[Federal Register Volume 68, Number 39 (Thursday, February 27, 2003)]
[Notices]
[Pages 9099-9104]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-4577]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-47386; File No. SR-NASD-2003-20]


Self-Regulatory Organizations; Notice of Filing and Order 
Granting Accelerated Approval of Proposed Rule Change and Amendment No. 
1 by the National Association of Securities Dealers, Inc. Relating to 
the Listing and Trading of Strategic Return Notes Linked to the Select 
Ten Index

February 20, 2003.
    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 February 14, 2003, the National Association of Securities Dealers, 
Inc. (``NASD''), through its subsidiary, The Nasdaq Stock Market, Inc. 
(``Nasdaq''), 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 Nasdaq. On 
February 20, 2003, the Amex submitted Amendment No. 1 to the proposed 
rule change.\3\ The Commission is publishing this notice to solicit 
comments on the proposed rule change from interested persons.

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    Nasdaq proposes to list and trade Strategic Return Notes[reg] 
Linked to the Select Ten Index (``Notes'') issued by Merrill Lynch & 
Co., Inc. (``Merrill Lynch'').

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

    In its filing with the Commission, Nasdaq 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
    Nasdaq proposes to list and trade notes, the return on which is 
based upon an approximately equal-dollar weighted portfolio of 
securities representing the ten highest dividend yielding stocks in the 
Dow Jones Industrial Average (``DJIA'') from year to year (``Select Ten 
Index'' or ``Index'').\4\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See letter from John D. Nachmann, Senior Attorney, Nasdaq, 
to Katherine A. England, Assistant Director, Division of Market 
Regulation, Commission, dated February 20, 2003.
    \4\ The portfolio of securities comprising the Select Ten Index 
currently consists of the ten common stocks in the DJIA having the 
highest dividend yield on May 24, 2002, and are as follows: 
Caterpillar Inc.; Eastman Kodak Company; E.I. du Pont de Nemours and 
Company; Exxon Mobil Corporation; General Motors Corporation; 
International Paper Company; J.P. Morgan Chase & Co.; Merck & Co., 
Inc.; Philip Morris Companies Inc.; and SBC Communications Inc.
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    Under Rule 4420(f), Nasdaq may approve for listing and trading 
innovative securities which cannot be readily categorized under 
traditional listing guidelines.\5\ Nasdaq proposes to list for trading 
notes based on the Select Ten Index under Rule 4420(f). The Select Ten 
Index is expected to be determined, calculated and maintained solely by 
the American Stock Exchange (``Amex'').\6\
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    \5\ See Securities Exchange Act Release No. 32988 (September 29, 
1993); 58 FR 52124 (October 6, 1993).
    \6\ Subject to the criteria in the prospectus supplement 
regarding the construction of the Index, the Amex 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 be subject to Nasdaq's listing criteria 
for other securities under Rule 4420(f). Specifically, under Rule 
4420(f)(1):
    (A) The issuer shall have assets in excess of $100 million and 
stockholders' equity of at least $10 million. In the case of an issuer 
which is unable to satisfy the income criteria set forth in paragraph 
(a)(1), Nasdaq generally will require the issuer to have the following: 
(i) assets in excess of $200 million and stockholders' equity of at 
least $10 million; or (ii) assets in excess of $100 million and 
stockholders' equity of at least $20 million;
    (B) There must be a minimum of 400 holders of the security, 
provided, however, that if the instrument is traded in $1,000 
denominations, there must be a minimum of 100 holders;
    (C) For equity securities designated pursuant to this paragraph, 
there must be a minimum public distribution of 1,000,000 trading units;
    (D) The aggregate market value/principal amount of the security 
will be at least $4 million.

