[Federal Register Volume 67, Number 230 (Friday, November 29, 2002)]
[Notices]
[Pages 71216-71219]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-30198]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-46883; File No. SR-Amex-2002-88]


Self-Regulatory Organizations; the American Stock Exchange LLC; 
Notice of Filing and Order Granting Accelerated Approval of Proposed 
Rule Change Relating to the Listing and Trading of Notes Linked to the 
Performance of the Dow Jones Industrial Average (``DJIA'')

November 21, 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 November 1, 2002, the American Stock Exchange LLC 
(``Amex'' or ``Exchange'') 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 
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 Exchange proposes to list and trade under section 107A of the 
Amex Company Guide (``Company Guide''), notes linked to the performance 
of the Dow Jones Industrial Average (the ``DJIA'' or the ``Market 
Recovery Notes'' or ``Notes'').

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 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 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 the 
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 Exchange 
proposes to list for trading under section 107A of the Company Guide 
notes, the performance which is linked to the DJIA (the ``Market 
Recovery Notes'' or ``Notes'').\4\ The DJIA is determined, calculated 
and maintained solely by Dow Jones.\5\ The Notes will provide for a 
multiplier of any positive performance of the DJIA during such term 
subject to a maximum payment amount or ceiling.
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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\ Merrill Lynch & Co., Inc. (``Merrill Lynch'') and Dow Jones 
& Co., Inc. (``Dow Jones'') have entered into a non-exclusive 
license agreement providing for the use of the DJIA by Merrill Lynch 
and certain affiliates and subsidiaries in connection with certain 
securities including these Notes. Dow Jones is not responsible and 
will not participate in the issuance and creation of the Notes.
    \5\ The DJIA is a price-weighted index comprised of 30 common 
stocks chosen by the editors of the Wall Street Journal (``WSJ'') as 
representative of the broad market of U.S. industry. A price-
weighted index refers to an index that assigns weights to component 
stocks based on the price per share rather than total market 
capitalization of such component stock. The corporations represented 
in the DJIA tend to be leaders within their respective industries 
and their stocks are typically widely held by individuals and 
institutional investors. Changes in the composition of the DJIA are 
made solely by the editors of the WSJ. In addition, changes to the 
common stocks included in the DJIA tend to be made infrequently with 
most substitutions the result of mergers and other extraordinary 
corporate actions. However, over time, changes are made to more 
accurately represent the broad market of U.S. industry. In choosing 
a new corporation for the DJIA, the editors of the WSJ focus on the 
leading industrial companies with a successful history of growth and 
wide interest among investors. Dow Jones, publisher of the WSJ, is 
not affiliated with Merrill Lynch and has not participated in any 
way in the creation of the Notes. The number of common stocks in the 
DJIA has remained at 30 since 1928, and, in an effort to maintain 
continuity, the constituent corporations represented in the DJIA 
have been changed on a relatively infrequent basis.
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    The Notes will initially conform to the 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 Merrill Lynch. The Notes will have a term of not 
less than one, nor more, than

[[Page 71217]]

