``Qualifying Stocks'' include those stocks that pass the 
following screening tests:
     Price Momentum Screen. First, the thirty-eight (38) stocks 
with the greatest 1-year price return are selected from the Amex 
Institutional Index. From this narrowed universe, the stocks are then 
ranked in descending order based on 1-year price return improvement.
     Recovery Screen. Second, the thirty-eight (38) stocks with 
the worst 3-year price return are selected from the Amex Institutional 
Index. These stocks are then ranked in descending order based on 1-year 
price return.
     Dividend Yield Screen. Third, the thirty-eight (38) stocks 
with the greatest dividend yield are selected from the Amex 
Institutional Index. These stocks are then ranked in descending order 
by 1-year price return.
     Price to Earnings Ratios Screen. Fourth, the thirty-eight 
(38) stocks with the lowest price-to-earnings ratio are selected from 
the Amex Institutional Index. These stocks are then ranked in 
descending order based on 1-year price return.
    The twenty Qualifying Stocks selected to make up the Institutional 
Holdings Index at the time of initial composition or any reconstitution 
are chosen in the following order: (1) Price Momentum Screen; (2) 
Recovery Screen; (3) Dividend Yield Screen; and (4) Price-to-Earnings 
Ratio Screen. The selection process includes one stock from each screen 
added to the Institutional Holdings Index in the order set forth above 
until there are twenty unique stocks. If a stock in a particular screen 
has already been included in the Institutional Holdings Index, the 
screen in which the duplicate appears is skipped and a stock from the 
next screen is then chosen.
    Components of the Institutional Holdings Index approved pursuant to 
this filing will also meet the following criteria: (1) A minimum market 
value of at least $75 million, except that up to 10% of the component 
securities in the Institutional Holdings Index may have a minimum 
market value of $50 million; (2) average monthly trading volume in the 
last six months of not less than 1,000,000 shares, except that up to 
10% of the component securities in the Institutional Holdings Index may 
have an average monthly trading volume of 500,000 shares or more in the 
last six months; (3) 90% of the Institutional Holdings Index's 
numerical 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; and (4) all component stocks 
will either be listed on the Amex, the New York Stock Exchange, Inc. 
(``NYSE'') or traded through the facilities of the National Association 
of Securities Dealers Automated Quotation System (``NASDAQ'') and 
reported National Market System securities.
    As of May 31, 2001, the market capitalization of the securities 
that would represent the Institutional Holdings Index would range from 
a high of $37.2 billion to a low of $2.9 billion. The average monthly 
trading volume for those same securities for the last six months, as of 
the same date, ranged from a high of 964.2 million shares to a low of 
41.4 million shares. Moreover, as of May 31, 2001, all of the 
securities that would comprise the Institutional Holdings Index were 
eligible for standardized options trading pursuant to Amex Rule 915.
    At the outset, each of the securities in the Institutional Holdings 
Index will represent approximately an equal percentage of the Starting 
Index Value. Specifically, each security included in the portfolio will 
be assigned a multiplier on the date of issuance so that the security 
represents approximately an equal percentage of the value of the entire 
portfolio underlying the Institutional Holdings Index on the date of 
the Institutional Holdings Notes are priced for initial sale to the 
public. The multiplier indicates the number of shares (or fraction of 
one share) of a security, given its market price on an exchange or 
through NASDAQ, to be included in the calculation of the Institutional 
Holdings Index. Accordingly, each of the twenty companies initially 
included in the Index will represent approximately 5% of the total 
portfolio at the time of business. The Institutional Holdings Index 
will initially be set to provide a benchmark value of $100 at the close 
of trading on the day the Institutional Holdings Notes are priced for 
initial sale to the public.
    The value of the Institutional Holdings Index at any time will 
equal: (1) The sum of the products of the current market price for each 
stock underlying the Institutional Holdings Index and the applicable 
share multiplier, plus (2) an amount reflecting current calendar 
quarter dividends, and less (3) a pro rata portion of the annual index 
adjustment factor.\8\ Current quarter dividends for any day will be 
determined by the Amex and will equal the sum of each dividend paid by 
the issuer on one share of stock underlying the Institutional Holdings 
Index during the current calendar quarter multiplied by the share 
multiplier applicable to such stock on the ex-dividend date.
---------------------------------------------------------------------------