[[Page 9100]]

    In addition, Merrill Lynch satisfies the listed marketplace 
requirement set forth in Rule 4420(f)(2).\7\ Lastly, pursuant to Rule 
4420(f)(3), prior to the commencement of trading of the Notes, Nasdaq 
will distribute a circular to members providing guidance regarding 
compliance responsibilities and requirements, including suitability 
recommendations, and highlighting the special risks and characteristics 
of the Notes. In particular, Nasdaq will advise members recommending a 
transaction in the Notes to: (1) Determine that such transaction is 
suitable for the customer; and (2) have a reasonable basis for 
believing that the customer can evaluate the special characteristics 
of, and is able to bear the financial risks of, such transaction.
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    \7\ Rule 4420(f)(2) requires issuers of securities designated 
pursuant to this paragraph to be listed on The Nasdaq National 
Market or the New York Stock Exchange (``NYSE'') or be an affiliate 
of a company listed on The Nasdaq National Market or the NYSE; 
provided, however, that the provisions of Rule 4450 will be applied 
to sovereign issuers of ``other'' securities on a case-by-case 
basis.
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    The Notes will be subject to Nasdaq's continued listing criterion 
for other securities pursuant to Rule 4450(c). Under this criterion, 
the aggregate market value or principal amount of publicly-held units 
must be at least $1 million. The Notes also must have at least two 
registered and active market makers as required by Rule 4450(a)(6). 
Nasdaq will also consider prohibiting the continued listing of the 
Notes if Merrill Lynch is not able to meet its obligations on the 
Notes.
    The Notes are a series of senior non-convertible debt securities of 
Merrill Lynch that provide for a single payment at maturity. The Notes 
will have a term of not less than one, nor more than ten, years. The 
Notes will entitle the owner at maturity to receive an amount based 
upon the percentage change between the ``Starting Index Value'' and the 
``Ending Index Value'' (the ``Redemption Amount''). The ``Starting 
Index Value'' is the value of the Select Ten Index on the date on which 
Merrill Lynch prices the Notes for the initial sale to the public. The 
``Ending Index Value'' is the value of the Select Ten 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 may 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 
the designated month each year, investors will have the right to 
require Merrill Lynch to repurchase the Notes at a redemption amount 
based on the value of the Select Ten Index at such repurchase date. The 
Notes are not callable by Merrill Lynch.
    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 securities, although the return on 
the investment is based on the aggregate portfolio value of the Select 
Ten Index securities.
    The Select Ten Index will consist of the ten stocks with the 
highest dividend yields among the thirty stocks that comprise the DJIA, 
adjusted as described below. The Commission has previously approved the 
listing of options on, and securities the performance of which have 
been linked to or based on, an index of the top ten dividend yielding 
stocks of the DJIA.\8\ The Commission has also previously approved the 
listing of securities with a structure identical to that of the 
Notes.\9\
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    \8\ See Securities Exchange Act Release No. 39453 (December 16, 
1997), 62 FR 67101 (December 23, 1997) (approving the listing and 
trading of options on the Dow Jones High Yield Select 10 Index); 
Securities Exchange Act Release No. 37533 (August 7, 1996), 61 FR 
42075 (August 13, 1996) (approving the listing and trading of Top 
Ten Yield Market Index Target-Term Securities).
    \9\ Securities Exchange Act Release No. 44342 (May 23, 2001), 66 
FR 29613 (May 31, 2001) (approving the listing and trading of Select 
Ten Notes).
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    Components of the Select Ten Index approved pursuant to this filing 
will 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 Ten 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 million shares, except that up to 10% of the component 
securities in the Select Ten Index may have an average monthly trading 
volume of 500,000 shares or more in the last six months; (3) 90% of the 
Select Ten 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 Amex Rule 915; and (4) all 
component stocks will either be listed on the Amex, the NYSE, or traded 
through the facilities of Nasdaq and reported National Market System 
securities.
    As of January 22, 2003, the market capitalization of the portfolio 
of securities representing the Select Ten Index ranged from a high of 
$124.9 billion to a low of $9.7 billion. The average monthly trading 
volume for the last six months, as of the same date, ranged from a high 
of 288 million shares to a low of 45.2 million shares. Moreover, as of 
January 22, 2003, all of the components comprising the portfolio of 
securities representing the Select Ten Index were eligible for 
standardized options trading pursuant to Amex Rule 915.
    The value of the Select Ten Index at any time will equal: (1) The 
sum of the products of the current market price for each stock 
underlying the Select Ten Index and the applicable share 
multiplier,\10\ 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 during the current calendar quarter 
multiplied by the share multiplier applicable to such stock on the ex-
dividend date.
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    \10\ The multiplier indicates the number of shares (or fraction 
of one share) of a security, given its market price on an exchange 
or Nasdaq, to be included in the calculation of the portfolio.
    \11\ At the end of each day, the Index will be reduced by a pro 
rata portion of the annual index adjustment factor, 1.5% (i.e., 
1.5%/365 days = 0.0041% daily). This reduction to the value of the 
Index will reduce the total return to investors upon redeeming the 
Notes at maturity. 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 
components of the Select Ten 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 Ten 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 dividends allocated to 
each stock can purchase of each stock based on the closing market price 
on the last day in the immediate preceding calendar quarter.
    As of the close of business on each anniversary date (May 29th of 
each year, which is the anniversary of the date the Select Ten Index 
was originally calculated and disseminated) through the applicable 
anniversary date in the year preceding the maturity of the Notes, 
Nasdaq states that the portfolio of securities comprising the Select 
Ten

