[Federal Register Volume 66, Number 247 (Wednesday, December 26, 2001)]
[Notices]
[Pages 66485-66489]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-31564]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-45160; File No. SR-Amex-2001-91]


Self-Regulatory Organizations; Notice of Filing and Order 
Granting Accelerated Approval to a Proposed Rule Change and Amendment 
No. 1 by the American Stock Exchange LLC Relating to the Listing and 
Trading of Balanced Strategy Notes

December 17, 2001.
    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 29, 2001, the American Stock Exchange LLC (``Amex'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'' or (``Sec'') a proposed rule change, as described in 
Items I and II below, which Items have been prepared by the Exchange. 
The Amex amended its proposal on November 21, 2001.\3\ The Commission 
is publishing this notice to solicit comments on the proposed rule 
change and Amendment No. 1 from interested persons and to approve the 
proposal, as amended, on an accelerated basis.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240. 19b-4.
    \3\ See letter from Jeffrey P. Burns, Assistant General Counsel, 
Amex, to Yvonne Fraticelli, Special Counsel, Division of Market 
Regulation (``Division''), Commission, dated November 20, 2001 
(``Amendment No. 1''). In Amendment No. 1, the Amex enclosed a draft 
circular that the Amex will distribute to members. Among other 
things, the circular described the Balanced Strategy Notes and the 
suitability requirements applicable to the Balanced Strategy Notes. 
In addition, the Amex made the following clarifications: (1) with 
respect to suitability recommendations and risks, the Exchange will 
require members, member organizations and employees thereof 
recommending a transaction in the Balanced Strategy Notes to 
determine that such transaction is suitable for the customer, and to 
have a reasonable basis for believing that the customer can evaluate 
the special characteristics of, and is able to bear the financial 
risks of, such transactions; (2) Merrill Lynch & Co., Inc. has 
designed the Balanced Strategy Notes for investors who want to 
participate in the changes in U.S. domestic equity and bond markets 
and who are willing to forego market interest payments on the 
Balanced Strategy Notes; (3) the Amex represents that its 
surveillance procedures are adequate to properly monitor the trading 
of the Balanced Strategy Notes; and (4) the index divisor referenced 
in connection with the Standard and Poor's 500 Total Return Index 
keeps the index comparable over time to its base period (1941-1943) 
and is the reference point for all maintenance adjustments.
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The Amex proposes to list and trade Balanced Strategy Notes 
(``Balanced Strategy Notes'' or ``Notes''), the return on which is 
based on the Balanced Strategy Index (``Balanced Strategy Index''). The 
Balanced Strategy Index is based upon the performance of the Standard & 
Poor's (``S&P'') 500 Total Return Index (``S&P 500 Total Return 
Index'') and the U.S. Domestic Master Index (``U.S. Bond Index'' \4\ 
(each, an ``Underlying Index,'' and together, the ``Underlying 
Indexes'') pursuant to the methodology set forth below. Initially, the 
Underlying Indexes will each have a weighting of 50% of the Balanced 
Strategy Index. The Amex will rebalance the Balanced Strategy Index 
annually to reset the weighting of the Underlying Indexes to 50% each 
of the weight of the Balanced Strategy Index.
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    \4\ The Amex clarified the definition of the U.S. Bond Index by 
indicating that it intends to refer to the U.S. Domestic Master 
Index as the U.S. Bond Index. Telephone conversation between Jeffrey 
P. Burns, Assistant General Counsel, Amex, and Yvonne Fraticelli, 
Special Counsel, Division, Commission, on December 7, 2001 
)``December 7 Conversation''). As discussed more fully below, the 
U.S. Bond Index, which is comprised of over 4,000 issues, is an 
indicator of the performance of the investment grade U.S. domestic 
bond market.
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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, as 
amended, and discussed any comments it received on the proposed rule 
change, as amended. The text of these statements may be examined at the 
places specified in Item III 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.\5\ The Amex proposes 
to list for trading under Section 107A of the Company Guide notes based 
on the Balanced Strategy Index (``Balance Strategy Notes'' or 
``Notes''), as described below. The Balanced Strategy Index will be

