[Federal Register Volume 67, Number 230 (Friday, November 29, 2002)]
[Notices]
[Pages 71219-71223]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-30199]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-46882; File No. SR-Amex-2002-76]


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 Notes Based 
on the Select Fifty Index

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 September 20, 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.
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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 notes, the 
return on which is based upon the performance of an equal-dollar 
weighted portfolio of securities representing the fifty stocks with the 
largest market capitalization in the S&P 500 Composite Stock Price 
Index (the ``S&P 500 Index'' or ``Underlying Index''), as reduced by an 
adjustment factor as described below (the ``Select Fifty Index'' or 
``Index'').\3\
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    \3\ As of September 3, 2002 the portfolio of securities 
comprising the Select Fifty Index consists of: Abbott Laboratories; 
American Express Company; American International Group, Inc.; Amgen 
Inc.; Anheuser-Busch Companies, Inc.; AOL Time Warner Inc.; AT&T 
Corp.; Bank of America Corporation; Bank One Corporation; Bellsouth 
Corporation; Bristol-Meyers Squibb Company; ChevronTexaco 
Corporation; Cisco Systems, Inc.; Citigroup Inc.; The Coca-Cola 
Company; Dell Computer Corporation; E.I. du Pont de Nemours and 
Company; Eli Lilly and Company; Exxon Mobil Corporation; Federal 
Home Loan Mortgage Corporation; Federal National Mortgage 
Association; Fifth Third Bancorp; General Electric Company; The 
Goldman Sachs Group, Inc.; Hewlett-Packard Company; The Home Depot, 
Inc.; International Business Machines Corporation; Intel 
Corporation; J.P. Morgan Chase & Co.; Johnson & Johnson; Medtronic, 
Inc.; Merck & Co., Inc.; Microsoft Corporation; Minnesota Mining and 
Manufacturing Company; Morgan Stanley, Dean Witter, Discover & Co.; 
Oracle Corporation; PepsiCo, Inc.; Pfizer Inc.; Pharmacia 
Corporation; Philip Morris Companies Inc.; The Procter & Gamble 
Company; SBC Communications Inc.; Texas Instruments Incorporated; 
U.S. Bancorp; Verizon Communications Inc.; Viacom Inc.; Wachovia 
Corporation; Wal-Mart Stores, Inc.; Wells Fargo & Company; and 
Wyeth.
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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 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 
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.\4\ The Amex proposes 
to list for trading under Section 107A of the Company Guide notes based 
on the Select Fifty Index. The Select Fifty Index will be determined, 
calculated and maintained solely by the Amex.\5\
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    \4\ See Securities Exchange Act Release No. 27753 (March 1, 
1990). 55 FR 8626 (March 8, 1990) (order approving File No. SR-Amex-
89-29).
    \5\ Subject to the criteria in the prospectus regarding the 
construction of the Index, the Exchange has sole discretion 
regarding changes to the Index due to annual reconstitutions and 
adjustments to the Index and the multipliers of the individual 
components.
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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 & Co., Inc. (``Merrill Lynch''). 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

[[Page 71220]]

