[Federal Register Volume 67, Number 102 (Tuesday, May 28, 2002)]
[Notices]
[Pages 36942-36945]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-13193]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-45966; File No. SR-Amex-2002-24]


Self Regulatory Organizations; Notice of Filing and Order 
Granting Accelerated Approval of a Proposed Rule Change by the American 
Stock Exchange LLC Relating to the Listing and Trading of Securities 
Linked to the Nasdaq-100 Index

May 20, 2002.
    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 March 25, 2002, 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 and 
II below, which Items have been prepared by the Exchange. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons and is approving the 
proposal on an accelerated basis.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Amex proposes to approve for listing and trading under Section 
107A of the Amex Company Guide (``Company Guide''), index linked debt 
securities whose value will be linked in part to changes in the value 
of the Nasdaq-100 Index (``Nasdaq-100'') pursuant to the methodology 
set forth below.

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 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.\3\ The Amex proposes 
to list for trading under Section 107A of the Company Guide, index 
linked debt securities (``Securities'') whose value in whole, or in 
part, will be based on the Nasdaq-100. Holders of the Securities will 
receive at maturity a payment linked to the closing level of the 
Nasdaq-100 based on the following formula: (1) If the Final Index Level 
of the Nasdaq-100 is at or above the Initial Index Level, the holder 
will receive a payment of $1,000 per Security; or (2) if the Final 
Index Level of the Nasdaq-100 is below the Initial Index Level, the 
holder will receive an amount in cash equal to $1,000 per Security 
multiplied by the Index Settlement Level. The Index Settlement Level is 
defined as the Final Index Level of the Nasdaq-100 divided by the 
Initial Index Level, expressed as a percentage. The Nasdaq-100 is 
determined, calculated and maintained solely by the Nasdaq.\4\
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    \3\ See Securities Exchange Act Release No. 27753 (March 1, 
1990), 55 FR 8626 (March 8, 1990) (order approving File No. SR-Amex-
89-29).
    \4\ J.P. Morgan Chase & Co. and The Nasdaq Stock Market, Inc. 
have entered into a non-exclusive licensing agreement providing for 
the use of the Nasdaq-100 by J.P. Morgan Chase & Co. and certain 
affiliates and subsidiaries in connection with certain securities 
including these Notes. Nasdaq is not responsible and will not 
participate in the issuance and creation of the Securities.
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    The Initial Index Level, which will be announced at the time of the 
offering, is the closing level of the Nasdaq-100 on the pricing date. 
The Final Index Level will equal the closing level of the Nasdaq-100 or 
any successor index at the regular official weekday close of the 
principal trading session of The Nasdaq Stock Market, Inc. (``Nasdaq'') 
National Market on the final index determination date.\5\
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    \5\ The final index determination date is five (5) trading days 
prior to maturity, subject to extension in the case of a market 
disruption event.
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Securities Description

    The Securities will be non-convertible, unsecured and 
unsubordinated obligations of J.P. Morgan Chase & Co. (``JP Morgan''). 
The Securities will conform to the initial

[[Page 36943]]

listing guidelines under Section 107A \6\ and continued listing 
guidelines under Sections 1001-1003 \7\ of the Company Guide. Although 
a specific maturity date will not be established until the time of the 
offering, the Securities will provide for a maturity of not less than 
one (1) year nor more than ten (10) years from the date of issue. The 
Securities are expected to issue at a discount from the face or 
denomination amount. At maturity, holders of the Securities may receive 
less than 100% of the initial issue price.
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    \6\ The initial listing standards for the Securities require: 
(1) A market value of at least $4 million, and (2) 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 Securities, 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 principal amount of 
bonds publicly held is less than $400,000.
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    Nasdaq-100 levels for the purpose of determining the payment to 
holders at maturity will be determined by reference to prices for the 
Index on a business date shortly prior to maturity. The payment at 
maturity of the Securities will be based on the Final Index Level. At 
maturity, holders will receive an amount in cash that is greater than 
the issue price of the Securities if the Final Index Level of the 
Nasdaq-100 is greater than the Initial Index Level. However, in no 
event will a holder of the Securities receive more than $1,000 per 
Security (or the face amount of such security) at maturity. A holder at 
maturity will receive less than $1,000 in an amount based on the Index 
Settlement Level if the Final Index Level is less than the Initial 
Index Level. Holders of the Securities will receive a cash payment at 
maturity as long as the Nasdaq-100 does not lose 100% of its value.\8\
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    \8\ Thus, the Securities are not principal protected. Telephone 
conversation between Jeffrey P. Burns, Assistant General Counsel, 
Amex, and Florence E. Harmon, Senior Special Counsel, Division of 
Market Regulation, Commission, on May 20, 2002.
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    The Securities are expected to be listed in $1,000 denominations 
with the Exchange's equity margin rules applying to trading. The 
Securities will be cash-settled in U.S. dollars. Holders of the 
Securities will have no claim or right to the underlying securities of 
the Nasdaq-100 or the Nasdaq-100 itself. The Securities are designed 
for investors who want to participate or gain exposure to the Nasdaq-
100 while limiting downside risk and, who are willing to forgo market 
interest payments during the term.\9\ The Securities will not have a 
minimum principal amount that will be repaid and, accordingly, payments 
at maturity may be less than the original issue price of the 
Securities.
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    \9\ For example, a 20% loss in the Nasdaq-100 will provide a 0% 
return on the Securities, assuming that the expected issue price for 
a Security is $800 per $1,000 face value.
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Index Description