[[Page 66486]]

determined, calculated and maintained solely by the Amex.\6\
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    \5\ 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'').
    \6\ Subject to the criteria in the prospectus supplement of the 
Notes regarding the construction of the Balanced Strategy Index, the 
Exchange has sole discretion regarding changes to the Balanced 
Strategy Index.
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Description of the Notes

    The Balanced Strategy Notes are senior non-convertible debt 
securities of Merrill Lynch & Co., Inc (``Merrill Lynch''). Merrill 
Lynch has designed the Balanced Strategy Notes for investors who want 
to participate in changes in U.S. domestic equity and bond markets and 
who are willing to forego market interest payments on the Notes, such 
as floating interest rates paid on standard senior non-callable debt 
securities.\7\ The Notes will have a term of not less than one, nor 
more than ten years. The 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'') less an index adjustment factor, as described 
more fully below. The ``Starting Index Value'' is the value of the 
Balanced Strategy Index on the date the issuer prices the Notes for 
initial sale to the public. The ``Ending Index Value'' is the value of 
the Balanced Strategy 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 Notes 
will not have a minimum principal amount that will be repaid, and, 
accordingly, payments on the Notes prior to or at 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 issues to repurchase the Balanced Strategy Notes at a 
redemption amount based on the value of the Balanced Strategy Index at 
such repurchase date. The Balanced Strategy Notes are not callable by 
the issuer.
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    \7\ See Amendment No. 1, supra note 3.
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    The Balanced Strategy Notes are cash-settled in U.S. dollars. The 
holder of a Note does not have any right to receive any of the 
securities comprising the Underlying Indexes or any other ownership 
right or interest in the component securities of the Underlying 
Indexes.
    At the outset, the Underlying Indexes will each approximate 50% of 
the Starting Index Value. Specifically, both the S&P 500 Total Return 
Index and the U.S. Bond Index will be assigned a multiplier on the date 
of issuance so that each Underlying Index represents approximately an 
equal percentage of the value of the Balanced Strategy Index on the 
date the Notes are priced for initial sale to the public. The 
multiplier indicates the percentage of the Underlying Index, given its 
current value, to be included in the calculation of the Balanced 
Strategy Index. The Balanced Strategy Index will initially be set to 
provide a benchmark value of 100.00 at the close of trading on the date 
the Notes are priced for initial sale to the public. The value of the 
Balanced Strategy Index at any time will equal the sum of values of 
each Underlying Index multiplied by their respective multiplier less a 
pro rata portion of the annual index adjustment factor.\8\
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    \8\ At the end of each day, the Balanced Strategy Index will be 
reduced by a pro rata portion of the annual index adjustment factor, 
expected to be 1.0% (i.e., 1.0% 365 days = 0.0027% daily). This 
reduction of the value of the Balanced Strategy Index will reduce 
the total return to investors upon exchange or maturity. The Amex 
represents that an explanation of this deduction will be included in 
any marketing materials, fact sheets, or any other material 
circulated to investors regarding the trading of this product.
