[Federal Register Volume 68, Number 150 (Tuesday, August 5, 2003)]
[Notices]
[Pages 46255-46259]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-19824]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-48253; File No. SR-NASD-2003-115]


Self Regulatory Organizations; Notice of Filing and Order 
Granting Accelerated Approval of a Proposed Rule Change by the National 
Association of Securities Dealers, Inc. Relating to the Listing and 
Trading of Industrial 15 Notes

July 29, 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 July 29, 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 
(``Commission'') the proposed rule change as described in Items I and 
II below, which Items have been prepared by Nasdaq. The Commission is 
publishing this notice to solicit comments on the proposed rule change 
from interested persons and to approve 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 the 
Substance of the Proposed Rule Change

    Nasdaq proposes to list and trade Strategic Return Notes' linked to 
the Industrial 15 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. Nasdaq has prepared summaries, set forth in Sections A, 
B,

[[Page 46256]]

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 the fifteen highest dividend yielding stocks from a group of 
certain stocks in Standard & Poor's (``S&P'') Industrial Index \3\ from 
year to year that meet the additional criteria set forth below 
(``Industrial 15 Index'' or ``Index'').\4\
    Under NASD 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 
the Notes under NASD Rule 4420(f). Nasdaq represents that the 
Industrial 15 Index is to be determined, calculated and maintained 
solely by the American Stock Exchange LLC (``Amex'').\6\
    The Notes will initially be subject to Nasdaq's listing criteria 
for other securities under NASD Rule 4420(f). Specifically, under NASD 
Rule 4420(f)(1): \7\
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    \3\ The S&P Industrial Index is a subset of the S&P 500 Index 
consisting of the largest 400 industrial stocks of the S&P 500. The 
S&P Industrial Index is calculated by starting with the S&P 500 
Index and then excluding financial, utility and transportation 
stocks.
    \4\ As of June 24, 2003, the portfolio of securities comprising 
the Industrial 15 Index are as follows: Abbott Laboratories; 
Albertson's, Inc.; Anheuser-Busch Companies Inc.; Bristol-Myers 
Squibb Company; The Clorox Company; ConAgra Foods, Inc.; Colgate-
Palmolive Company; Emerson Electric Co.; Ingersoll-Rand Company 
Limited; Johnson Controls, Inc.; Paychex, Inc.; Pfizer, Inc.; Rohm 
and Haas Company; Schering-Plough Corporation; and Wm. Wrigley Jr. 
Company.
    The portfolio of securities will include the fifteen highest 
dividend yielding stocks from a group of certain stocks in the S&P 
Industrial Index for that year and Nasdaq represents that the Amex 
will not have any discretion in the selection process.
    \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, Nasdaq represents that 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.
    \7\ Nasdaq represents that Merrill Lynch and the Notes satisfy 
these listing criteria. Telephone call between Sapna C. Patel, 
Attorney, Division of Market Regulation, Commission, and John 
Nachmann, Senior Attorney, Office of the General Counsel, Nasdaq, on 
July 29, 2003.

    (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.

    In addition, Nasdaq represents that Merrill Lynch satisfies the 
listed marketplace requirement set forth in NASD Rule 4420(f)(2).\8\ 
Lastly, pursuant to NASD 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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    \8\ NASD Rule 4420(f)(2) requires issuers of securities 
designated pursuant to this paragraph to be listed on Nasdaq 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 NASD 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 NASD Rule 
4310(c)(1). Nasdaq will also prohibit the continued listing of the 
Notes if Merrill Lynch is not able to meet its obligations on the 
Notes.\9\
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    \9\ Telephone call between Sapna C. Patel, Attorney, Division of 
Market Regulation, Commission, and John Nachmann, Senior Attorney, 
Office of the General Counsel, Nasdaq, on July 29, 2003.
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    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 Industrial 15 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 Industrial 15 
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, the investors may 
have the right to require Merrill Lynch to repurchase the Notes at a 
redemption amount based on the value of the Industrial 15 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 
Industrial 15 Index securities.
    The Industrial 15 Index will consist of the a portfolio of the 
fifteen qualifying stocks (``Qualifying Stocks'') with the highest 
dividend yields at the time of initial composition or any 
reconstitution of the Industrial 15 Index. Qualifying Stocks are those 
stocks from the S&P Industrial Index that are (1) In the top 75% of the 
Index, as measured by market capitalization after elimination of stocks 
included in the Dow Jones Industrial Average (``DJIA''), and (2) have 
an S&P Common Stock Ranking of A or A+.
    Components of the Industrial 15 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 Industrial 15 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 Industrial 15 Index may have an average monthly 
trading volume of 500,000 shares or more in the last six months; (3) 
90% of the Industrial 15 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