    \8\ At the end of each day, the Institutional Holdings Index 
will be reduced by a pro rata portion of the annual index adjustment 
factor, expected to approximately be 1.5% (i.e. 1.5%/365 
days=0.0041% daily). This reduction to the value of the 
Institutional Holdings Index will reduce the total return to 
investors upon exchange or at maturity. The Amex represents that an 
explanation of this deduction will be included in any marketing 
materials, fact sheets, or any other materials circulated to 
investors regarding the trading of this product.
---------------------------------------------------------------------------

    As of the first day of the start of each calendar quarter, the Amex 
will allocate the current quarter dividends as of the end of the 
immediately preceding calendar quarter to each then outstanding 
component of the Institutional Holdings Index. The amount of the 
current quarter dividends allocated to each stock will equal the 
percentage of the value of such stock contained in the portfolio of 
securities comprising the Institutional Holdings Index relative to the 
value of the entire portfolio based on the closing market price of such 
stock on the last day in the immediately preceding calendar quarter. 
The share multiplier of each stock will be increased to reflect the 
number of shares, or portion of a share, that can be purchased of each 
outstanding component based on the amount of the current quarter 
dividend allocated to each stock and the closing market price on the 
last day in the immediately preceding calendar quarter.
    As of the close of business on each anniversary date (anniversary 
of the day the Institutional Holdings Notes are priced for initial sale 
to the public) through the applicable anniversary date in the year 
preceding the maturity of the Notes, the portfolio of securities 
comprising the Institutional Holdings Index will be reconstituted by 
the Amex using the same methodology applied at the initial composition 
of the Institutional Holdings Index. The Exchange will announce such 
changes to investors at least one day prior to the anniversary date.\9\
---------------------------------------------------------------------------

    \9\ The Exchange will publish a notice to advise investors of 
changes to the securities underlying the index if any such changes 
are made following an annual reconstitution.
---------------------------------------------------------------------------

    The portfolio will be reconstituted and rebalanced on the 
anniversary date so that each stock in the Institutional Holdings Index 
will represent approximately 5% of the value of the Institutional 
Holdings Index. To effectuate this, the share multiplier for each new 
stock will be determined by the Amex and will indicate the number of 
shares or fractional portion thereof of each new stock, given the 
closing

[[Page 35679]]

market price of such new stock on the anniversary date, so that each 
new stock represents an equal percentage of the Institutional Holdings 
Index value at the close of business on such anniversary date. For 
example, if the Institutional Holdings Index value at the close of 
business on an anniversary date was 200, then each of the twenty new 
stocks comprising the Institutional Holdings Index would be allocated a 
portion of the value of the Index equal to 10, and if the closing 
market price of one such new stock on the anniversary date was 20, the 
applicable share multiplier would be 0.5. Conversely, if the 
Institutional Holdings Index value was 80, then each of the twenty new 
stocks comprising the Institutional Holdings Index would be allocated a 
portion of the value of the Institutional Holdings Index equal to 4 and 
if the closing market price of one such new stock on the anniversary 
date was 20, the applicable share multiplier would be 0.2. The last 
anniversary date on which such reconstitution will occur will be the 
anniversary date in the year preceding the maturity of the Notes. As 
noted above, investors will receive information on the new portfolio of 
securities comprising the Institutional Holdings Index at least one day 
prior to each anniversary date.
    The multiplier of each component stock in the Institutional 
Holdings Index will remain fixed until adjusted for quarterly dividend 
adjustments, annual reconstitutions or certain corporate events, such 
as payment of a dividend other than an ordinary cash dividend, a 
distribution of stock of another issuer to its shareholders,\10\ stock 
split, reverse stock split, and reorganization.
---------------------------------------------------------------------------

    \10\ If the issuer of a component security in the Institutional 
Holdings Index issues to all of its shareholders publicly traded 
stock of another issuer, such new securities will be added to the 
portfolio comprising the Institutional Holdings Index until the 
subsequent anniversary date. The multiplies for the new component 
will equal the product of the original issuer's multiplier and the 
number of shares of the new component issued with respect to one 
share of the original issuer.
---------------------------------------------------------------------------