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    The S&P 500 Total Return Index is a broad-based stock index that 
provides an indication of the performance of the U.S. equity market. 
The S&P 500 Total Return Index is a capitalization-weighted index 
reflecting the total market value, including the reinvestment of 
dividends, of 500 widely-held component stocks relative to a particular 
base period. The S&P 500 Total Return Index is computed by dividing the 
total market value, plus dividends reinvested,\9\ of the 500 companies 
in the S&P 500 Total Return Index by an index divisor.\10\ The 
securities included in the S&P 500 Total Return Index are listed on the 
Amex or the New York Stock Exchange, Inc. (``NYSE''), or traded through 
the facilities of the National Association of Securities Dealers, Inc. 
Automated Quotation (``Nasdaq'') System and listed as Nasdaq National 
Market securities. As of October 22, 2001, the market capitalization of 
the securities included in the S&P 500 Total Return ranged from a high 
of $373,58 billion to a low $329.04 million. The average daily trading 
volume for these same securities for the last six months, as of the 
same date, ranged from a high of 22 million shares to a low of 1.1 
million shares. The Amex and other options exchanges previously have 
listed options and other securities whose performance has been linked 
to or based on the S&P 500 Composite Stock Price Index (``S&P 500 
Index''),\11\ which is identical to the S&P 500 Total Return Index 
except that the S&P 500 Total Return Index includes dividends paid on 
the underlying component stocks of the S&P 500 Index.
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    \9\ The S&P 500 Total Return Index assumes the reinvestment of 
dividends on a daily basis. Monthly, quarterly, and annual total 
return numbers are calculated by daily compounding of reinvested 
dividends.
    \10\ The index divisor keeps the S&P 500 Total Return Index 
comparable over time to its base period (1941-1943) and is the 
reference point for all maintenance adjustments. See Amendment No. 
1, supra note 3.
    \11\ See Securities Exchange Act Release Nos. 19907 (June 24, 
1983), 48 FR 30814 (July 5, 1983) (File No. SR-CBOE-83-08) 
(approving the listing and trading of options on the S&P 500 Index); 
31591 (December 11, 1992), 57 FR 60253 (December 18, 1992) (File No. 
SR-Amex-92-18) (approving the listing and trading of Portfolio 
Depositary Receipts based on the S&P 500 Index); No. 27382 (October 
26, 1989), 54 FR 45834 (October 31, 1989) (File No. SR-NYSE-89-05) 
(approving the listing and trading of Exchange Stock Portfolios 
based on the value of the S&P 500 Index); and 30394 (February 21, 
1992), 57 FR 7409 (March 2, 1992) (File No. SR-AMEX-90-06) 
(approving the listing and trading of a unitinvestment trust linked 
to the S&P 500 Index).
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    The Commission previously approved an Amex proposal to list and 
trade seven bond index-linked term notes under Section 107A of the 
Company Guide.\12\ One of the bond indexes included in the 1999 Order 
was the U.S. Bond Index. The U.S. Bond Index, established in 1975 and 
sponsored and calculated by the Merrill Lynch Research Portfolio 
Strategy Group, is an indicator of the performance of the investment 
grade U.S. domestic bond market. It is a broad-based index consisting 
of over 4,000 bonds with a market value of over $5 trillion. For a bond 
to qualify for inclusion in the U.S. Bond Index, the bond must meet a 
pre-established and defined list of objective criteria.\13\ The bonds 
included in the U.S. Bond Index also meet or exceed the Exchange's Bond 
and Debenture Listing Standards set forth in Section 104 of the Company 
Guide.\14\ The U.S. Bond Index