Amount''). The ``Starting Index Value'' is the value of the Select 
Fifty Index on the date the issuer prices the Notes for the initial 
sale to the public. The ``Ending Index Value'' is the value of the 
Select Fifty 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 an approximately two-week period in the designated 
month each year, the investors will have the right to require the 
issuer to repurchase the Notes at a redemption amount based on the 
value of the Select Fifty Index at such repurchase date. The Notes are 
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 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 Select 
Fifty Index. The Notes are designed for investors who want to 
participate or gain exposure to a broad section of large capitalization 
companies and who are willing to forego market interest payments on the 
Notes during such term.
    The Select Fifty Index will consist of a portfolio of stocks 
(excluding Merrill Lynch and its affiliates) of the fifty companies 
with the largest market capitalization in the S&P 500 Index \8\ at the 
time of initial composition or any reconstitution of the Select Fifty 
Index. The Securities and Exchange Commission (``Commission'' or 
``SEC'') has previously approved the listing of options on, and 
securities the performance of which have been linked to or based on, 
the S&P 500 Index.\9\ In addition, the Commission in 1994 granted 
approval to the listing and trading of options on an index comprised of 
the fifty largest U.S. stocks as measured by market capitalization.\10\
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    \8\ The S&P 500 Index is a broad-based stock index which 
provides an indication of the performance of the U.S. equity market. 
The S&P 500 Index is a capitalization-weighted index reflecting the 
total market value of 500 widely-held component stocks relative to a 
particular base period. The Index is computed by dividing the total 
market value of the 500 stocks by an Index divisor. The Index 
Divisor keeps the Index comparable over time to its base period of 
1941-1943 and is the reference point for all maintenance 
adjustments. The securities included in the Index are listed on the 
Amex, New York Stock Exchange, Inc. (``NYSE'') or traded through 
NASDAQ. The Index reflects the price of the common stocks of 500 
companies without taking into account the value of the dividend paid 
on such stocks.
    \9\ See Securities Exchange Act Release Nos. 19907 (June 24, 
1983), 48 FR 30814 (July 5, 1983) (approving the listing and trading 
of options on the S&P 500 Index); 31591 (December 18, 1992), 57 FR 
60253 (December 18, 1992) (approving the listing and trading of 
Portfolio Depositary Receipts based on the S&P 500 Index); 27382 
(October 26, 1989), 54 FR 45834 (October 31, 1989) (approving the 
listing and trading of Exchange Stock Portfolios based on the value 
of the S&P 500 Index); 30394 (February 21, 1992), 57 FR 7409 (March 
2, 1992) (approving the listing and trading of a unit investment 
trust linked to the S&P 500 Index)(SPDR); and 45160 (December 17, 
2001) 66 FR 66485 (December 26, 2001) (approving the listing and 
trading of notes based on the Balanced Strategy Index).
    \10\ See Securities Exchange Act Release No. 33973 (April 28, 
1994), 59 FR 23245 (May 5, 1994) (approving the listing and trading 
of options on the Big Cap Index).
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    Components of the Select Fifty Index approved pursuant to this 
filing will also meet the following criteria: (1) A minimum market 
value of at least $75 million, except that up to 10% of the component 
securities in the Select Fifty Index may have a minimum market value of 
$50 million; (2) average monthly trading volume in the last six months 
of not less than 1,000,000 shares, except that up to 10% of the 
component securities in the Select Fifty Index may have an average 
monthly trading volume of 500,000 shares or more in the last six 
months; (3) 90% of the Select Fifty Index's numerical value and at 
least 80% of the total number of component securities will meet the 
then current criteria for standardized option trading set forth in 
Exchange Rule 915; and (4) all component stocks will either be listed 
on the Amex, the New York Stock Exchange, Inc. (``NYSE'') or traded 
through the facilities of the National Association of Securities 
Dealers Automated Quotation System (``NASDAQ'') and reported National 
Market System securities.
    If calculated as of September 16, 2002, the market capitalization 
of the securities that would represent the Select Fifty Index would 
range from a high of $269.1 billion to a low of $35.2 billion. The 
average monthly trading volume of those same securities for the last 
six months, as of the same date, ranged from a high of 463.5 million 
shares to a low of 87.9 million shares. Moreover, as of September 16, 
2002, all of the securities that would comprise the Select Fifty Index 
were eligible for standardized options trading pursuant to Amex Rule 
915.
    At the outset, each of the securities in the Select Fifty Index 
will represent approximately an equal percentage of the Starting Index 
Value. Specifically, each security included in the portfolio will be 
assigned a multiplier on the date of issuance so that the security 
represents approximately an equal percentage of the value of the entire 
portfolio underlying the Select Fifty Index on the date the Notes are 
priced for initial sale to the public. The multiplier indicates the 
number of shares (or fraction of one share) of a security, given its 
market price on an exchange or through NASDAQ, to be included in the 
calculation of the portfolio. Accordingly, initially each of the fifty 
companies included in the Select Fifty Index will represent 
approximately 2.00% of the total portfolio at the time of issuance. The 
Select Fifty Index will initially be set to provide a benchmark value 
of 100.00 at the close of trading on the day the Notes are priced for 
initial sale to the public.
    The value of the Select Fifty Index at any time will equal: (1) The 
sum of the products of the current market price for each stock 
underlying the Select Fifty Index and the applicable share multiplier, 
plus (2) an amount reflecting current calendar quarter dividends, and 
less (3) a pro rata portion of the annual index adjustment factor.\11\ 
Current quarter dividends for any day will be determined by the Amex 
and will equal the sum of each dividend paid by the issuer on one share 
of stock underlying the Select Fifty Index during the current calendar 
quarter multiplied by the share multiplier applicable to such stock on 
the ex-dividend date.
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    \11\ At the end of each day, the Select Fifty Index will be 
reduced by a pro rata portion of the annual index adjustment factor, 
expected to be 1.5% (i.e., 1.5%/365 days = 0.0041% daily). This 
reduction to the value of the Select Fifty Index will reduce the 
total return to investors upon exchange or at maturity. The Amex 
represents that an explanation of this deduction will be included in 
any marketing materials, fact sheets, or any other materials 
circulated to investors regarding the trading of this product.
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    As of the first day of the start of each calendar quarter, the Amex 
will allocate the current quarter dividends as of the end of the 
immediately preceding calendar quarter to each then outstanding 
component of the Select Fifty Index. The amount of the current quarter 
dividends allocated to each stock will equal the percentage of the 
value of such stock contained in the portfolio of securities comprising 
the Select Fifty Index relative to the value of the entire portfolio 
based on the closing market price of such stock on the last day in the 
immediately preceding calendar quarter. The share multiplier of each 
stock will be increased to reflect the number of shares, or portion of 
a share, that the amount of the current quarter dividend allocated to 
each stock can purchase of each stock based on the closing market price 
on the last day in the immediately preceding calendar quarter.