[[Page 9101]]

Index will be reconstituted by the Amex so as to include the ten common 
stocks in the DJIA having the highest dividend yield on the second 
scheduled index business day prior to such anniversary date. Nasdaq 
represents that the Amex will announce such changes to investors at 
least one day prior to the anniversary date.\12\
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    \12\ Nasdaq states that the Amex 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 Ten Index will 
represent 10% of the value of the Index. To effectuate this, Nasdaq 
states that 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 Ten Index value at the 
close of business on such anniversary date. For example, if the Select 
Ten Index value at the close of business on an anniversary date was 
200, then each of the ten new stocks comprising the Select Ten Index 
would be allocated a portion of the value of the Index equal to 20, and 
if the closing market price of one such new stock on the anniversary 
date was 40, the applicable share multiplier would be 0.5. Conversely, 
if the Select Ten Index value was 80, then each of the ten new stocks 
comprising the Select Ten Index would be allocated a portion of the 
value of the Select Ten Index equal to 8, and if the closing market 
price of one such new stock on the anniversary was 40, the applicable 
share multiplier would be 0.2. 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 Ten Index at least one day prior to each anniversary date.
    The multiplier of each component stock in the Select Ten Index will 
remain fixed unless 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 Ten 
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 Ten 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 Ten 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 Ten Index value 
prior to the subsequent anniversary date. For example, if a company 
included in the Select Ten 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 Ten 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 
Ten 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 an Index stock due to circumstances including, but not 
limited to, liquidations, bankruptcy, insolvency, or any other similar 
proceeding, then the security will be assigned a value of zero when 
calculating the Select Ten 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 Ten Index, the multiplier of that security 
in the Select Ten Index may be adjusted to maintain the component's 
relative weight in the Select Ten Index at the level immediately prior 
to the corporate action. In all cases, the multiplier will be adjusted, 
if necessary, to ensure Select Ten Index continuity.
    Nasdaq states that the Amex will calculate the Select Ten Index 
and, similar to other stock index values published by the Amex, the 
value of the Index will be calculated continuously and disseminated 
every fifteen seconds over the Consolidated Tape Association's Network 
B. The Index value will equal the sum of the products of the most 
recently available market prices and the applicable multipliers for the 
component securities. In the event that Amex discontinues the 
publication of the Select Ten Index, Nasdaq will facilitate the 
calculation and dissemination every 15 seconds of a value of a 
successor index either through the facilities of Nasdaq or those of an 
outside provider that is an independent calculation agent, unless 
otherwise approved by the Commission.\14\ Amex could discontinue 
publication of the Select Ten Index, and Amex or another entity could 
publish a successor or substitute index that the calculation agent, in 
its sole discretion, could deem a comparable successor index. Also, 
Amex could discontinue publication of the Select Ten Index and the 
calculation agent could not select a successor index. In such case, the 
calculation agent will compute a substitute value for the Select Ten 
Index in accordance with the procedures last used to calculate the 
Select Ten Index before any discontinuance. If Amex discontinues 
publication of the Select Ten Index before the period during which the 
Redemption Amount is to be determined and the calculation agent 
determines that no successor index is available at that time, then on 
each business day until the earlier to occur of (1) the determination 
of the Ending Value or (2) a determination by the calculation agent 
that a successor index is available, the calculation agent will 
determine the value that would be used in computing the Redemption 
Amount as if that day were a calculation day.\15\
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    \14\ See Amendment No. 1, supra n. 3.
    \15\ Telephone conference between John Nachmann, Senior 
Attorney, Nasdaq, and Geoff Pemble, Special Counsel, Commission, 
dated February 20, 2003.
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    Since the Notes will be deemed equity securities for the purpose of 
Rule 4420(f), the NASD and Nasdaq's existing equity trading rules will 
apply to the Notes. First, pursuant to Rule 2310 and IM-2310-2, members 
must have reasonable grounds for believing that a recommendation to a 
customer regarding the purchase, sale or exchange of any security is 
suitable for such customer upon the basis of the facts, if any, 
disclosed by such customer as to his other security holdings and as to 
his financial situation and needs.\16\ In addition, Nasdaq will 
distribute a circular to advise members recommending a transaction in 
the Notes to, among other things, have a reasonable basis for believing 
that the customer can evaluate the special characteristics of, and is 
able to bear the