    The multiplier of each component stock may 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. If the issuer of 
a stock included in the institutional Holdings Index were to no longer 
exist, whether by reason of a merger, acquisition or similar type of 
corporate transaction, a value equal to the stock's final value will be 
assigned to the stock for the purpose of calculating the Institutional 
Holdings Index value prior to the subsequent anniversary date. For 
example, if a company included in the Institutional Holdings Index were 
acquired by another company, a value would be assigned to the company's 
stock equal to the value per share at the time the acquisition 
occurred. If the issuer of stock included in the Institutional Holdings 
Index is in the prices of liquidation or subject to a bankruptcy 
proceeding, insolvency, or other similar adjudication, such security 
will continue to be included in the Institutional Holdings Index so 
long as a market price for such security is available or until the 
subsequent anniversary date. If a market price is no longer available 
for an Institutional Holdings Index stock due to circumstances 
including but not limited to, liquidation, bankruptcy, insolvency, or 
any other similar proceeding, then the security will be assigned a 
value of zero when calculating the Institutional Holdings Index for so 
long as no market price exists for that security or until the 
subsequent anniversary date. If the stock remains in the Institutional 
Holdings Index, the multiplier of that security may be adjusted to 
maintain the component's relative weight in the Institutional Holdings 
Index at the level immediately prior to the corporate action. In all 
cases, the multiplier will be adjusted, if necessary, to ensure 
Institutional Holdings Index continuity.
    The Exchange will calculate the Institutional Holdings Index and, 
similar to other stock index values published by the Exchange, the 
value of the Institutional Holdings Index will be calculated 
continuously and disseminated every fifteen seconds over the 
Consolidated Tape Association's Network B. The Index value will equal 
the sum of the products of the most recently available market prices 
and the applicable multipliers for the component securities.
    Because the Institutional Holdings Notes are linked to a portfolio 
of equity securities, the Amex's existing equity floor trading rules 
will apply to the trading of the Institutional Holdings Notes. First, 
pursuant to AmexRule 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.\11\ Second, the 
Institutional Holdings Notes will be subject to the equity margin rules 
of the Exchange.\12\ Third, in conjunction with the Hybrid Approval 
Order, the Exchange will, prior to trading the Institutional Holdings 
Notes, distribute a circular to the membership providing guidance with 
regard to member firm compliance responsibilities (including 
suitability recommendations) when handling transactions in the Notes 
and highlighting the special risks and characteristics of the Notes.
---------------------------------------------------------------------------

    \11\ Amex Rule 411 requires that every member, member firm or 
member corporation use due diligence to learn the essential facts, 
relative to every customer and to every order or account accepted.
    \12\ See Amex Rule 462 and Section 107B of the Company Guide.
---------------------------------------------------------------------------

(2) Statutory Basis
    The proposed rule change is consistent with Section 6(b) of the 
Act,\13\ in general, and furthers the objectives of Section 
6(b)(5),\14\ 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 open 
market and a national market system.
---------------------------------------------------------------------------

    \13\ 15 U.S.C. 78f(b).
    \14\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

B. Self-Regulatory Organization's Statement on Burden on Competition

    The proposed rule change will impose no burden on competition.

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

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

III. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing. Persons making written submissions 
should file six copies thereof with the Secretary, Securities and 
Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549-0069. 
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 SR-Amex-

[[Page 35680]]

2001-40 and should be submitted by July 27, 2001.

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

    After careful consideration, 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, with the requirements of Section 6(b)(5) 
of the Act.\15\ The Commission finds that this proposal is similar to 
several approved instruments currently listed and traded on the Amex 
and the NYSE.\16\ Accordingly, the Commission finds that the listing 
and trading of Industrial Holdings Notes is consistent with the Act and 
will promote just and equitable principles of trade, foster cooperation 
and coordination with persons engaged in regulating, clearing, 
settling, processing information with respect to, and facilitating 
transactions in securities, and, in general, protect investors and the 
public interest consistent with Section 6(b)(5) of the Act.\17\
---------------------------------------------------------------------------