10 years. Merrill Lynch will issue the Notes in denominations of whole 
units (a ``Unit''), with each Unit representing a single Note. The 
original public offering price will be $10 per Unit. The Notes will 
entitle the owner at maturity to receive an amount based upon the 
percentage change of the DJIA. At maturity, if the value of the DJIA 
has increased over the term of the Notes, a beneficial owner will be 
entitled to receive a payment on the Notes equal to three times the 
amount of that percentage increase, not to exceed a maximum payment 
(the ``Capped Value'') to be determined at the time of issuance of the 
Notes. The Notes will not have a minimum principal amount that will be 
repaid, and accordingly, payment on the Notes prior to or at maturity 
may be less than the original issue price of the Notes. The Notes are 
also not callable by the Issuer.
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    \6\ The initial listing standards for the Notes require: (1) A 
minimum public distribution of one million units; (2) a minimum of 
400 shareholders; (3) a market value of at least $4 million; and (4) 
a term of at least one year. In addition, the listing guidelines 
provide that the issuer have assets in excess of $100 million, 
stockholder's equity of at least $10 million, and pre-tax income of 
at least $750,000 in the last fiscal year or in two of the three 
prior fiscal years. In the case of an issuer which is unable to 
satisfy the earning criteria stated in section 101 of the Company 
Guide, the Exchange will require the issuer to have the following: 
(1) Assets in excess of $200 million and stockholders' equity of at 
least $10 million; or (2) assets in excess of $100 million and 
stockholders' equity of at least $20 million.
    \7\ The Exchange's continued listing guidelines are set forth in 
sections 1001 through 1003 of part 10 to the Exchange's Company 
Guide. Section 1002(b) of the Company Guide states that the Exchange 
will consider removing from listing any security where, in the 
opinion of the Exchange, it appears that the extent of public 
distribution or aggregate market value has become so reduced to make 
further dealings on the Exchange inadvisable. With respect to 
continued listing guidelines for distribution of the Notes, the 
Exchange will rely in part, on the guidelines for bonds in section 
1003(b)(iv). Section 1003(b)(iv)(A) provides that the Exchange will 
normally consider suspending dealings in, or removing from the list, 
a security if the aggregate market value or the principal amount of 
bonds publicly held is less than $400,000.
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    The payment that a holder or investor of a Note will be entitled to 
receive (the ``Redemption Amount'') depends entirely on the relation of 
the average of the values of the DJIA at the close of the market on 
five business days shortly before the maturity of the Notes (the 
``Ending Value'') and the closing value of the DJIA on the date the 
Notes are priced for initial sale to the public (the ``Starting 
Value'').
    If the Ending Value is greater than the Starting Value, the 
Redemption Amount per Unit will equal:
[GRAPHIC] [TIFF OMITTED] TN29NO02.072

    not to exceed the Capped Value.If the Ending Value is less than or 
equal to the Starting Value, the Redemption Amount per Unit will equal:
[GRAPHIC] [TIFF OMITTED] TN29NO02.073

    The Notes are cash-settled in U.S. dollars and do not give the 
holder any right to receive a portfolio security, dividend payments or 
any other ownership right or interest in the portfolio or index of 
securities comprising the DJIA. The Notes are designed for investors 
who want to participate or gain exposure to the DJIA, subject to a cap, 
and who are willing to forego market interest payments on the Notes 
during such term. The SEC has previously approved the listing of 
options on, and securities the performance of which have been linked to 
or based on, the DJIA.\8\
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    \8\ See Securities Exchange Act Release Nos. 39011 (September 3, 
1997), 62 FR 47840 (September 11, 1997) (approving the listing and 
trading of options on the DJIA); 39525 (January 8, 1998), 63 FR 2438 
(January 15, 1998) (approving the listing and trading of 
DIAMONDSSM Trust Units, portfolio depositary receipts 
based on the DJIA).
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    As of October 29, 2002, the market capitalization of the securities 
included in the DJIA ranged from a high of $279.3 billion to a low of 
$10 billion. The average daily trading volume for these same securities 
for the last six months, as of the same date, ranged from a high of 
57.3 million shares to a low of 2 million shares.
    Because the Notes are linked to a portfolio 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, 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, the Notes will be subject to the equity margin 
rules of the Exchange.\10\ Third, 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. 
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, Merrill Lynch will deliver a prospectus in 
connection with the initial sales 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 Exchange 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(b) 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 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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    \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 at

[[Page 71218]]

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 the File No. SR-Amex-2002 88 
and should be submitted by December 20, 2002.