[[Page 71221]]

    As of the close of business on each anniversary date (anniversary 
of the day the Notes are priced for initial sale to the public) through 
the applicable anniversary date in the year preceding the maturity of 
the Notes, the portfolio of securities comprising the Select Fifty 
Index will be reconstituted by the Amex so as to include the fifty 
stocks (excluding Merrill Lynch and its affiliates) having the largest 
market capitalization in the S&P 500 Index on the second scheduled 
index business day prior to such anniversary date. The Exchange will 
announce such changes to investors at least one day prior to the 
anniversary date.\12\
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    \12\ The Exchange will publish a notice to advise investors of 
changes to the securities underlying the Index if any such changes 
are made following an annual reconstitution.
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    The portfolio will be reconstituted and rebalanced on the 
anniversary date so that each stock in the Select Fifty Index will 
represent approximately 2.00% of the value of the Select Fifty Index. 
To effectuate this, the share multiplier for each new stock will be 
determined by the Amex and will indicate the number of shares or 
fractional portion thereof of each new stock, given the closing market 
price of such new stock on the anniversary date, so that each new stock 
represents an equal percentage of the Select Fifty Index value at the 
close of business on such anniversary date. For example, if the Select 
Fifty Index value at the close of business on an anniversary date was 
150, then each of the fifty new stocks comprising the Select Fifty 
Index would be allocated a portion of the value of the Select Fifty 
Index equal to 3, and if the closing market price of one such new stock 
on the anniversary date was 20, the applicable share multiplier would 
be 0.15. Conversely, if the Select Fifty Index value was 50, then each 
of the fifteen new stocks comprising the Select Fifty Index would be 
allocated a portion of the value of the Select Fifty Index equal to 1 
and if the closing market price of one such new stock on the 
anniversary date was 20, the applicable share multiplier would be 0.05. 
The last anniversary date on which such reconstitution will occur will 
be the anniversary date in the year preceding the maturity of the 
Notes. As noted above, investors will receive information on the new 
portfolio of securities comprising the Select Fifty Index at least one 
day prior to each anniversary date.
    The multiplier of each component stock in the Select Fifty Index 
will remain fixed until adjusted for quarterly dividend adjustments, 
annual reconstitutions or certain corporate events, such as payment of 
a dividend other than an ordinary cash dividend, a distribution of 
stock of another issuer to its shareholders,\13\ stock split, reverse 
stock split, and reorganization.
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    \13\ If the issuer of a component security in the Select Fifty 
Index issues to all of its shareholders publicly traded stock of 
another issuer, such new securities will be added to the portfolio 
comprising the Select Fifty Index until the subsequent anniversary 
date. The multiplier for the new component will equal the product of 
the original issuer's multiplier and the number of shares of the new 
component issued with respect to one share of the original issuer.
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    The multiplier of each component stock may be adjusted, if 
necessary, in the event of a merger, consolidation, dissolution or 
liquidation of an issuer or in certain other events such as the 
distribution of property by an issuer to shareholders. If the issuer of 
a stock included in the Select Fifty Index were to no longer exist, 
whether by reason of a merger, acquisition or similar type of corporate 
transaction, a value equal to the stock's final value will be assigned 
to the stock for the purpose of calculating the Select Fifty Index 
value prior to the subsequent anniversary date. For example, if a 
company included in the Select Fifty Index were acquired by another 
company, a value will be assigned to the company's stock equal to the 
value per share at the time the acquisition occurred. If the issuer of 
stock included in the Select Fifty Index is in the process of 
liquidation or subject to a bankruptcy proceeding, insolvency, or other 
similar adjudication, such security will continue to be included in the 
Select Fifty Index so long as a market price for such security is 
available or until the subsequent anniversary date. If a market price 
is no longer available for a Select Fifty Index stock due to 
circumstances including but not limited to, liquidation, bankruptcy, 
insolvency, or any other similar proceeding, then the security will be 
assigned a value of zero when calculating the Select Fifty Index for so 
long as no market price exists for that security or until the 
subsequent anniversary date. If the stock remains in the Select Fifty 
Index, the multiplier of that security may be adjusted to maintain the 
component's relative weight in the Select Fifty Index at the level 
immediately prior to the corporate action. In all cases, the multiplier 
will be adjusted, if necessary, to ensure Select Fifty Index 
continuity.
    The Exchange will calculate the Select Fifty Index and, similar to 
other stock index values published by the Exchange, the value of the 
Select Fifty Index will be calculated continuously and disseminated 
every fifteen seconds over the Consolidated Tape Association's Network 
B.
    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.\14\ Second, the Notes will be subject to the equity margin 
rules of the Exchange.\15\ 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 purchase of the Notes.
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    \14\ 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.
    \15\ 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 that 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,\16\ in general, and furthers the objectives 
of Section 6(b)(5) of the Act,\17\ 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