    \15\ Id.
    \16\ See Securities Exchange Act Release Nos. 44437 (June 18, 
2001), 66 FR 33585 (June 22, 2001) (accelerated approval order for 
the listing and trading of Industrial 15 Notes); 44342 (May 23, 
2001), 66 FR 29613 (May 31, 2001) (accelerated approval order for 
the listing and trading of Select Ten Notes); 42582 (March 27, 
2000), 65 FR 17685 (April 4, 2000) (accelerated approval order for 
the listing and trading of notes linked to a basket of no more than 
twenty equity securities) (File No. SR-Amex-99-42); 41546 (June 22, 
1999), 64 FR 35222 (June 30, 1999) (accelerated approval order for 
the listing and trading of notes linked to a narrow based index with 
a non-principal protected put option) (File No. SR-Amex-99-15); 
39402 (December 4, 1997), 62 FR 65459 (December 12, 1997) (notice of 
immediate effectiveness for the listing and trading non-principal 
protected commodity preferred securities linked to certain 
commodities indices) (File No. SR-Amex-97-47); 37533 (August 7, 
1996), 61 FR 42075 (August 13, 1996) (accelerated approval order for 
the listing and trading of the Top Ten Yield Market Index Target 
Term Securities (``MITTS'')) (File No. SR-Amex-96-28); 33495 
(January 19, 1994), 59 FR 3883 (January 27, 1994) (accelerated 
approval order for the listing and trading of Stock Upside Note 
Securities) (File No. SR-Amex-93-40); 32840 (September 2, 1993), 58 
FR 47485 (September 9, 1993) (accelerated approval order for the 
listing and trading of MITTS on the NYSE) (File No. SR-NYSE-93-31); 
and 32343 (May 20, 1993), 58 FR 30833 (May 27, 1993) (accelerated 
approval order for the listing and trading of non-principal 
protected notes linked to a single equity security) (File No. SR-
Amex-92-42).
    \17\ 15 U.S.C. 78f(b)(5). In approving this rule, the Commission 
notes that it has considered the proposed rule's impact on 
efficiently, competition, and capital formation. 15 U.S.C. 78c(f).
---------------------------------------------------------------------------

    Industrial Holdings Notes are not leveraged instruments; however, 
their price will still be derived and based upon the underlying linked 
security. Accordingly, the level of risk involved in the purchase or 
sale of Industrial Holdings Notes is similar to the risk involved in 
the purchase or sale of traditional common stock. Nonetheless, because 
the final rate or return of Industrial Holdings Notes is derivatively 
priced, based on the performance of a portfolio of securities, and the 
components of the Industrial Holdings Index are more likely to change 
each year, over the term of the Industrial Holdings Notes, than 
products previously issued, there are several issues regarding the 
trading of this type of product.
    The Commission notes that the Exchange's rules and procedures that 
addresses the special concerns attendant to the trading of hybrid 
securities will be applicable to Industrial Holdings Notes. In 
particular, by imposing the hybrid listing standards, suitability, 
disclosure, and compliance requirements noted above, the Commission 
believes the Exchange has addressed adequately the potential problems 
that could arise from the hybrid nature of Industrial Holdings Notes. 
Moreover, the Exchange will distribute a circular to its membership 
calling attention to the specific risks associated with Industrial 
Holdings Notes. In addition, the Commission notes that Amex will 
incorporate and rely upon its existing surveillance procedures 
governing equities, which have been deemed adequate under the Act.\18\
---------------------------------------------------------------------------

    \18\ The Commission also notes that Amex has a general policy 
which prohibits the distribution of material, non-public information 
by its employees. Telephone conversation between Jeffrey Burns, 
Senior Counsel, AMEX and Mare McKayle, Special Counsel, Division of 
Market Regulation, Commission on June 26, 2001.
---------------------------------------------------------------------------

