[Federal Register Volume 66, Number 199 (Monday, October 15, 2001)]
[Notices]
[Pages 52469-52472]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-25867]



[[Page 52469]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-44913; File No. SR-NASD-2001-73]


Self-Regulatory Organizations; Notice of Filing and Order 
Granting Accelerated Approval of Proposed Rule Change by the National 
Association of Securities Dealers, Inc. Relating to the Listing and 
Trading of Performance Leveraged Upside Securities (``PLUS'')

October 9, 2001.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'')\1\ and Rule 19b-4 thereunder,\2\ notice if hereby given that 
on October 9, 2001, the National Association of Securities Dealers, 
Inc. (``NASD'' or ``Association''), through its subsidiary, The Nasdaq 
Stock Market, Inc. (``Nasdaq''), 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 
Nasdaq. The Commission is publishing this notice to solicit comments on 
the proposed rule change from interested persons. For the reasons 
discussed below, the Commission is granting 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

    Nasdaq proposes to list and trade medium-term notes issued by 
Morgan Stanley Dean Witter & Co. (``Morgan Stanley''), referred to as 
the PLUS, the return on which is based upon the performance of the 
Nasdaq-100 Index.

II. Self-Regulatory Organization's Statements of the Purpose of, 
and Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, Nasdaq 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. Nasdaq 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 NASD Marketplace rule 4420(f), Nasdaq 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\ Nasdaq proposes to list for trading the PLUS, as described 
below, under NASD Marketplace Rule 4420(f).
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    \3\ See Securities Exchange Act Release No. 32988 (September 29, 
1993), 58 FR 52124 (October 6, 1993).
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Description of the PLUS \4\
    The PLUS are medium-term notes that will be issued by Morgan 
Stanley. The principal amount and issue price of each PLUS will be 
equal to one-eightieth of the closing value of the Nasdaq-100 Index \5\ 
on the day that the PLUS are offered for initial sale to the public. 
The PLUS will pay interest quarterly beginning on December 30, 2001. 
The interest rate approximates the current dividend yield on the 
Nasdaq-100 Index and will not be adjusted up or down over the life of 
the PLUS. The PLUS will expire on December 30, 2004.
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    \4\ For a detailed description of the PLUS, including the risks 
associated with investing in the PLUS, see the registration 
statement filed by Morgan Stanley with the Commission (File No. 333-
47576).
    \5\ The Nasdaq-100 Index is a modified capitalization-weighted 
index of 100 of the largest non-financial companies listed on The 
Nasdaq National Market tier of Nasdaq. The Nasdaq-100 Index 
constitutes a broadly diversified segment of the largest and most 
actively traded securities listed on Nasdaq and includes companies 
across a variety of major industry groups. IN order to limit 
domination of the Nasdaq-100 Index by a few large stocks, the 
Nasdaq-100 Index is calculated under a ``modified capitalization-
weighted'' methodology. This capitalization weight distribution is 
evaluated on a quarterly basis and is rebalanced, if either one or 
both of the following two weight distribution requirements are not 
met: (1) the current weight of the single largest market 
capitalization Nasdaq-100 Index component security must be less than 
or equal to 24.0%, and (2) the ``collective weight'' of those 
Nasdaq-100 Index component securities whose individual current 
weights are in excess of 4.5%, when added together, must be less 
than or equal to 48.0%. Nasdaq-100 Index securities are ranked by 
market value and are evaluated annually to determine which 
securities will be included in the Nasdaq-100 Index. Moreover, if at 
any time during the year a Nasdaq-100 Index security is not longer 
trading on Nasdaq, or is otherwise determined by Nasdaq to become 
ineligible for continued inclusion in the Nasdaq-100 Index, the 
security will be replaced with the largest market capitalization 
security not currently in the Nasdaq-100 Index that meets the 
Nasdaq-100 Index eligibility criteria. For a detailed description on 
the Nasdaq-100 Index, see the registration statement filed by Morgan 
Stanley with the Commission (File No. 333-47576).
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    At maturity, unless Morgan Stanley has called the PLUS, investors 
will receive in exchange for the principal amount of each PLUS an 
amount in cash equal to one-eightieth of the final average index value, 
plus a supplemental amount in cash equal to one-eightieth of the 
amount, if any, by which the final average index value exceeds the 
closing value of the Nasdaq-100 Index on the day the PLUS is offered 
for initial sale to the public. The final average index value will be 
the average closing value of the Nasdaq-100 Index over a period of five 
trading days commencing on December 15, 2004. In no event will the 
supplemental amount be less than zero.
    The return that investors realize on the PLUS is limited by Morgan 
Stanley's call right. Morgan Stanley has the right to call all of the 
PLUS at any time beginning in October 2003, including at matrutiy, for 
an amount in cash equal to the call price, which will be the equivalent 
to a percentage of the issue price of the PLUS. If Morgan Stanley calls 
the PLUS, it will send a notice announcing that it has decided to call 
the PLUS and specify in the notice a call date when investors will 
receive the cash call price in exchange for delivering the PLUS to the 
trustee. The call date will not be less than 15 nor more than 30 days 
after the date of the notice. If Morgan Stanley calls the PLUS, 
investors will not be entitled to receive accrued but upaid interest on 
the PLUS on the call date.
    Unlike ordinary debt securities, the PLUS do not guarantee any 
return of principal at maturity. If the average closing value of the 
Nasdaq-100 Index at maturity is less than the closing value of the 
Nasdaq-100 Index on the day that the PLUS are offered for initial sale 
to the public and Morgan Stanley has not called the PLUS, Morgan 
Stanley will pay an amount in cash that is less than the issue price of 
the PLUS.
Criteria for Initial and Continued Listing
    The PLUS will be subject to Nasdaq's initial listing criteria for 
other securities under NASD Marketplace Rule 4420(f). Specifically:
    (i) The issuer will have assets in excess of $100 million and 
stockholders' equity of at least $10 million. In the case where the 
issuer is unable to satisfy the $1 million annual pre-tax income 
requirement of NASD Marketplace Rule 4420(a)(1), Nasdaq generally will 
require the issuer 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;
    (ii) There will be at least 400 holders of the PLUS;