[[Page 71222]]

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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    \16\ 15 U.S.C. 78f(b).
    \17\ 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

    Written comments were neither solicited nor 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 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-2002-76 and 
should be submitted by December 20, 2002.

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

    After careful review, the Commission finds that implementation of 
the proposed rule change is consistent with the requirements of Section 
6 of the Act \18\ and the rules and regulations thereunder applicable 
to a national securities exchange.\19\ Specifically, the Commission 
believes that the proposal is consistent with Section 6(b)(5) of the 
Act.\20\ The Commission believes that the availability of the Notes 
will provide an instrument for investors to achieve desired investment 
objectives through the purchase of an exchange-traded debt product 
linked to the Select Fifty Index. These objectives include 
participating in or gaining exposure to the Index while limiting 
somewhat downside risk. However, the Commission notes that the Notes 
are index-linked debt securities whose value in whole or in part will 
be based upon the performance of the S&P 500 Index. In addition, the 
Notes are non-principal protected: they do not have a minimum principal 
amount that will be repaid, and payments on the Notes 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 Notes are consistent with the Act.
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    \18\ 15 U.S.C. 78f.
    \19\ 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).
    \20\ Id.
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    The Notes are non-convertible and will conform initially to the 
Amex listing guidelines under Section 107A of the Company Guide and 
continued listing guidelines under Sections 1001-1003 of the Company 
Guide. The specific maturity date will not be established until the 
time of the offering, but will be not less than one, nor more than ten 
years from the date of issue. The Notes will entitle the owner at 
maturity to receive an amount based upon the percentage change between 
the Starting Index Value (the value of the Index on the date the issuer 
prices the Notes for the initial sale to the public) and the Ending 
Index Value (the value of the Index over a period shortly prior to the 
expiration of the Notes). The Ending Index Value will be used in 
calculating the amount investors 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 issuer to repurchase the Notes at a redemption amount 
based on the value of the Index at such repurchase date. The Notes are 
cash-settled in U.S. dollars and may not be called by the issuer. The 
Select Fifty 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 Notes are not-leveraged, non-principal protected instruments. 
The Notes are debt instruments whose price will be derived and based 
upon the value of the Select Fifty Index. The Notes do not have a 
minimum principal amount that will be repaid at maturity and the 
payments on the Notes prior to or at maturity may be less than the 
original issue price of the Notes.\21\ Thus, if the Select Fifty 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 of the Notes 
is derivatively priced, based on the performance of the Underlying 
Index, and because the Notes are instruments that do not guarantee a 
return of principal, there are several issues regarding the trading of 
this type of product.
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    \21\ The Commission recognizes that during a two-week period in 
the designated month investors will have the right to require the 
issuer to repurchase the Notes at a redemption amount based on the 
value of the Select Fifty Index at such repurchase date.
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    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 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 circular should 
include, among 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.\22\ The Commission also 
notes that Merrill Lynch will deliver a prospectus in connection with 
the initial purchase of the Notes.
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    \22\ 15 U.S.C. 78f(b)(5).
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    The Commission notes that the Notes are dependent 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,

