[Federal Register Volume 68, Number 152 (Thursday, August 7, 2003)]
[Notices]
[Pages 47121-47124]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-20183]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-48280; File No. SR-NASD-2003-119]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by National Association of Securities Dealers, Inc. Relating to 
the Listing and Trading of Index Leveraged Stock Market Return 
Securities Based Upon the Nasdaq-100 Index

August 1, 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 August 1, 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'' or ``SEC'') the proposed rule change as described in 
Items I, II, and III below, which Items have been prepared by Nasdaq.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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    The Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.

[[Page 47122]]

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

    Nasdaq proposes to list and trade Index LeverAged StockMarkEt 
Return Securities SM linked to the Nasdaq-100[reg] Index 
(``Notes'') issued by Citigroup Global Markets Holdings Inc. 
(``CGMHI'').

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 IV below. Nasdaq 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 Index LeverAged StockmarkEt 
Return Securities, the return on which is based upon the Nasdaq-100 
Index.\3\
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    \3\ The Nasdaq-100 Index is a modified capitalization-weighted 
index of 100 of the largest non-financial companies listed on The 
Nasdaq National Market tier of The Nasdaq Stock Market. The Index 
constitutes a broadly diversified segment of the largest securities 
listed on The Nasdaq Stock Market and includes companies across a 
variety of major industry groups. The securities in the Index must, 
among other things, have an average daily trading volume on Nasdaq 
of at least 200,000 shares.
    In order to limit domination of the Index by a few large stocks, 
the Index is calculated under a ``modified capitalization-weighted'' 
methodology, which is a hybrid between equal weighting and 
conventional capitalization weighting. Under the methodology 
employed, on a quarterly basis coinciding with Nasdaq's quarterly 
scheduled weight adjustment procedures, the Index Securities are 
categorized as either ``Large Stocks'' or ``Small Stocks'' depending 
on whether their current percentage weights (after taking into 
account such scheduled weight adjustments due to stock repurchases, 
secondary offerings, or other corporate actions) are greater than, 
or less than or equal to, the average percentage weight in the Index 
(i.e., as a 100-stock index, the average percentage weight in the 
Index is 1.0%). Such quarterly examination will result in an Index 
rebalancing if either one or both of the following two weight 
distribution requirements are not met: (1) The current weight of the 
single largest market capitalization Index component security must 
be less than or equal to 24.0%, and (2) the ``collective weight'' of 
those Index component securities whose individual current weights 
are in excess of 4.5%, when added together, must be less than or 
equal to 48.0%. Index securities are ranked by market value and are 
evaluated annually to determine which securities will be included in 
the Index. Moreover, if at any time during the year an Index 
security is no longer trading on the Nasdaq Stock Market, or is 
otherwise determined by Nasdaq to become ineligible for continued 
inclusion in the Index, the security will be replaced with the 
largest market capitalization security not currently in the Index 
that meets the Index eligibility criteria.
    For a detailed description of the Nasdaq-100 Index, see the 
prospectus supplement that will be filed by CGMHI with the 
Commission prior to the issuance of the Notes.
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    Under NASD Rule 4420(f), Nasdaq may approve for listing and trading 
securities which cannot be readily categorized under traditional 
listing guidelines.\4\ Nasdaq proposes to list for trading notes based 
on the Nasdaq-100 Index under NASD Rule 4420(f).
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    \4\ See Securities Exchange Act Release No. 32988 (September 29, 
1993); 58 FR 52124 (October 6, 1993).
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    The Notes, which will be registered under Section 12 of the Act, 
will initially be subject to Nasdaq's listing criteria for other 
securities under NASD Rule 4420(f). Specifically, under NASD 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.
    CGMHI and the Notes will satisfy the criteria set forth above. In 
addition, CGMHI satisfies the listed marketplace requirement set forth 
in NASD Rule 4420(f)(2).\5\ 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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    \5\ NASD 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 NASD 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 consider prohibiting the continued listing 
of the Notes if CGMHI is not able to meet its obligations on the Notes.
    The Notes are a series of senior unsecured debt securities that 
will be issued by CGMHI. Each Index LASERS represents a principal 
amount of $10. Index LASERS may be transferred only in units of $10 and 
integral multiples of $10. The Notes will not pay interest and are not 
subject to redemption by CGMHI or at the option of any beneficial owner 
before maturity, which is expected on or about one year after the issue 
date.\6\
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    \6\ The actual maturity date will be determined on the day the 
Notes are priced for initial sale to the public.
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    At maturity, a beneficial owner will receive an amount in cash 
equal to $10 plus an index return amount, which may be positive, zero 
or negative. Because the index return amount may be negative, the 
maturity payment could be less than the $10 principal amount per Index 
LASERS and could be zero.
    The index return amount will be based on the index return of the 
Nasdaq-100 Index. The index return will equal a fraction, the numerator 
of which is the Ending Value \7\ minus the Starting Value \8\ and the 
denominator of which is the Starting Value, provided that the index 
return will not in any circumstances be greater than a cap which is 
expected to be approximately 5% to 6%.\9\ How the index return is 
calculated will depend on whether the index return is positive, zero or 
negative.
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    \7\ The Ending Value will be the closing value of the Nasdaq-100 
Index on approximately the third index business day before the 
maturity date of the Notes.
    \8\ The Starting Value will equal the closing value of the 
Nasdaq-100 Index on the date the Notes are priced for initial sale 
to the public.
    \9\ The actual cap will be determined on the date the Notes are 
priced for initial sale to the public.
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    If the index return is positive, the index return amount will equal 
the