[[Page 9102]]

financial risks of, such transaction. Furthermore, the Notes will be 
subject to the equity margin rules. Lastly, the regular equity trading 
hours of 9:30 am to 4 pm will apply to transactions in the Notes.
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    \16\ Rule 2310(b) requires members to make reasonable efforts to 
obtain information concerning a customer's financial status, a 
customer's tax status, the customer's investment objectives, and 
such other information used or considered to be reasonable by such 
member or registered representative in making recommendations to the 
customer.
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    Nasdaq represents that NASD's surveillance procedures are adequate 
to properly monitor the trading of the Notes. Specifically, NASD will 
rely on its current surveillance procedures governing equity 
securities, and will include additional monitoring on key pricing 
dates.
2. Statutory Basis
    Nasdaq believes that the proposed rule change, as amended, is 
consistent with section 15A of the Act,\17\ in general, and furthers 
the objectives of section 15A(b)(6) of the Act,\18\ in particular, in 
that the proposal 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. 
Specifically, the proposed rule change, as amended, will provide 
investors with another investment vehicle based on an index of the top 
ten dividend yielding stocks of the DJIA.
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    \17\ 15 U.S.C. 78o-3.
    \18\ 15 U.S.C. 78o-3(b)(6).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    Nasdaq does not believe that the proposed rule change, as amended, 
will result in any burden on competition that is not necessary or 
appropriate in furtherance of the purposes of the Act.

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, as amended, 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-NASD-2003-20 and should be submitted by March 20, 2003.

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, as amended, is consistent with the 
requirements of section 15A of the Act \19\ and the rules and 
regulations thereunder applicable to a national securities 
association.\20\ Specifically, the Commission believes that the 
proposal is consistent with section 15A(b)(6) of the Act.\21\ The 
Commission believes that the availability of the Notes will provide an 
instrument for investors to achieve desired investment objectives 
through the purchase of a publicly-traded debt product linked to the 
Select Ten 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 Select Ten 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 Nasdaq listing standards applicable to the Notes 
are consistent with the Act.
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    \19\ 15 U.S.C. 78o-3.
    \20\ 15 U.S.C. 78o-3(b)(6). 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).
    \21\ Id.
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    The Notes are non-convertible and will conform initially to the 
Nasdaq listing criteria for other securities under Rule 4420(f), and 
continued listing criterion for other securities pursuant to Rule 
4450(c). 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 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 Notes are non-leveraged, non-principal protected instruments. 
The Notes are debt instruments whose price will be derived and based 
upon the value of the Select Ten 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.\22\ Thus, if the Select Ten 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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    \22\ The Commission recognizes that during a 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 Select Ten Index at such repurchase date.
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    The Commission notes that Nasdaq'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 Nasdaq 
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

[[Page 9103]]