    In approving the product, the Commission recognizes that the 
components are likely to change each year over the life of the product. 
Nevertheless, the Commission believes that this is acceptable because 
the Amex has clearly stated its guidelines and formula for replacing 
components from a specific group of well-known and highly capitalized 
securities. Each year, as noted above, the portfolio of securities 
comprising the Industrial Holdings Index will represent twenty 
qualifying stocks selected using four separate screens: (1) Price 
Momentum Screen; (2) Recovery Screen; (3) Dividend Yield Screen; and 
(4) Price-to-Earnings Ratio Screen. Amex will do the calculation for 
replacements based on a set formula to determine which of the 
Industrial Holdings Index securities will be in the Index for the 
following year. The Commission believes that within these confines the 
potential frequent changes in the components of the Industrial Holdings 
Index are reasonable and will meet the expectation of investors.
    In addition, the Commission notes that the Industrial Holdings 
Notes are non-principal protected. The Notes may not have a minimum 
principal amount that will be repaid and that payments on the Notes 
prior to or at maturity may be less than the original issue price of 
the Industrial Holdings Notes. The Commission also recognizes that 
annually, during a two-week period of the designated month, investors 
may have the right to require the issuer to repurchase the Industrial 
Holdings Notes at a redemption amount based on the value of the 
Industrial Holdings Index at such repurchase date.
    The Commission notes that Industrial Holdings Notes are dependent 
upon the individual credit of the issuer, Merrill Lynch. To some extent 
this credit risk is minimized by the Exchange's listing standards in 
Section 107A of the Company Guide which provide the only issuers 
satisfying substantial asset and equity requirements may issue 
securities such as Industrial Holdings Notes. In addition, the 
Exchange's hybrid listing standards further require that Industrial 
Holdings Notes have at least $4 million in market value.\19\ In any 
event, financial information regarding Merrill Lynch, in addition to 
the information on the issuers of the underlying securities comprising 
the Industrial Holdings Index, will be publicly available.\20\
---------------------------------------------------------------------------

    \19\ See Company Guide Section 107A.
    \20\ The companies that comprise the Industrial Holdings Index 
are reporting companies under the Act.
---------------------------------------------------------------------------

    The Commission also has a systemic concern, however, that a broker-
dealer, such as Merrill Lynch, or a subsidiary providing a hedge for 
the issuer will incur position exposure. As discussed in the prior 
approval orders for similar instruments (e.g., the Select Ten Notes), 
the Commission believes this concern is minimal given the size of 
Industrial Holdings Notes issuance in relation to the next worth of 
Merrill Lynch.
    The Commission also believes that the listing and trading of 
Industrial Holdings Notes should not unduly impact the market for the 
underlying securities comprising the Industrial Holdings Index. First, 
the underlying securities comprising the Industrial Holdings Index, 
from which the Industrial Holdings Notes components are selected, are 
well-capitalized, highly liquid stocks. Second, because all of the 
components of the Industrial Holdings Index will be equally weighted, 
initially

[[Page 35681]]

and immediately following each annual reconstitution of the Industrial 
Holdings Index, no single stock or group of stocks will likely dominate 
the Industrial Holdings Index. Finally, the issuers of the underlying 
securities comprising the Industrial Holdings Index, are subject to 
reporting requirements under the Act, and all of the portfolio 
securities are either listed or traded on, or traded through the 
facilities of, U.S. securities markets. Additionally, the Amex's 
surveillance procedures will serve to deter as well as detect any 
potential manipulation.
    Finally, the Commission notes that the value of the Industrial 
Holdings Index will be disseminated at least once every fifteen seconds 
throughout the trading day. The Commission believes that providing 
access to the value of the Industrial Holdings Index at least once 
every fifteen seconds throughout the trading day is extremely important 
and will provide benefits to investors in the product.
    The Commission finds good cause for approving the proposed rule 
change prior to the thirtieth day after the date of publications of 
notice thereof in the Federal Register. The Amex has requested 
accelerated approval because this product is similar to several other 
instruments currently listed and traded on the Amex and NYSE. In 
determining to grant the accelerated approval for good cause, the 
Commission notes that the Industrial Holdings Index is a portfolio of 
highly capitalized and actively traded securities similar to hybird 
securities products that have been approved by the Commission for U.S. 
exchange trading. Additionally, Industrial Holdings Notes will be 
listed pursuant to existing hybird security listing standards as 
described above. Moreover, the Index's applicable equal-dollar 
weighting methodology is a commonly applied index calculation need. 
Based on the above, the Commission finds, consistent the Section 6(b) 
of the Act,\21\ that there is good casue for accelerated approval of 
the product.
---------------------------------------------------------------------------

    \21\ 15 U.S.C. 78f(b).
---------------------------------------------------------------------------

V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\22\ that the proposed rule change (SR-Amex-2001-40), is hereby 
approved on an accelerated basis.
---------------------------------------------------------------------------

    \22\ 15 U.S.C. 78s(b)(2).
---------------------------------------------------------------------------

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\23\
---------------------------------------------------------------------------

    \23\ 17 CFR 200.30-3(a)(12).

Jonathan G. Katz,
Secretary.
[FR Doc. 01-16885 Filed 7-5-01; 8:45 am]
BILLING CODE 8010-01-M