    The Nasdaq-100 is a modified capitalization-weighted index of 100 
of the largest and most active non-financial domestic and international 
issues listed on Nasdaq. The Index is determined, comprised and 
calculated by Nasdaq without regard to the Securities. The Index is 
calculated and disseminated every fifteen seconds to market information 
vendors. The Nasdaq-100 reflects the largest growth companies across 
major industry groups with all index components of domestic issuers 
having a market capitalization of at least $500 million and an average 
daily trading volume of at least 100,000 shares. For foreign issuers, 
the worldwide market capitalization must be at least $10 billion with a 
U.S. market capitalization of at least $4 billion and an average daily 
trading volume of at least 200,000 shares. In addition, no single 
security comprising the Nasdaq-100 is permitted to have more than a 24% 
weighting. The Nasdaq-100 was originally developed with a base value of 
125 on February 1, 1985. Originally a capitalization-weighted index, on 
December 21, 1998, the Nasdaq-100 changed to a modified capitalization-
weighted index.
    A modified capitalization-weighted index is a hybrid between equal 
weighting and capitalization-weighting. This type of methodology is 
expected to: (1) Retain the economic attributes of capitalization 
weighting; (2) promote portfolio weight diversification; (3) reduce 
Nasdaq-100 performance distortion by preserving the capitalization 
ranking of companies; and (4) reduce market impact on the smallest 
Nasdaq-100 securities from necessary weight rebalancings. A quarterly 
examination of the Nasdaq-100 is performed to gauge whether a 
rebalancing of the Index is necessary. If one of the following weight 
distribution requirements is not met, the Index is rebalanced. These 
requirements are as follows: (1) The current weight of the single 
largest market capitalization index security must be less than or equal 
to 24%; and (2) the collective weight of those index securities whose 
individual current weights are in excess of 4.5%, when added together, 
must be less than or equal to 48.0%.
    As of March 19, 2002, the market capitalization of the securities 
included in the Nasdaq-100 ranged from a high of $334.98 billion to a 
low of $1.42 billion. The average daily trading volume for these same 
securities for the last six (6) months, as of the same date, ranged 
from a high of 76.86 million shares to a low of 0.54 million shares. 
The Commission has previously granted approval to the Amex to list and 
trade the Nasdaq-100 Tracking Stock (``QQQ'') and options on the 
QQQ.\10\ In addition, the Exchange also lists and trades options on the 
Nasdaq-100 (NDX) and the Mini Nasdaq-100 (MNX).\11\
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    \10\ See Securities Exchange Act Nos. 41119 (February 26, 1999), 
64 FR 11510 (March 9, 1999) (approval to list and trade Nasdaq-100 
Shares) and 40157 (July 1, 1998), 63 FR 37426 (July 10, 1998) 
(approval to list and trade options on Exchange-Traded Funds).
    \11\ Approval of the Nasdaq-100 for underlying an option 
contract was originally granted to the Chicago Board Options 
Exchange, Inc. in 1994. See Securities Exchange Act Release Nos. 
33428 (January 4, 1994), 59 FR 1576 (January 11, 1994) (approval to 
list and trade options on the Nasdaq-100); 34052 (May 12, 1994), 59 
FR 25972 (May 18, 1994) (approval to list and trade Flex Options on 
the Nasdaq-100) and 43000 (June 30, 2000), 65 FR 42409 July 10, 
2000) (approval of a Reduced Value Nasdaq-100).
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    Because the Securities are issued in $1,000 denominations, the 
Amex's existing floor trading rules will apply to the listing of the 
Securities. First, pursuant to Amex Rule 411, the Exchange will impose 
a duty of due diligence on its members and member firms to learn the 
essential facts relating to every customer prior to trading the 
Securities.\12\ Second, even though the Exchange's debt trading rules 
apply, the Securities will be subject to the equity margin rules of the 
Exchange.\13\ Third, in conjunction with the Amex's Hybrid Approval 
Order, the Exchange will, prior to trading the Securities, distribute a 
circular to the membership providing guidance with regard to member 
firm

[[Page 36944]]

compliance responsibilities (including suitability recommendations) 
when handling transactions in the Securities and highlighting the 
special risks and characteristics of the Securities. With respect to 
suitability recommendations and risks, the Exchange will require 
members, member organizations and employees thereof recommending a 
transaction in the Securities: (1) to determine that such transaction 
is suitable for the customer, and (2) to have a reasonable basis for 
believing that the customer can evaluate the special characteristics, 
and bear the financial risks, of such transaction.
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    \12\ 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.
    \13\ See Amex Rule 462.
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    The Exchange represents that its surveillance procedures are 
adequate to properly monitor the trading of the Securities. 
Specifically, the Amex will rely on its existing surveillance 
procedures governing debt, which have been deemed adequate under the 
Act. In addition, the Exchange also has a general policy which 
prohibits the distribution of material, non-public information by its 
employees.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with section 6 of the Act \14\ in general and furthers the objectives 
of Section 6(b)(5) \15\ 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.
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    \14\ 15 U.S.C. 78f(b).
    \15\ 15 U.S.C. 78f(b)(5).
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A. 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

    The Exchange did not receive any written comments on the proposed 
rule change.