[[Page 71223]]

the Exchange's ``Other Securities'' listing standards further require 
that the Notes have at least $4 million in market value.\23\ In any 
event, financial information regarding Merrill Lynch, in addition to 
the information on the Underlying Index, will be publicly 
available.\24\
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    \23\ See Company Guide Section 107A.
    \24\ The companies that comprise the Oil and Natural Gas Index 
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,\25\ 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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    \25\ 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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    The Commission also believes that the listing and trading of the 
Notes should not unduly impact the market for the component securities 
of the Underlying Index or raise manipulative concerns. The Commission 
notes that the Exchange maintains the Select Fifty Index and states 
that it has sole discretion in determining, calculating, and 
maintaining the Index. However, the prospectus provides that guidelines 
under which the Exchange will perform such functions. The Commission 
also notes that the Index is equal-dollar weighted but is only 
rebalanced on an annual basis; however, the Commission notes that the 
S&P 500 Index is broad-based and composed of stocks with significant 
market capitalization and average daily trading volume. The Commission 
further 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 
the 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 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 Index on 
which the Select Fifty Index is based (the S&P 500 Index), is broad-
based and independent of both the Exchange and the Issuer, factors that 
the Commission believes should act to minimize the possibility of 
manipulation.
    The Commission notes that the Select Fifty Index is equal-dollar 
weighted index and that the portfolio of securities underlying the 
Index will be rebalanced annually--rather than quarterly--by the Amex 
so as to include the fifty stocks (excluding Merrill Lynch and its 
affiliates) having the largest market capitalization in the S&P 500 
Index on the second scheduled index business day prior to the 
anniversary date. Although quarterly rebalancing is generally required 
with respect to options and futures linked to an equal-dollar weighted 
index,\26\ Amex maintains, and the Commission believes, that there are 
relevant distinctions between the Notes and index options and futures. 
Specifically, unlike options and futures, debt products, such as the 
Notes, do not provide a leveraged ``play'' on the value of the index 
and are not generally actively traded, but instead are a ``buy and 
hold'' investment.\27\ Although the Commission has significant concerns 
about the frequency of rebalancing in the cases of options and futures 
linked to an equal-dollar weighted index (because of their leveraged 
nature and active trading), the Commission believes that the Amex's 
proposal to rebalance the Select Fifty Index on an annual basis is 
consistent with the Act.
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    \26\ See, e.g., Amex Rule 901C, Commentary .02.
    \27\ Telephone conference among Jeffrey Burns, Assistant General 
Counsel, Amex, Florence Harmon, Senior Special Counsel, and Geoffrey 
Pemble, Special Counsel, Division of Market Regulation, Commission, 
on November 19, 2002.
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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 underlying Index on which the Select Fifty 
Index is based (the S&P 500) is a broad-based index providing an 
indication of the performance of the U.S. equity market. The Commission 
further notes that it has previously approved the listing of options 
on, and securities the performance of which have been linked to or 
based on the S&P 500 Index. Additionally, the Notes will be listed 
pursuant to 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, prior to the thirtieth 
day after the date of publication of notice thereof in the Federal 
Register.
    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\28\ that the proposed rule change, (SR-Amex-2002-76) is hereby 
approved on an accelerated basis.
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    \28\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\29\
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    \29\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-30199 Filed 11-27-02; 8:45 am]
BILLING CODE 8010-01-P