[[Page 46257]]

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 July 9, 2003, Nasdaq represents that the market 
capitalization of the portfolio of securities representing the 
Industrial 15 Index ranged from a high of $258.6 billion to a low of 
$6.7 billion. The average monthly trading volume for the last six 
months, as of the same date, ranged from a high of 20.2 million shares 
to a low of 0.6 million shares. Moreover, as of July 29, 2003, Nasdaq 
represents that all of the components comprising the portfolio of 
securities representing the Industrial 15 Index were eligible for 
standardized options trading pursuant to Amex Rule 915.
    The value of the Industrial 15 Index at any time will equal: (1) 
The sum of the products of the current market price for each stock 
underlying the Industrial 15 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\ Nasdaq represents that 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 
Industrial 15 Index 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 Industrial 15 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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    Nasdaq represents that, 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 Industrial 15 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 Industrial 15 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 immediate preceding 
calendar quarter.
    Nasdaq represents that, as of the close of business on each 
anniversary date (June 26th of each year, which is the anniversary of 
the date the Industrial 15 Index was originally calculated and 
disseminated) through the applicable anniversary date in the year 
preceding the maturity of the Notes, the portfolio of securities 
comprising the Industrial 15 Index will be reconstituted by the Amex so 
as to include the fifteen Qualifying Stocks in the S&P Industrial Index 
having the highest dividend yield on the second scheduled index 
business day prior to the applicable anniversary date. Nasdaq also 
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 represents that the Amex will publish a notice to 
advise investors of changes to the securities underlying the 
Industrial 15 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 Industrial 15 Index will 
represent 6.67% of the value of the Industrial 15 Index. To effectuate 
this, Nasdaq represents 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 Industrial 15 Index 
value at the close of business on such anniversary date. For example, 
if the Industrial 15 Index value at the close of business on an 
anniversary date was 150, then each of the fifteen new stocks 
comprising the Industrial 15 Index would be allocated a portion of the 
value of the Index equal to 10, and if the closing market price of one 
such new stock on the anniversary date was 20, the applicable share 
multiplier would be 0.5. Conversely, if the Industrial 15 Index value 
was 60, then each of the fifteen new stocks comprising the Industrial 
15 Index would be allocated a portion of the value of the Industrial 15 
Index equal to 4, and if the closing market price of one such new stock 
on the anniversary was 20, 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 Industrial 15 Index at least one 
day prior to each anniversary date.
    The multiplier of each component stock in the Industrial 15 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 Industrial 15 
Index issues to all of its shareholders publicly traded stock of 
another issuer, such new securities will be added to the portfolio 
comprising the Industrial 15 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 Industrial 15 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 Industrial 15 Index 
value prior to the subsequent anniversary date. For example, if a 
company included in the Industrial 15 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 Industrial 15 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 
Industrial 15 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 Industrial 15 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 Industrial 15 Index for 
so long as no market price exists for that security or until the 
subsequent anniversary date. If the stock remains in the Industrial 15 
Index, the multiplier of that security in the Industrial 15 Index may 
be adjusted to maintain the component's relative weight in the 
Industrial 15 Index at the level immediately prior to the corporate 
action. In all cases, the multiplier will

