[Federal Register Volume 67, Number 218 (Tuesday, November 12, 2002)]
[Notices]
[Pages 68706-68709]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-28605]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-46769; File No. SR-Amex-2002-80]


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

November 4, 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 September 30, 2002, the American Stock Exchange LLC (the 
``Exchange'' or ``Amex''), 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 
Exchange.\3\ The Commission is publishing this notice to solicit 
comments on the proposed rule change from interested persons. For the 
reasons described 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.
    \3\ The Commission corrected a typographical error in the 
description of the proposed rule change, with the consent of the 
Exchange, to reflect the proper term of the Notes. Telephone 
conversation between Jeffrey P. Burns, Assistant General Counsel, 
Amex, and Andrew Shipe, Special Counsel, Division of Market 
Regulation, Commission (October 22, 2002).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to approve for listing and trading principal 
protected notes the return on which is based upon the performance of a 
basket of ten (10) specified U.S. sector exchange-traded funds \4\ 
pursuant to the methodology set forth below.
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    \4\ The U.S. sector exchange-traded funds (``Sector ETFs'') that 
will be included in the basket (the ``ETF Basket'') are as follows: 
(1) iShares Dow Jones U.S. Basic Materials Index Fund; (2) iShares 
Dow Jones U.S. Consumer Cyclical Sector Index Fund; (3) iShares Dow 
Jones U.S. Consumer Non-Cyclical Sector Index Fund; (4) iShares Dow 
Jones U.S. Energy Sector Index Fund; (5) iShares Dow Jones U.S. 
Financial Sector Index Fund; (6) iShares Dow Jones U.S. Healthcare 
Sector Index Fund; (7) iShares Dow Jones U.S. Industrial Sector 
Index Fund; (8) iShares Dow Jones U.S. Technology Sector Index Fund; 
(9) iShares Dow Jones U.S. Telecommunications Sector Index Fund; and 
(10) iShares Dow Jones U.S. Utilities Sector Index Fund. The ETFs 
are trademarks of Dow Jones & Company and have been licensed for use 
by The Bear Stearns Companies Inc.
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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 Exchange included statements 
concerning the purpose of and basis for the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The Exchange has prepared summaries, set forth in 
Sections A, B, and C below, of the most significant aspects of such 
statements.

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

1. Purpose
    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 principal 
protected sector selector notes (the ``Notes''), the return on which is 
based upon the performance of the ETF Basket.
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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''). See also Securities Exchange Act 
Release No. 42582 (March 27, 2000), 65 FR 17685 (April 4, 2000) 
(approving the listing and trading of notes linked to a basket of no 
more than twenty equity securities).
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    The 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 Notes are senior non-convertible debt 
securities of The Bear Stearns Companies Inc. (``the ``Issuer''). The 
Notes will have a term of five (5) years. The Notes, at maturity, will 
provide for a minimum principal amount that will be repaid plus a 
variable return amount (the ``Variable Return'') based on the 
performance of the ETF Basket. The Notes will not be subject to 
redemption prior to maturity and are not callable by the issuer.
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    \6\ The initial listing standards for the Notes require: (1) A 
market value of at least $4 million; and (2) a term of at least one 
year. Because the Notes will be issued in $1,000 denominations, the 
minimum public distribution requirement of one million units and the 
minimum holder requirement of 400 holders do not apply. In addition, 
the listing guidelines provide that the issuer has 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.
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    The 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 ETF 
Basket. The Notes are designed for investors who want to participate or 
gain exposure to a variety of U.S. market sectors and who are willing 
to forego market interest payments on the Notes during such term. The 
calculation agent for the Notes will be Bear Stearns & Co., Inc., an 
affiliate of the Issuer (''Bear Stearns'').

[[Page 68707]]