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    (iii) There will be a minimum public distribution of 1 million 
trading units; and
    (iv) The aggregate market value/principal amount of the PLUS will 
be at least $4 million.
    In addition, Morgan Stanley satisfies the listed marketplace 
requirement set forth in NASD Marketplace 4420(f)(2). Prior to the 
commencement of trading of the PLUS, Nasdaq will distribute a circular 
to the membership providing guidance regarding member firm compliance 
responsibilities and requirements when handling transactions in the 
PLUS.
    The PLUS will be subject to Nasdaq's continued listing criteria for 
other securities pursuant to NASD Marketplace Rule 4450(c). Under this 
criteria, the aggregate market value or principal amount of publicly-
held units must be at least $1 million.
    Pursuant to NASD Marketplace Rule 4310(c)(23)(A), the PLUS will 
have a CUSIP number identifying the securities included in the file of 
eligible issues maintained by a securities depository registered as a 
clearing agency under Section 17A of the Act (``securities depository'' 
or ``securities depositories''), in accordance with the rules and 
procedures of such securities depository; except that this provision of 
the rule shall not apply to a security if the terms of the security do 
not and cannot be reasonably modified to meet the criteria for 
depository eligibility at all securities depositories.
    Under NASD Marketplace Rule 4310(c)(23)(B), a security depository's 
inclusion of a CUSIP number identifying a security in its file of 
eligible issues does not render the security ``depository eligible'' 
under NASD Marketplace Rule 11310 until: (i) in the case of any new 
issue distributed by an underwriting syndicate on or after the date a 
securities depository system for monitoring repurchases of distributed 
shares by the underwriting syndicate is available, the date of the 
commencement of trading in such security on Nasdaq; or (ii) in the case 
of any new issue distributed by an underwriting syndicate prior to the 
date a securities depository system for monitoring repurchases of 
distributed shares by the underwriting syndicate is available where the 
managing underwriter elects not to deposit the securities on the date 
of the commencement of trading in such security on Nasdaq, such later 
date designated by the managing underwriter in a notification submitted 
to the securities depository; but in no event more than three months 
after the commencement of trading in such security on Nasdaq.
    In addition, the PLUS will be registered under Section 12 of the 
Act.
Rules Applicable to the Trading of the PLUS
    Since the PLUS will be deemed equity securities for the purpose of 
NASD Marketplace Rule 4420(f), the NASD and Nasdaq's existing equity 
trading rules will apply to the trading of the PLUS. First, pursuant 
NASD Marketplace Rule 2310 and IM-2310-2, NASD members must have 
reasonable grounds for believing that a recommendation to a customer 
regarding the purchase, sale or exchange of any security is suitable 
for such customer upon the basis of the facts, if any, disclosed by 
such customer as to his other security holdings and as to his financial 
situation and needs.\6\ Second, the PLUS will be subject to the equity 
margin rules. Third, the regular equity trading hours of 9:30 am to 
4:00 pm will apply to transactions in the PLUS. Lastly, NASD 
Regulation's surveillance procedures for the PLUS will be the same as 
the current surveillance procedures governing equity securities, and 
will include additional monitoring on key pricing dates.
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    \6\ NASD Marketplace Rule 2310(b) requires members to make 
reasonable efforts to obtain information concerning a customer's 
financial status, a customer's tax status, the customer's investment 
objectives, and such other information used or considered to be 
reasonable by such member or registered representative in making 
recommendations to the customer.
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Disclosure and Dissemination of Information
    Morgan Stanley will deliver a prospectus in connection with the 
initial purchase of the PLUS. The procedure for the delivery of a 
prospectus will be the same as Morgan Stanley's current procedure 
involving primary offerings.
    In addition, Nasdaq will issue a circular to NASD members 
explaining the unique characteristics and risks of the PLUS. The 
circular will also note NASD member and member organization 
responsibilities under Marketplace Rule 2310 and IM-2310-2.
2. Statutory Basis
    Nasdaq believes that the proposed rule change is consistent with 
Section 15A of the Act,\7\ in general, and furthers the objectives of 
Section 15A(b)(8)\8\ of the Act, in particular, in that the proposed 
rule change is designed to prevent fraudulent and manipulative acts and 
practices, to promote just and equitable principles of trade, to remove 
impediments to and perfect the mechanism of a free and open market, 
and, in general, to protect investors and the public interest.
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    \7\ 15 U.S.C. 78o-3.
    \8\ 15 U.S.C. 78o-3(b)(6).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    Nasdaq does not believe that the proposed rule change will result 
in any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act.