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. In particular, Nasdaq will advise members 
recommending a transaction in the Notes to: (1) Determine that such 
transaction is suitable for the customer; and (2) have a reasonable 
basis for believing that the customer can evaluate the special 
characteristics of, and is able to bear the financial risks of, such a 
transaction. Based on these factors, the Commission finds that the 
proposal to trade the Notes is consistent with section 15(b)(6) of the 
Act.\23\ The Commission also notes that Merrill Lynch will deliver a 
prospectus in connection with the initial purchase of the Notes.
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    \23\ 15 U.S.C. 78o-3(b)(6).
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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 Nasdaq's listing standards in Rule 4420(f), 
which provide the only issuers satisfying substantial asset and equity 
requirements may issue securities such as the Notes. In addition, 
Nasdaq's ``other securities'' listing standards further require that 
the Notes have at least $4 million in market value.\24\ In any event, 
financial information regarding Merrill Lynch, in addition to the 
information on the Underlying Index, will be publicly available.\25\
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    \24\ See NASD Rule 4420(f)(1).
    \25\ The companies that comprise the Select Ten 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,\26\ 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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    \26\ 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 Amex maintains the Select Ten Index and states that it has 
sole discretion in determining, calculating, and maintaining the Index. 
The Commission notes that Nasdaq is relying on Amex to calculate 
continuously and disseminate the Index value every fifteen seconds over 
the Consolidated Tape Association's Network B. The Commission considers 
the dissemination of this Index value important to this product's 
approval and expects Nasdaq to be ultimately responsible for such 
dissemination.\27\ The Commission also notes that Amex could 
discontinue publication of the Select Ten Index and Amex or another 
entity could publish a successor or substitute index that the 
calculation agent,\28\ in its sole discretion, could deem a comparable 
successor index. Also, Amex could discontinue publication of the Select 
Ten Index and the calculation agent could not select a successor index. 
In such a case, the calculation agent will compute a substitute value 
for the Select Ten Index in accordance with the procedures last used to 
calculate the Select Ten Index before any discontinuance. If Amex 
discontinues publication of the Select Ten Index before the period 
during which the Redemption Amount is to be determined and the 
calculation agent determines that no successor index is available at 
that time, then on each business day until the earlier to occur of (1) 
the determination of the Ending Value or (2) a determination by the 
calculation agent that a successor index is available, the calculation 
agent will determine the value that would be used in computing the 
Redemption Amount as if that day were a calculation day. The Commission 
notes that these risks should be disclosed in the circular that Nasdaq 
provides to its members.
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    \27\ Nasdaq represents that, in the event that Amex discontinues 
the publication of the Select Ten Index, Nasdaq will facilitate the 
calculation and dissemination every 15 seconds of a value of a 
successor index either through the facilities of Nasdaq or those of 
an outside provider that is an independent calculation agent (e.g., 
not Merrill Lynch), unless otherwise approved by the Commission. See 
Amendment No. 1, supra n. 3.
    \28\ The Commission notes that in approving this product any 
such calculation agent that calculates and disseminates the value of 
a comparable successor index should be independent of the issuer of 
the Notes.
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    The Commission also notes that, at the outset, securities in the 
Select Ten Index will represent approximately an equal percentage of 
the starting value of the Index, but the Index will only be rebalanced 
on an annual basis. The Commission notes that the Select Ten Index is 
composed of stocks with significant market capitalization and average 
daily trading volume. The portfolio of securities underlying the Index 
will be rebalanced annually so as to include the ten highest dividend 
yielding stocks in the DJIA.
    In addition, Nasdaq's 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 Nasdaq 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 measure on 
which the Select Ten Index is based (the DJIA), is broad-based and 
independent of both Nasdaq and the Issuer, factors that the Commission 
believes should act to minimize the possibility of manipulation.
    Nasdaq has requested that the Commission find good cause for 
approving the proposed rule change, as amended, prior to the thirtieth 
day after the date of publication of notice thereof in the Federal 
Register. Nasdaq has requested accelerated approval because this 
product is similar to several other instruments currently traded on 
Nasdaq. In determining to grant the accelerated approval for good 
cause, the Commission notes that it has previously approved the listing 
of securities and options on securities the performance of which has 
been linked to or based on an index of the top dividend yielding stocks 
of the DJIA. 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, as amended, 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,\29\ that the proposed rule change, as amended (SR-NASD-2003-20) is 
hereby approved on an accelerated basis.
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    \29\ 15 U.S.C. 78s(b)(2).


[[Page 9104]]


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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\30\
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    \30\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-4577 Filed 2-26-03; 8:45 am]
BILLING CODE 8010-01-P