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

    After careful consideration, the Commission finds that the proposed 
rule change is consistent with the requirements of the Act and the 
rules and regulations thereunder, applicable to a national securities 
exchange, and, in particular, with the requirements of section 6(b)(5) 
of the Act.\13\ The Commission finds that this proposal is similar to 
several approved instruments currently listed and traded on the 
Amex.\14\ Accordingly, the Commission finds that the listing and 
trading of the Notes based on the DJIA is consistent with the Act and 
will promote just and equity principles of trade, foster cooperation 
and coordination with persons engaged in regulating, clearing, 
settling, processing information with respect to, and facilitating 
transactions in securities, and, in general, protect investors and the 
public interest consistent with section 6(b)(5) of the Act.\15\
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    \13\ 15 U.S.C. 78f(b)(5).
    \14\ See Securities Exchange Act Release Nos. 46021 (June 3, 
2002), 67 FR 39753 (June 10, 2002) (approving the listing and 
trading of non-principal protected exchangeable notes linked to the 
Select European 50 Index); 45639 (March 25, 2002), 67 FR 15258 
(March 29, 2002) (approving the listing and trading of non-principal 
protected exchangeable notes linked to the Oil and Natural Gas 
Index); 45305 (January 17, 2002), 67 FR 3753 (January 25, 2002) 
(approving the listing and trading of non-principal protected 
exchangeable notes linked to the Biotech-Pharmaceutical Index); 
45160 (December 17, 2001), 66 FR 66485 (December 26, 2001) 
(approving the listing and trading of non-principal protected 
exchangeable notes linked to the Balanced Strategy Index); 44483 
(June 27, 2001), 66 FR 35677 (July 6, 2001) (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) (approving the listing and trading of non-
principal protected exchangeable notes linked to the Industrial 15 
Index); and 44342 (May 23, 2001); 66 FR 29613 (May 31, 2001) 
(approving the listing and trading of non-principal protected 
exchangeable notes linked to the Select Ten Index).
    \15\ 15 U.S.C. 78f(b)(5). In approving this rule, the Commission 
notes that it has considered the proposed rule's impact on 
efficiency, competition, and capital formation. 15 U.S.C. 78c(f).
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    As described more fully above, at maturity, the holder of a Note 
will receive an amount based upon the percentage change of the DJIA. 
Specifically, at maturity, the holder of a Note will be entitled to 
receive a payment equal to three times the amount of that percentage 
increase, not to exceed a certain maximum payment, if the value of the 
DJIA has increased over the term of such Note. The Notes will provide 
investors who are willing to forego market interest payments during the 
term of the Notes with a means to participate or gain exposure to the 
DJIA, subject to a cap.
    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 that the Exchange has 
addressed adequately the potential problems that could arise from the 
hybrid nature of the Notes. Moreover, the Commission notes that the 
Exchange will distribute a circular to its membership calling attention 
to the specific risks associated with the Notes. The Commission also 
notes that Merrill Lynch will deliver a prospectus in connection with 
the initial sales of the Notes. In addition, the Commission notes that 
Amex will incorporate and rely upon its existing surveillance 
procedures governing equities, which have been deemed adequate under 
the Act. Moreover, the Commission also notes that the Exchange has a 
general policy that prohibits the distribution of material, non-public 
information by its employees.
    In approving the product, the Commission recognizes that the DJIA 
is a price-weighted index comprised of 30 component common stocks, 
representing a broad market of the U.S. industry, with each stock 
affecting the DJIA in proportion to its market price. The Commission 
notes that the changes in the composition of the DJIA are made solely 
by the editors of the WSJ. The changes to these common stocks tend to 
be made infrequently with most substitutions the result of mergers and 
other extraordinary corporate actions. Further, the Commission notes 
that the DJIA has remained at 30 since 1928. As of October 29, 2002, 
the 30 stocks in the DJIA ranged in capitalization from a high of 
$279.3 billion to a low of $10 billion. In addition, the average daily 
trading volume for the component stocks over the six-month period from 