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

    Written comments were neither solicited nor received on 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, 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 
NASD. All submissions should refer to File No. SR-NASD-2001-73 and 
should be submitted by November 5, 2001.

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

    After careful review, 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 association, 
and, in particular, the requirements of Section 15A of the Act.\9\ 
Specifically, the Commission finds that the proposal is consistent with 
Section 15A(b)(6) of the Act, which requires that the rules be designed 
to

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promote just and equitable principles of trade, foster cooperation and 
coordination with persons engaged in processing information with 
respect to and facilitating transactions in securities, as well as to 
remove impediments to and perfect the mechanism of a free and open 
market, and, in general, to protect investors and the public 
interest.\10\ The Commission believes that the proposal to list and 
trade the PLUS will provide investors flexibility in satisfying their 
investment needs by providing them with the opportunity to obtain 
leveraged returns based on the Nasdaq-100 Index.
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    \9\ 15 U.S.C. 78o-3.
    \10\ 15 U.S.C. 78o-3(b)(6).
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    The Commission notes that the PLUS are leveraged debt instruments 
and that their price will be derived and based upon the performance and 
value of the Nasdaq-100 Index. Accordingly, the level of risk involved 
in the purchase or sale of the PLUS is similar to the risk involved in 
the purchase or sale of traditional common stock. In addition, because 
the final rate of return of the PLUS is derivatively priced and is 
based on the performance of an index of securities, there are several 
issues regarding the trading of this type of product.
    The Commission notes that Nasdaq's rules and procedures that 
address the special concerns attendant to the trading of hybrid 
securities will be applicable to the PLUS. In particular, by imposing 
the hybrid listing standards, suitability, disclosure, and compliance 
requirements noted above, the Commission believes Nasdaq has addressed 
adequately the potential problems that could arise from the hybrid 
nature of the PLUS. Moreover, Nasdaq will distribute a circular to its 
membership calling attention to the specific risks associated with the 
PLUS.
    In approving the product, the Commission recognizes that the 
components of the Nasdaq-100 Index may change each year over the life 
of the product. Nevertheless, the Commission believes that this is 
acceptable because Nasdaq has clearly stated its guidelines and formula 
for replacing components from a specific group of the largest and most 
actively traded securities listed on the Nasdaq, including companies 
across a variety of major industry groups. Each year, as noted above, 
the index of securities comprising the Nasdaq-100 Index will represent 
the 100 largest non-financial companies listed on The Nasdaq National 
Market tier of Nasdaq. Nasdaq will do the calculation for replacements 
based on a set formula to determine which of the securities will be in 
the Nasdaq-10 Index for the following year. The Commission believes 
that within these confines the potential changes in the components of 
the Nasdaq-100 Index are reasonable and will meet the expectation of 
investors.
    In addition, the Commission notes that, unlike traditional debt 
securities, the PLUS are non-principal protected. The PLUS will not 
have a minimum principal amount that will be repaid and may be less 
than the original issue price of the PLUS. The interest payments on the 
PLUS prior to or at maturity approximates the current dividend yield on 
the Nasdaq-100 Index and will not be adjusted up or down over the life 
of the PLUS. The Commission also notes that the PLUS will be registered 
under Section 12 of the Act and will be treated as equity securities, 
subject to NASD and Nasdaq's existing equity trading rules, including 
rules or suitability, margin, disclosure, trading hours, and 
surveillance.
    Nasdaq represents that the PLUS meet NASD requirements for 
depository eligibility under NASD Market Place Rules 4310 and 11310 for 
purposes of clearance and settlement. The Commission notes that Morgan 
Stanley will deliver a prospectus to investors with the initial 