IV. 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 at the 
Commission's Public Reference Room. Copies of such filing will also be 
available for inspection and copying at the principal office of the 
Exchange. All submissions should refer to File No. SR-Amex-2002-24 and 
should be submitted by June 18, 2002.

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

    The Commission finds that the proposed rule change is consistent 
with the requirements of 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.\16\ 
The Commission believes that the availability of the Securities will 
provide an instrument for investors to achieve desired investment 
objectives through the purchase of an exchange-traded debt product 
linked to the Nasdaq. These objectives include participating in or 
gaining exposure to the Nasdaq while limiting somewhat downside risk. 
However, the Commission notes that the Securities are index-linked debt 
securities whose value in whole or in part will be based upon the 
Nasdaq-100. In addition, the Securities are non-principal protected: 
they do not have a minimum principal amount that will be repaid, and 
payments on the Securities at maturity may be less than their original 
issue price. For the reasons discussed below, the Commission has 
concluded that the Amex listing standards applicable to the Securities 
are consistent with the Act.
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    \16\ Id.
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    The Securities are non-convertible and will conform to the Amex 
listing guidelines under Section 107A of the Company Guide. The 
specific maturity date will not be established until the time of the 
offering, but will not be less than one year from the date of issue. 
The securities will have a face value of $1,000 per security and will 
be sold at a discount. Holders of the Securities will receive a cash 
payment based on the following formula: If the Final Index Value is 
greater than or equal to the Initial Index Value, then a holder 
receives $1,000 per Security; If the Final Index Value is less than the 
Initial Index Value, then the holder receives, per security, $1,000 
multiplied by the result of dividing the Final Index Value by the 
Initial Index Value.
    The Commission notes that the Exchange's rules and procedures that 
address the special concerns attendant to the trading of hybrid 
securities will be applicable to the Securities. 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 the Securities. The Exchange will 
require members, member organizations and employees thereof 
recommending a transaction in the Securities 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, and bear the financial risks, of such 
transaction.
    In addition, the Amex equity margin rules and debt trading rules 
will apply to the Securities. The Commission believes that the 
application of these rules should strengthen the integrity of the 
Securities. The Commission also believes that the Amex has appropriate 
surveillance procedures in place to detect and deter potential 
manipulation for similar index-linked products. By applying these 
procedures to the Securities, the Commission believes that the 
potential for manipulation of the Securities is minimal, thereby 
protecting investors and the public interest. The Commission further 
notes that the underlying Index is managed by the Nasdaq, an entity 
independent of both the Exchange and the Issuer, and thus, a factor 
which the Commission believes should act to minimize the possibility of 
manipulation. In addition, the Nasdaq-100 is calculated and 
disseminated every 15 seconds to market information vendors.
    The Commission also notes that the Amex will issue a circular on 
the Securities. The circular should include, among other things, a 
discussion of the risks that may be associated with the Securities in 
addition to details on the composition of the Index and how the rates 
of return will be computed. Further, pursuant to Exchange Rule 411, the 
Exchange will impose a duty of due diligence on its members and member 
firms to learn the essential facts relating

[[Page 36945]]

to every customer prior to trading the Securities.
    The Commission notes that the securities are dependent upon the 
individual credit of the issuer, J.P. Morgan. 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 securities such as 
the Securities. In addition, the Exchange's hybrid listing standards 
further require that the securities have at least $4 million in market 
value.\17\ In any event, financial information regarding J.P. Morgan, 
in addition to the information on the issuers of the underlying 
securities comprising the Nasdaq-100, will be publicly available.\18\ 
Based on these factors, the Commission finds that the proposal to trade 
the Securities is consistent with section 6(b)(5) of the Act.\19\
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    \17\ See Section 107A of the Company Guide.
    \18\ The companies that comprise the Nasdaq-100 are reporting 
companies under the Act.
    \19\ 15 U.S.C. 78(f)(b)(5).
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    Amex has requested that the Commission find good cause for 
approving the proposed rule change prior to the thirtieth day after the 
date of publication of notice 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. In 
determining to grant the accelerated approval for good cause, the 
Commission notes that the Nasdaq-100 is a portfolio of highly 
capitalized and actively traded securities similar to component 
securities in hybrid securities products that have been approved by the 
Commission for U.S. exchange trading. Additionally, the Securities will 
be listed pursuant to existing hybird security listing standards as 
described above. Based on the above, the Commission finds good cause to 
accelerate approval of the proposed rule change, as amended.

V. Conclusion

    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\20\ that the proposed rule change (SR-Amex-2002-24), is hereby 
approved on an accelerated basis.
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    \20\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\21\
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    \21\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-13193 Filed 5-24-02; 8:45 am]
BILLING CODE 8010-01-P