[[Page 66487]]

is rebalanced on the last calendar day of the month. Bonds meeting the 
U.S. Bond Index's inclusion criteria on the last calendar day of the 
month are included in the U.S. Bond Index for the following month. 
Issues that no longer meet the criteria during the course of the month 
remain in the U.S. Bond Index until the next month-end rebalancing, at 
which point they are dropped from the U.S. Bond Index. Bonds included 
in the U.S. Bond Index are held constant throughout the month until the 
following monthly rebalancing. Bond weightings for the U.S. Bond Index 
are based on a bond's total outstanding capitalization (sum of the 
product of total face value currently outstanding multiplied by the 
price and accrued interest). Returns and weighted average 
characteristics are published daily.
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    \12\ See Securities Exchange Act Release No. 41334 (April 27, 
1999), 64 FR 23883 (May 4, 1999) (order approving File No. SR-Amex-
99-03) (``1999 Order'').
    \13\ Information as to how the U.S. Bond Index is calculated, 
including the inclusion rules, is published on Bloomberg and the 
Merrill Lynch public web site. Changes in any rules are generally 
published approximately 30 days in advance of the change.
    \14\ The Exchange's Bond and Debenture Listing Standards provide 
for the listing of individual bond or debenture issuance provided 
the issue has an aggregate market value or principal amount of at 
least $5 million and either: The issuer of the debt security has 
equity securities listed on the Exchange (or on the NYSE); an issuer 
of equity securities listed on Exchange (or on the NYSE) directly or 
indirectly owns a majority interest in, or is under common control 
with, the issuer of the debt security; an issuer of equity 
securities listed on the Exchange (or on the NYSE) has guaranteed 
the debt security; a nationally recognized statistical rating 
organization (an ``NRSRO'') has assigned a current rating to the 
debt security that is no lower than an S&P Corporation ``B'' rating 
or equivalent rating by another NRSRO; or if no NRSRO has assigned a 
rating to the issue, an NRSRO has currently assigned: (i) An 
investment grade rating to an immediately senior issue; or (ii) a 
rating that is no lower than an S&P Corporation ``B'' rating, or an 
equivalent rating by another NRSRO, to a pari passu or junior issue.
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    As of the close of business on each anniversary date (the 
anniversary of the day the Balanced Strategy Index was initially 
calculated and set to 100), the Amex will rebalance the Balanced 
Strategy Index so that each Underlying Index will represent 
approximately 50% of the value of the Balanced Strategy Index. To 
effectuate this result, the Amex will determine the multiplier for each 
Underlying Index and will indicate the percentage allocated to each 
Underlying Index, given their respective closing values on the 
anniversary date, so that each Underlying Index represents an equal 
percentage of the Balanced Strategy Index value at the close of 
business on an anniversary date. For example, if the Balanced Strategy 
Index value at the close of business on an anniversary date was 200, 
then each of the Underlying Indexes would be allocated a portion of the 
value of the Index equal to 100, and if the closing market price of one 
Underlying Index on the anniversary date was 160, the applicable share 
multiplier would be reset to 0.625. Conversely, if the Balanced 
Strategy Index value was 80, then each of the Underlying Indexes would 
be allocated the value of the Balanced Strategy Index equal to 40, and 
if the closing market price of one Underlying Index on the anniversary 
date was 20, the applicable share multiplier would be reset to 2.
    The Exchange will continuously calculate the Balanced Strategy 
Index and, similar to other stock index values published by the 
Exchange, the value of the Balanced Strategy Index will be disseminated 
every 15 seconds over the Consolidated Tape Association's Network B.

Criteria for Initial and Continued Listing

    The Balanced Strategy Notes will conform to the initial listing 
guidelines under Section 107A of the Company Guide and continued 
listing guidelines under Sections 1001-1003 of the Company Guide. 
Specifically, under Section 107A of the Company Guide, 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 
shall 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 that is unable to satisfy the earning criteria stated in 
Section 101 of the Company Guide, Section 107A of the Company Guide 
provides that 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.
    The continued listing guidelines are set forth under Sections 1001 
through 1003 of Part 10 to the 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 as to make further dealings on the Exchange 
inadvisable. With respect to the continued listing guidelines for 
distribution of the Notes, the Exchange will rely, in part, on the 
guidelines for bonds in Section 1003(b)(iv) of the Company Guide. 
Section 1003(b)(iv)(A) of the Company Guide 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 less than $400,000.
    The Notes will be registered under Section 12 of the Act.\15\
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    \15\ See December 7 Conversation, supra note 4.
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    Lastly, in conjunction with the Amex's Hybrid Approval Order,\16\ 
the Exchange will, prior to trading the Notes, distribute a circular to 
the membership providing guidance regarding member firm compliance 
responsibilities and requirements, including suitability 
recommendations, and highlighting the special risks and characteristics 
of the Notes. In particular, with respect to suitability 
recommendations and risks, the Exchange will require members, member 
organizations and employees thereof recommending a transaction in the 
Notes to: (1) Determine that such transaction is suitable for the 
customer; and (2) have a reasonable basis for believing that the 
customer can evaluate the special characteristics of, and is able to 
bear the financial risks of, such transaction.\17\
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    \16\ See note 5, supra.
    \17\ See Amendment No. 1, supra note 3.
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Rules Applicable to the Trading of the Notes