purchase of the PLUS. In addition, Nasdaq will issue a circular to NASD 
members explaining the unique characteristics and risks of the PLUS. 
The circular will also note NASD member and member organization 
responsibilities under Marketplace rule 2310 and IM-2310-2. 
Specifically, NASD members must have reasonable grounds for believing 
that a recommendation to a customer regarding the purchase, sale or 
exchange of any security is suitable for such customer upon the basis 
of the facts, if any, disclosed by such customer as to his other 
security holdings and as to his financial situation and needs.
    The Commission recognizes that as of October 2003, Morgan Stanley 
has the option to call all of the PLUS. Furthermore, the Commission 
notes that the PLUS are dependent upon the individual credit of the 
issuer, Morgan Stanley. To some extent this credit risk is minimized by 
Nasdaq's listing standards in NASD Marketplace Rule 4420(f), which 
provide the only issuers satisfying substantial asset and equity 
requirements may issue securities such the PLUS. In addition, Nasdaq's 
hybrid listing standards further require that the PLUS have at least $4 
million in market value.\11\ In any event, financial information 
regarding Morgan Stanley, in addition to the information on the issuers 
of the underlying securities comprising the Nasdaq-100 Index, will be 
publicly available.\12\
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    \11\ See NASD Marketplace Rule 4420(f).
    \12\ The companies that comprise the Nasdaq-100 Index are 
reporting companies under the Act.
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    The Commission also has a systemic concern, however, that a broker-
dealer, such as Morgan Stanley, or a subsidiary providing a hedge for 
the issuer will incur position exposure. As discussed in the prior 
approval orders for other hybrid instruments (e.g., the MIITTS), the 
Commission believes this concern is minimal given the size of the PLUS 
issuance in relation to the net worth of Morgan Stanley.
    The Commission also believes that the listing and trading of the 
PLUS should not unduly impact the market for the underlying securities 
comprising the Nasdaq-100 Index. First, the underlying securities 
comprising the Nasdaq-100 Index are well-capitalized, highly liquid 
stocks listed on the Nasdaq-100 Index, no single stock or group of 
stocks will likely dominate the Nasdaq-100 Index. Nasdaq will rebalance 
and adjust the weight of the Nasdaq-100 Index on a quarterly basis, or 
sooner in the event of corporate actions such as mergers or stock 
repurchases. Additionally, Nasdaq's surveillance procedures will serve 
to deter as well as detect any potential manipulation.
    The Commission finds good cause for approving the proposed rule 
change prior to the thirtieth day after the date of publication of 
notice thereof in the Federal Register. Nasdaq has requested 
accelerated approval in order to begin listing and trading the PLUS 
immediately. In determining to grant the accelerated approval for good 
cause, the Commission notes that the Nasdaq-100 Index is an index of 
large, actively traded securities listed on the Nasdaq. Additionally, 
the PLUS will be listed pursuant to existing hybrid security listing 
standards as described above. Moreover, the Nasdaq-100 Index's 
weighting methodology is a commonly applied index calculation method. 
Based on the above, the Commission finds, consistent with Sections 
15A(b)(6) \13\ and 19(b) \14\ of the Act, that there is good cause for 
accelerate approval of the product.
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    \13\ 15 U.S.C. 78o-3(b)(6).
    \14\ 15 U.S.C. 78s(b).
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    The Commission is approving Nasdaq's proposed listing and trading 
standards for the PLUS. The Commission specifically notes that, 
notwithstanding approval of the listing standards for the PLUS, other 
similarly structured products will require review

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by the Commission prior to being trading on Nasdaq.

V. Conclusion

    It is Therefore Ordered, pursuant to Section 19(b)(2) of the 
Act,\15\ that the proposed rule change (SR-NASD-2001-73) is hereby 
approved on an accelerated basis.
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    \15\ 15 U.S.C. 78s(b)(2).
    \16\ 17 CFR 200.30-2(a)(12).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\16\
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-25867 Filed 10-12-01; 8:45 am]
BILLING CODE 8010-01-M