[[Page 46258]]

be adjusted, if necessary, to ensure Industrial 15 Index continuity.
    Nasdaq represents that the Amex will calculate the Industrial 15 
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.\14\ 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.
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    \14\ Nasdaq will prohibit the continued listing of the Notes if 
the Amex discontinues publication of the Industrial 15 Index and a 
successor index or index value is not disseminated every 15 seconds 
during calculation days. Telephone call between Sapna C. Patel, 
Attorney, Division of Market Regulation, Commission, and John 
Nachmann, Senior Attorney, Office of the General Counsel, Nasdaq, on 
July 29, 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.\15\ 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 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 4:00 pm will apply to transactions 
in the Notes.
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    \15\ 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 is consistent with 
the provisions of Section 15A of the Act,\16\ in general, and with 
Section 15A(b)(6) of the Act,\17\ 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 will provide investors with another investment 
vehicle based on an index of the fifteen highest dividend yielding 
stocks from a group of certain stocks in the S&P Industrial Index.
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    \16\ 15 U.S.C. 78o-3.
    \17\ 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 will result 
in any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act, as amended.

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 in the 
Commission's Public Reference Room. Copies of such filing will also be 
available for inspection and copying at the principal office of the 
NASD. All submissions should refer to file number SR-NASD-2003-115 and 
should be submitted by August 26, 2003.

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 
15A(b)(6) of the Act.\18\ The Commission notes that it has previously 
approved the listing of Industrial 15 Index notes on the Amex.\19\ 
Furthermore, the Commission finds that this proposal is similar to 
several other approved instruments currently listed and traded on the 
Amex and the NYSE.\20\ Accordingly, the Commission finds that the 
listing and trading of the Notes on Nasdaq is consistent with the Act 
and will promote just and equitable 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 15A(b)(6) of 
the Act.\21\
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    \18\ 15 U.S.C. 78o-3(b)(6).
    \19\ See Securities Exchange Act Release No. 44437 (June 18, 
2001) 66 FR 33585 (June 22, 2001) (accelerated approval for listing 
and trading of Industrial 15 Index on the Amex).
    \20\ See Securities Exchange Act Release Nos. 44342 (May 23, 
2001), 66 FR 29613 (May 31, 2001) (accelerated approval order for 
the listing and trading of Select Ten Notes); 42582 (March 27, 
2000), 65 FR 17685 (April 4, 2000) (accelerated approval order for 
the listing and trading of notes linked to a basket of no more than 
twenty equity securities) (File No. SR-Amex-99-42); 41546 (June 22, 
1999), 64 FR 35222 (June 30, 1999) (accelerated approval order for 
the listing and trading of notes linked to a narrow based index with 
a non-principal protected put option) (File No. SR-Amex-99-15); 
39402 (December 4, 1997), 62 FR 65459 (December 12, 1997) (notice of 
immediate effectiveness for the listing and trading non-principal 
protected commodity preferred securities linked to certain 
commodities indices) (File No. SR-Amex-97-47); 37533 (August 7, 
1996), 61 FR 42075 (August 13, 1996) (accelerated approval order for 
the listing and trading of the Top Ten Yield Market Index Target 
Term Securities (``MITTS'')) (File No. SR-Amex-96-28); 33495 
(January 19, 1994), 59 FR 3883 (January 27, 1994) (accelerated 
approval order for the listing and trading of Stock Upside Note 
Securities) (File No. SR-Amex-93-40); 32840 (September 2, 1993), 58 
FR 47485 (September 9, 1993) (accelerated approval order for the 
listing and trading of MITTS on the NYSE) (File No. SR-NYSE-93-31); 
and 32343 (May 20, 1993), 58 FR 30833 (May 27, 1993) (accelerated 
approval order for the listing and trading of non-principal 
protected notes linked to a single equity security) (File No. SR-
Amex-92-42).
    \21\ 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).
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    The Notes are not leveraged instruments; however, their price will 
still be derived and based upon the

[[Page 46259]]