    Because the Notes are linked, in part to a portfolio consisting of 
equity securities, the Amex's existing equity floor trading rules will 
apply to the trading of the Notes. First, pursuant to Amex Rule 411, 
``Duty to Know and Approve Customers,'' 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.\18\ 
Second, the Notes will be subject to the equity margin rules of the 
Exchange. Third, as discussed earlier, in conjunction with the Amex's 
Hybrid Approval Order,\19\ the Exchange will, prior to trading the 
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.
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    \18\ 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.
    \19\ See note 5, supra.
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    Furthermore, the Amex represents that its surveillance procedures 
are adequate to properly monitor the trading of Balanced Strategy 
Notes. Specifically, the Amex will rely on its existing surveillance 
procedures governing equities to monitor trading in the Notes.\20\ In 
addition, the Amex also has a general policy that prohibits the 
distribution of material, non-public information by its employees.\21\
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    \20\ See Amendment No. 1, supra note 3.
    \21\ Id.
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Disclosure and Dissemination of Information

    The Amex will issue a circular to the membership providing guidance 
with regard to member firm compliance

[[Page 66488]]

responsibilities when handling transactions in the Notes and explaining 
the special characteristics and risks of the Notes. Furthermore, 
Merrill Lynch will deliver a prospectus in connection with the initial 
purchase of the Notes. The procedure for the delivery of a prospectus 
will be the same as Merrill Lynch's current procedure involving primary 
offerings.\22\
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    \22\ Telephone conversation between Jeffrey P. Burns, Assistant 
General Counsel, Amex, and Cyndi Nguyen, Attorney, Division, 
Commission, on December 13, 2001 (``December 13 Conversation'').
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(2) Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6 of the Act \23\ in general, and furthers the objectives 
of Section 6(b)(5) \24\ 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 an a national market system.
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    \23\ 15 U.S.C. 78f(b)
    \24\ 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.

III. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change and Amendment No. 1 are 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 Amex. All submissions should refer to file 
number SR-Amex-2001-91 and should be submitted by January 16, 2002.

IV. Commissions Findings and Order Granting Accelerated Approval of 
the Proposed Rule Change

    The Amex has asked the Commission to approve the proposal and 
Amendment No. 1 on an accelerated basis because the Amex believes that 
the Notes are similar to several instruments listed and currently 
trading on the Amex.\25\
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    \25\ See Securities Exchange Act Release Nos. 44483 (June 27, 
2001), 66 FR 35677 (July 6, 2001) (File No. SR-Amex-2001-40) 
(approving the listing and trading of non-principal protected 
exchangeable notes linked to the Institutional Holdings Index); 
44437 (June 18, 2001), 66 FR 33585 (June 22, 2001) (File No. SR-
Amex-2001-39) (approving the listing and trading of non-principal 
protected exchangeable notes linked to the Industrial 15 Index); 
44342 (May 23, 2001), 66 FR 29613 (May 31, 2001) (File No. SR-Amex-
2001-28) (approving the listing and trading of non-principal 
protected exchangeable notes linked to the Select Ten Index); and 
42582 (March 27, 2000), 65 FR 17685 (April 4, 2000) (File No. SR-
Amex-99-42) (approving the listing and trading of notes linked to a 
basket of no more than twenty equity securities). See also 1999 
Order, supra note 12.
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    The Commission finds that the proposed rule change, as amended, 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,\26\ in that it is designed to 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.\27\ The Commission believes that the Notes 
will provide investors who are willing to forego market interest 
payments during the term of the Notes with a means to participate in 
the U.S. domestic equity and bond markets.\28\ Specifically, as 
described more fully above, at maturity, or upon exchange, the holder 
of a Note will receive an amount based upon the percentage change in 
the value of the Balanced Strategy Index, less the index adjustment 
factor.
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    \26\ 15 U.S.C. 78f(b)(5).
    \27\ In approving the proposed rule, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. 15 U.S.C. 78c(f).
    \28\ See Amendment No. 1, supra note 3. Although holders of the 
Notes will not receive interest payments during the term of the 
Notes, holders of the Notes will have the right, during a two-week 
period in the designated month each year, to require the issuer to 
repurchase the Notes at a redemption amount based on the value of 
the Balanced Strategy Index at the repurchase date.
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    The Notes are debt instruments whose price will be derived from and 
based upon the value of the Balanced Strategy Index. In addition, as 
discussed more fully above, the Notes do not guarantee any return of 
principal at maturity. Thus, if the Balanced Strategy Index has 
declined at maturity, the holder of the Note may receive significantly 
less than the original public offering price of the Note. Accordingly, 
the level of risk involved in the purchase or sale of the Notes is 
similar to the risk involved in the purchase or sale of traditional 
common stock. Because the final rate of return on the Notes is 
derivatively priced and based upon the performance of an index of 
securities and because the Notes are instruments that do not guarantee 
a return of principal, there are several issues regarding trading of 
this type of product. For the reasons discussed below, the Commission 
believes that the Amex's proposal, as amended, adequately addresses the 
concerns raised by this type of product.
    First, the Commission notes that the protections of Section 107A of 
the Company Guide were designed to address the special concerns 
attendant to the trading of hybrid securities like the Notes. In 
particular, by imposing the hybrid listing standards, heighted 
suitability for recommendations,\29\ and compliance requirements, noted 
above, the Commission believes that the Exchange has adequately 
addressed the potential problems that could arise from the hybrid 
nature of the Notes. The Commission notes that the Amex will distribute 
a circular to its membership that provides guidance regarding member 
firm compliance responsibilities and requirements, including 
suitability recommendations, and highlights the special risks and 
characteristics associated with the Notes. Specifically, among other 
things, the circular notes that the issuer will make no payments prior 
to maturity, that the value of the Balanced Strategy Index must 
increase for holders to receive at least the original public offering 
price of $10 per Note upon exchange or at maturity, and that holders 
will receive less, and possibly