    The Sector ETFs that comprise the ETF Basket are issued by iShares 
Trust, a registered investment company. The Sector ETFs are investment 
portfolios that seek investment results that correspond generally to 
the price and yield performance, before fees and expenses, of a 
particular U.S. sector equity market index compiled by Dow Jones & 
Company (``Dow Jones''). Each of the Sector ETFs is listed and traded 
on the Amex.
    The Variable Return of the Notes is linked to the performance of 
the ETF Basket. This amount is designed to reflect the selection of the 
best performing ETF Sector remaining in the ETF Basket every six (6) 
months during the term of the Notes. Individual Sector ETFs will be 
removed from the ETF Basket once their performance has been used on an 
observation date. The Variable Return will be calculated as follows:
    [sbull] The individual Sector ETF in the ETF Basket which has the 
most positive or least negative percentage change since the issue date 
will be selected and used to establish the performance rate for that 
particular observation date. Once the performance of an individual 
Sector ETF has been used on an observation date, such Sector ETF will 
then be removed from the ETF Basket and will not be utilized in the 
calculation of performance rates for any subsequent observation date.
    [sbull] At maturity, the Variable Return will equal the average of 
the performance rates of the ten (10) selected Sector ETFs multiplied 
by the principal amount of such Note.
    [sbull] The average performance is calculated at maturity by 
summing the selected performance rates of each Sector ETF and then 
dividing by the number of Sector ETFs that comprised the basket (ten).
    If the Variable Return for the term of the Notes is less than or 
equal to zero, the Variable Return will be zero. If the Variable Return 
is zero, investors will receive only the principal amount of the Notes. 
The Variable Return cannot be less than zero.
    As of September 26, 2002, the market capitalization of the Sector 
ETFs that would comprise the ETF Basket ranged from a high of $302.84 
million shares (iShares Dow Jones U.S. Healthcare Sector Index Fund 
(IYH)) to a low of $45 million (iShares Dow Jones U.S. 
Telecommunications Sector Index Fund (IYZ)). The average monthly 
trading volume of these Sector ETFs comprising the ETF Basket for the 
last six months, as of the same date, ranged from a high of 1.68 
million shares (iShares Dow Jones U.S. Consumer Cyclical Sector Index 
Fund (IYC)) to a low of 389,183 shares (iShares Dow Jones U.S. 
Financial Sector Index Fund (IYF)). Moreover, as of September 26, 2002, 
all of the Sector ETFs that would comprise the ETF Basket were eligible 
for standardized options trading pursuant to Commentary .06 to Amex 
Rule 915. The Amex currently lists and trades option contracts on 
iShares Dow Jones U.S. Financial Sector Index Fund (IYF), iShares Dow 
Jones U.S. Technology Sector Index Fund (IYW) and iShares Dow Jones 
U.S. Telecommunications Sector Index Fund (IYZ).
    During the term of the Notes, the performance rate for each of the 
Sector ETFs will be calculated every six (6) months as follows: 
(reference value--initial value)/initial value. The individual Sector 
ETF in the ETF Basket which has the most positive or least negative 
percentage change since the issue date will be selected and used to set 
the performance rate for that observation date. The ``reference value'' 
is the closing value of each of the Sector ETFs that comprise the ETF 
Basket on each observation date or, if that day is not a business day, 
on the next business day. An ``observation date'' occurs semi-annually 
throughout the terms of the Notes. For the first observation date, the 
``initial value'' will equal the closing value of each of the Sector 
ETFs on the issue date of the Notes.
    If any of the Sector ETFs is de-listed from the Amex or ceases to 
be issued by the iShares Trust prior to removal from the ETF Basket, 
Bear Stearns will substitute a corresponding Dow Jones U.S. Sector 
Index compiled by Dow Jones for the discontinued Sector ETF. If the 
corresponding Dow Jones U.S. Sector Index ceases to be compiled by Dow 
Jones and Dow Jones or another entity compiles a successor or 
substitute sector index that Bear Stearns determines, to be comparable 
to the discontinued Dow Jones U.S. Sector Index, then such successor or 
substitute sector index will be used to calculate the Variable Return. 
Upon selection by Bear Stearns of a corresponding, successor or 
substitute sector index, notice of such fact will be provided to the 
holders of the Notes.
    If Bear Stearns determines that any successor or substitute sector 
index is discontinued and there is not a successor or substitute sector 
index available, Bear Stearns will determine the Variable Return based 
on a methodology that attempts to replicate closely the Sector ETF. 
Bear Stearns may similarly determine the performance rate to be used if 
the level of any successor or a substitute sector index is not 
available on an observation date.
    Bear Stearns as the calculation agent will be permitted (but not 
required) to make adjustments in any successor or substitute sector 
index or concerning the method of such index calculation as it deems 
appropriate to ensure that the performance rates used to determine the 
Variable Return are equitable.
    Discontinuance of any of the Sector ETFs may adversely affect the 
value of the Notes. All determinations made by Bear Stearns as 
calculation agent will be at its discretion and will be conclusive for 
all purposes, absent manifest error.
    If there is a market disruption event \8\ on any observation date, 
the observation date will be the first succeeding business day on which 
there is no market disruption event, unless there is a market 
disruption event on each of the five business days following the 
original date that, but for the market disruption event, would have 
been the observation date. In that case, the fifth business day will be 
deemed to be the observation date and Bear Stearns will determine the 
performance rate of the Sector ETFs as of the valuation time on that 
fifth business day.
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    \8\ A market disruption event means the occurrence or existence 
on any business day during the one-half hour prior to the valuation 
time of any suspension of, or limitation imposed on, trading (by 
reason of movements in price exceeding limits permitted by any 
relevant exchange or market or otherwise) of (i) the Sector ETFs on 
the Amex or of the securities that comprise 20% or more of any Dow 
Jones U.S. Sector Index or any successor or substitute index on any 
relevant exchange; or (ii) in options or futures contracts on the 
Sector ETFs, any corresponding Dow Jones U.S. Sector Index or any 
successor or substitute index on any relevant exchange if, any such 
suspension or limitation is material.
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    Because the Notes are issued in $1,000 denominations, the Amex's 
existing floor trading rules will apply to the issuing and trading of 
the Notes. 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 
Notes.\9\ Second, even though the Exchange's debt trading rules apply, 
the Notes will be subject to the equity margin rules of the 
Exchange.\10\ Third, in conjunction with the Hybrid Approval Order, the 
Exchange will, prior to trading the Notes, distribute a circular to the 
membership providing guidance with regard to member firm compliance 
responsibilities (including