May 2002 to October 2002 ranged from a high of 57.3 million shares to a 
low of 2 million shares. Given the compositions of the stocks 
underlying the DJIA, the Commission believes that the listing and 
trading of the Notes that are linked to the DJIA, should not unduly 
impact the market for the underlying securities comprising the DJIA or 
raise manipulative concerns. As discussed more fully above, the 
underlying stocks comprising the DJIA are well-capitalized, highly 
liquid stocks. Moreover, the issuers of the underlying securities 
comprising the DJIA, are subject to reporting requirements under the 
Act, and all of the component stocks are either listed or traded on, or 
traded through the facilities of, U.S. securities markets. 
Additionally, the Amex's surveillance procedures will serve to deter as 
well as detect any potential manipulation.
    Furthermore, the Commission notes that the Notes are depending upon 
the individual credit of the issuer, Merrill Lynch. To some extent this 
credit risk is minimized by the Exchange's listing standards in section 
107A of the Company Guide which provide the only issuers satisfying 
substantial asset and equity requirements may issue securities such as 
the Notes. In addition, the Exchange's ``Other Securities'' listing 
standards further require that the Notes have a market value of at 
least $4 million.\16\ In any event, financial information regarding 
Merrill Lynch, in addition to the information on the 30 common stocks 
comprising the DJIA, will be publicly available.\17\
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    \16\ See Company Guide section 107A.
    \17\ The SEC notes that the 30 component stocks that comprise 
the DJIA are reporting companies under the Act, and the Notes will 
be registered under section 12 of the Act.
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    The Commission also has a systemic concern, however, that a broker-
dealer such as Merrill Lynch, or a subsidiary providing a hedge for the 
issuer will incur position exposure. However, as the Commission has 
concluded in previous approval orders for other hybrid instruments 
issued by broker-dealers,\18\ 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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    \18\ See, e.g., Securities Exchange Act Release Nos. 44913 
(October 9, 2001), 66 FR 52469 (October 15, 2001) (order approving 
the listing and trading of notes whose return is based on the 
performance of the Nasdaq-100 Index) (File No. SR-NASD-2001-73); 
44483 (June 27, 2001), 66 FR 35677 (July 6, 2001) (order approving 
the listing and trading of notes whose return is based on a 
portfolio of 20 securities selected from the Amex Institutional 
Index) (File No. SR-Amex-2001-40); and 37744 (September 27, 1996), 
61 FR 52480 (October 7, 1996) (order approving the listing and 
trading of notes whose return is based on a weighted portfolio of 
healthcare/biotechnology industry securities) (File No. SR-Amex-96-
27).
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    Finally, the Commission notes that the value of the DJIA will be 
disseminated at least once every 15 seconds throughout the trading day. 
The Commission believes that providing access to the value of the DJIA 
at least once every 15 seconds throughout the

[[Page 71219]]

trading day is extremely important and will provide benefits to 
investors in the product.
    The Commission finds good cause for approving the proposed rule 
change prior to the 30th 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.\19\ The Commission believes 
that the Notes will provide investors with an additional investment 
choice and that accelerated approval of the proposal will allow 
investors to begin trading the Notes promptly. Additionally, the Notes 
will be listed pursuant to Amex's existing hybrid security listing 
standards as described above. Based on the above, the Commission 
believes that there is good cause, consistent with sections 6(b)(5) and 
19(b)(2) of the Act \20\ to approve the proposal on an accelerated 
basis.
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    \19\ See supra note 14.
    \20\ 15 U.S.C. 78f(b)(5) and 78s(b)(2).
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V. Conclusion

    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\21\ that the proposed rule change (SR-Amex-2002-88), is hereby 
approved on an accelerated basis.


    \21\ 15 U.S.C. 78s(b)(2).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\22\
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    \22\ 17 CFR 200.30-3(a)(12).

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-30198 Filed 11-27-02; 8:45 am]
BILLING CODE 8010-01-P