[[Page 66489]]

significantly less than $10 per Note if the Balanced Strategy Index 
declines. Distribution of the circular should help to ensure that only 
customers with an understanding of the risks attendant to the trading 
of the Notes and who are able to bear the financial risks associated 
with transactions in the Notes will trade the Notes. In addition, the 
Commission notes that Merrill Lynch will deliver a prospectus in 
connection with the initial purchase of the Notes.\30\
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    \29\ As discussed above, the Amex will require members, member 
organizations, and employees thereof recommending a transaction in 
the Notes to: (1) determine that the transaction is suitable for the 
customer; and (2) have a reasonable basis for believing that the 
customer can evaluate the special characteristics of, and is able to 
bear the financial risks of, the transaction. See Amendment No. 1, 
supra note 3.
    \30\ See December 13 Conversation, supra note 22.
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    Second, the Commission notes that the final rate of return on the 
Notes depends, in part, 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 that only issuers satisfying substantial asset and equity 
requirements may issue these types of hybrid securities. In addition, 
the Exchange's hybrid listing standards further require that the Notes 
have at least $4 million in market value. Financial information 
regarding Merrill Lynch will be publicly available.
    Third, the Notes will be registered under Section 12 of the Act. As 
noted above, the Amex's existing equity floor trading rules will apply 
to the Notes, which will be subject to the Amex's equity margin rules. 
The Amex will rely on its existing surveillance procedures for equities 
to monitor trading in the Notes.\31\
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    \31\ See Amendment No. 1, supra note 3.
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    Fourth, the Commission has systemic concern that a broker-dealer, 
such as Merrill Lynch, or a subsidiary providing a hedge for the issuer 
will incur position exposure. However, as the Commission has concluded 
in previous approval orders for other hybrid instruments issued by 
broker-dealers,\32\ the Commission believes that this concern is 
minimal given the size of the Notes issuance in relation to the net 
worth of Merrill Lynch.
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    \32\ See, e.g., Securities Exchange Act Release Nos. 44913 
(October 9, 2001), 66 FR 52469 (October 15, 2001) (order approving 
File No. SR-NASD-2001-73) (approving the listing and trading of 
notes issued by Morgan Stanley Dean Witter & Co. whose return is 
based on the performance of the Nasdaq-100 Index); 44483 (June 27, 
2001), 66 FR 35677 (July 6, 2001) (order approving File No. SR-Amex-
2001-40) (approving the listing and trading of notes issued by 
Merrill Lynch whose return is based on a portfolio of 20 securities 
selected from the Amex Institutional Index); and 37744 (September 
27, 1996), 61 FR 52480 (October 7, 1996) (order approving File No. 
SR-Amex-96-27) (approving the listing and trading of notes issued by 
Merrill Lynch whose return is based on a weighted portfolio of 
healthcare/biotechnology industry securities).
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    Fifth, the Commission believes that the listing and trading of the 
Notes should not unduly impact the market for the securities underlying 
the Balanced Strategy Index or raise manipulative concerns. As 
discussed more fully above, the Balanced Strategy Index is based upon 
the return of the Underlying Indexes. Each of the Underlying Indexes 
will have a weighting of 50% of the weight of the Balanced Strategy 
Index, initially and immediately following each annual rebalancing of 
the Balanced Strategy Index. Both of the Underlying Indexes are well-
established and broad-based,\33\ and the Commission has concluded 
previously that the Underlying Indexes are not readily susceptible to 