[[Page 68708]]

suitability recommendations) when handling transactions in the Notes 
and highlighting the special risks and characteristics of the Notes. 
With respect to suitability recommendations and risks, the Exchange 
will require members, member organizations and employees thereof 
recommending a transaction in the Notes: (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 of, and is able to bear the financial risks of such 
transaction. In addition, the Issuer will deliver a prospectus in 
connection with the initial purchase of the Notes.
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    \9\ 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.
    \10\ See Amex Rule 462 and Section 107B of the Company Guide.
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    The Exchange represents that its surveillance procedures are 
adequate to properly monitor the trading of the Notes. Specifically, 
the Amex will rely on its existing surveillance procedures governing 
equities, 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 \11\ in general and furthers the objectives 
of section 6(b)(5) \12\ 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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    \11\ 15 U.S.C. 78f(b).
    \12\ 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

    The Exchange did not receive any written comments 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 
Amex. All submissions should refer to File No. SR-Amex-2002-80 and 
should be submitted by December 3, 2002.

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

    After careful review, the Commission finds that implementation of 
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).\13\ Pursuant to Section 19(b)(2) of the Act,\14\ the 
Commission further finds good cause to approve the proposed rule change 
prior to the thirtieth day after the date of publication of notice of 
filing thereof in the Federal Register.
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    \13\ 15 U.S.C. 78f(b)(5).
    \14\ 15 U.S.C. 78s(b)(2).
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    The Commission believes that the availability of the Notes will 
provide an additional choice for investors to achieve desired 
investment objectives through the purchase of an exchange-traded debt 
product linked to the performance of the basket of ETFs described 
above. These objectives include participating in or gaining exposure to 
the ETF basket's components, while limiting downside risk. The Notes 
are principal protected--they provide for a minimum principal amount 
that will be repaid. They also provide for a variable return based upon 
the performance of the components of the ETF basket. For the reasons 
discussed below, the Commission has concluded that the Amex listing 
standards applicable to the Notes are consistent with the Act.
    The Notes are senior, non-convertible debt securities and will 
conform to the initial listing guidelines under Section 107A, and the 
continued listing guidelines under Sections 1001-1003 of the Amex 
Company Guide. The notes will have a term of five years. The Notes will 
entitle the owner at maturity to receive a minimum principal amount, 
plus a variable return amount based upon the performance of the ETFs in 
the ETF basket. Each of the Sector ETFs that comprise the ETF basket is 
listed and traded on Amex; thus, the Commission notes that each of the 
components would satisfy the Exchange's listing standards for Index 
Fund Shares (or alternatively for Portfolio Depositary Receipts). The 
Notes are cash-settled in U.S. dollars and may not be called by the 
issuer.
    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 Notes. In particular, by imposing 
the hybrid listing standards, suitability, disclosure, and compliance 
requirements noted above, the Commission believes the Exchange has 
addressed adequately any potential problems that could arise from the 
hybrid nature of the Notes. 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, and bear the 
financial risks, of such transaction.
    In addition, the Amex equity margin rules and debt trading rules 
will apply to the Notes. The Exchange's debt trading rules are 
applicable because the notes are issued in $1,000 denominations. The 
Commission believes that the application of these rules should 
strengthen the integrity of the Notes. 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 Notes, the Commission 
believes that the potential for manipulation of the Notes is minimal, 
thereby protecting investors and the public interest. The Commission 
further notes that the underlying indices on which the ETFs are based 
are compiled by Dow Jones, 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.
    The Commission also notes that the Amex will issue a circular on 
the Notes. The circular would include, among

[[Page 68709]]

other things, a discussion of the risks that may be associated with the 
Notes 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 to every 
customer prior to trading the Notes. Based on these factors, the 
Commission finds that the proposal to trade the Notes is consistent 
with section 6(b)(5) of the Act.\15\
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    \15\ 15 U.S.C. 78f(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 traded on the Amex. In determining 
to grant the accelerated approval for good cause, the Commission notes 
that the ETFs comprising the ETF basket are based on indices composed 
of 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 Notes will be listed pursuant to the existing hybrid 
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,\16\ that the proposed rule change (SR-Amex-2002-80) is hereby 
approved on an accelerated basis.
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    \16\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\17\
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    \17\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-28605 Filed 11-8-02; 8:45 am]
BILLING CODE 8010-01-P