underlying linked security. 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. Nonetheless, because 
the final rate of return of the Notes is derivatively priced, based on 
the performance of a portfolio of securities, and the components of the 
Industrial 15 Index are more likely to change each year, over the term 
of the Notes, than products previously issued, there are several issues 
regarding the trading of this type of product.
    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 and the suitability, disclosure, and 
compliance requirements noted above, the Commission believes that 
Nasdaq has addressed adequately the potential problems that could arise 
from the hybrid nature of the Notes. Moreover, Nasdaq will distribute a 
circular to its membership calling attention to the specific risks 
associated with the Notes.
    In approving the product, the Commission recognizes that the 
components are likely to change each year over the life of the product. 
Nevertheless, the Commission believes that this is acceptable because 
the Amex has clearly stated the guidelines and formula for replacing 
components from a specific group of well-known and highly capitalized 
securities. Each year, as noted above, the portfolio of securities 
comprising the Industrial 15 Index will represent the fifteen highest 
dividend yielding Qualifying Stocks in the S&P Industrial Index. Nasdaq 
represents that the Amex will do the calculation for replacements based 
on a set formula to determine which of the S&P Industrial Index 
securities will be in the Index for the following year. The Commission 
believes that within these confines the potential frequent changes in 
the components of the Industrial 15 Index are reasonable and will meet 
the expectation of investors.
    In addition, the Commission notes that the Notes are non-principal 
protected. The Notes may not have a minimum principal amount that will 
be repaid, and payments on the Notes prior to or at maturity may be 
less than their original issue price. The Commission also recognizes 
that during the designated month, investors may require the issuer to 
repurchase the Notes at a redemption amount based on the value of the 
Industrial 15 Index at such repurchase date.
    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 NASD Rules 
4420(f)(1) and 4420(f)(2), which provide that only issuers satisfying 
substantial asset and equity requirements may issue securities such as 
the Notes. In addition, Nasdaq's hybrid listing standards further 
require that the Notes have at least $4 million in market value.\22\ In 
any event, financial information regarding Merrill Lynch, in addition 
to the information on the issuers of the underlying securities 
comprising the Industrial 15 Index, will be publicly available.\23\
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    \22\ See NASD Rule 4420(f)(1)(D).
    \23\ The companies that comprise the Industrial 15 Index are 
reporting companies under 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. As discussed in the prior 
approval orders for similar instruments (e.g., the Select Ten Notes and 
the Industrial 15 Notes for the Amex), the Commission believes this 
concern is minimal given the size of the Notes issuance in relation to 
the net worth of Merrill Lynch.
    The Commission also believes that the listing and trading of the 
Notes should not unduly impact the market for the underlying securities 
comprising the Industrial 15 Index. First, the underlying securities 
comprising the S&P Industrial Index, from which the Industrial 15 Index 
components are selected, are well-capitalized, highly liquid stocks. 
Second, because all of the components of the Industrial 15 Index will 
be equally weighted, initially and immediately following each annual 
reconstitution of the Industrial 15 Index, no single stock or group of 
stocks will likely dominate the Industrial 15 Index. Finally, the 
issuers of the underlying securities comprising the Industrial 15 Index 
are subject to reporting requirements under the Act, and all of the 
portfolio securities are either listed or traded on, or traded through 
the facilities of, U.S. securities markets. Additionally, Nasdaq's 
surveillance procedures will serve to deter as well as detect any 
potential manipulation.
    Finally, the Commission notes that the value of the Industrial 15 
Index will be disseminated at least once every fifteen seconds 
throughout the trading day. The Commission believes that providing 
access to the value of the Industrial 15 Index at least once every 
fifteen seconds throughout the 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 thirtieth day after the date of publication of 
notice thereof in the Federal Register. In determining to grant the 
accelerated approval for good cause, the Commission notes that the 
Industrial 15 Index is a portfolio of highly capitalized and actively 
traded securities similar to hybrid securities products that have been 
approved by the Commission for U.S. exchange trading and is also 
similar to several other instruments currently listed and traded on the 
Amex and the NYSE, including the Industrial 15 Notes on the Amex.\24\ 
Additionally, the Notes will be listed pursuant to existing hybrid 
security listing standards as described above. Based on the above, the 
Commission finds, consistent with Section 15A(b) of the Act,\25\ that 
there is good cause for accelerated approval of the product.
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    \24\ See supra notes 19-20.
    \25\ 15 U.S.C. 78o-3(b).
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V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\26\ that the proposed rule change (SR-NASD-2003-115), is hereby 
approved on an accelerated
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    \26\ 15 U.S.C. 78s(b)(2). basis.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\27\
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    \27\ 17 CFR 200.30-3(a)(12).

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-19824 Filed 8-4-03; 8:45 am]
BILLING CODE 8010-01-P