manipulation. For example, in the 1999 Order, the Commission found that 
the U.S. Bond Index, and the other bond indexes reviewed in the 1999 
Order, were not readily susceptible to manipulation based on the 
indexes' issue size, market value, and the representative nature of 
different sectors of the fixed income securities market.\34\ Similarly, 
in approving a proposal to eliminate position and exercise limits for 
S&P 500 Index options, S&P 100 Index options, and Dow Jones Industrial 
Index options, the Commission noted that the enormous capitalization of 
and deep, liquid markets for the underlying securities contained in the 
indexes significantly reduced concerns regarding market manipulation or 
disruption in the underlying market.\35\ In addition, the Amex's 
surveillance procedures should serve to deter as well as detect any 
potential manipulation of the Balanced Strategy Index.
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    \33\ See Order, supra note 12 (concluding that the U.S. Bond 
Index is well-established and broad-based); and Securities Exchange 
Act Release No. 19907 (June 24, 1983), 48 FR 30814 (July 5, 1983) 
(order approving File No. SR-CBOE-83-8)(noting that the S&P 500 
Index is a broad-based index).
    \34\ See 1999 Order, supra note 12.
    \35\ See Securities Exchange Act Release No. 44994 (October 26, 
2001), 66 FR 55722 (November 2, 2001) (order approving File No. SR-
CBOE-2001-22) (``2001 Order''). In the 2001 Order, the Commission 
also noted that, as of October 2001, the market capitalization of 
the S&P 500 Index was $9.81 trillion.
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    Finally, the Commission notes that the value of the Balanced 
Strategy Index will be disseminated at least once every fifteen seconds 
throughout the trading day. The Commission believes that disseminating 
the value of the Balanced Strategy Index at least once every fifteen 
seconds throughout the trading date is useful and will benefit 
investors in the Notes.
    The Commission finds good cause for approving the proposed rule 
change, as amended, prior to the thirtieth day after the day of 
publication of notice of filing thereof in the Federal Register. The 
Commission believes that the Notes will provide investors with an 
additional investment choice and that accelerated approval of the 
proposal, as amended, will allow investors to begin trading the Notes 
promptly. Amendment No. 1 strengthens the Amex's proposal by, among 
other things, noting the surveillance procedures that will apply to 
trading in the Notes and requiring members, member organizations, and 
employees thereof recommending transactions in the Notes to: (1) 
Determine that the transaction is suitable for the customer; and (2) 
have a reasonable basis for believing that the customer can evaluate 
the special characteristics of, and is able to bear the financial risks 
of, the transaction. Accordingly, the commission believes that there is 
good cause, consistent with Sections 6(b)(5) and 19(b)(2) of the Act 
\36\ to approve the proposal and Amendment No. 1 on an accelerated 
basis.
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    \36\ 15 U.S.C. 78f(b)(5) and 78s(b)(2).
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    The Commission is approving the Amex's proposed listing standards 
for the Notes. The commission specifically notes that, notwithstanding 
approval of the listing standards for the Notes, other similarly 
structured products will require review by the Commission prior to 
being listed and traded on the Amex.

V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act\37\, that the proposed rule change, as amended, (File No. SR-Amex-
2001-91) be, and it hereby is, approved.
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    \37\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\38\
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    \38\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-31564 Filed 12-21-01; 8:45 am]
BILLING CODE 8010-01-M