[[Page 47123]]

product of: (i) $10, (ii) the upside participation rate, and (iii) the 
index return. The upside participation rate is expected to be 
approximately 500% to 600%.\10\ Thus, if the ending value of the 
Nasdaq-100 Index exceeds its starting value by approximately 5% to 6% 
or less, the appreciation on an investment in the Notes will be 
approximately 5 to 6 times the return on an instrument directly linked 
to the Nasdaq-100 Index because of the upside participation rate. 
However, because the appreciation cap, together with the upside 
participation rate, limits the maximum index return amount at maturity 
to approximately 25% to 36% of the principal amount of the Notes, in no 
circumstances will the payment received by a beneficial owner at 
maturity be more than approximately $2.50 to $3.60 per Index LASERS.
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    \10\ The upside participation rate will be determined on the 
date the Notes are priced for initial sale to the public.
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    If the index return is negative and the value of the Nasdaq-100 
Index on any index business day after the date the Notes are priced for 
initial sale to the public up to and including approximately the third 
index business day before maturity (whether intra-day or at the close 
of trading on any index business day) is less than or equal to 
approximately 75% to 80% of the starting value of the Nasdaq-100 Index, 
then the index return amount will equal the product of (i) $10, (ii) 
the downside participation rate, and (iii) the index return. The 
downside participation rate is expected to be approximately 200%.\11\ 
Thus, the return on the Notes will be less than the return from an 
investment in an instrument directly linked to the Nasdaq-100 Index 
because the downside participation rate increases the participation in 
the index's depreciation by approximately 200%. Because of the downside 
participation rate, the payment at maturity will be zero if the ending 
value of the Nasdaq-100 Index is less than or equal to approximately 
50% of its starting value. Consequently, investors could lose all or a 
significant portion of their investment if the Nasdaq-100 Index 
decreases as described above.
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    \11\ The downside participation rate will be determined on the 
date the Notes are priced for initial sale to the public.
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    If the index return is negative and the value of the index on any 
index business day after the date the Notes are priced for initial sale 
to the public up to and including approximately the third index 
business day before maturity is not less than or equal to approximately 
75% to 80% of the starting value of the Nasdaq-100 Index, then the 
index return amount will be zero and the maturity payment will be $10 
per Index LASERS.
    If the index return is zero, then the index return amount will be 
zero and the maturity payment will be $10 per Index LASERS.
    The Notes are cash-settled in U.S. dollars and do not give the 
holder any right to receive a portfolio security, dividend payments or 
any other ownership right or interest in the portfolio or index of 
securities comprising the Nasdaq-100 Index. The Commission has 
previously approved the listing of options on, and other securities the 
performance of which have been linked to or based on, the Nasdaq-100 
Index.\12\ These options and other securities, however, do not have a 
downside participation rate as described above.
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    \12\ See Securities Exchange Act Release No. 45429 (February 11, 
2002), 67 FR 7438 (February 19, 2002) (approving the listing and 
trading of Enhanced Return Notes Linked to the Nasdaq-100 Index); 
Securities Exchange Act Release No. 45024 (November 5, 2001), 66 FR 
56872 (November 13, 2001) (approving the listing and trading of 
Enhanced Return Notes Linked to the Nasdaq-100 Index); Securities 
Exchange Act Release No. 44913 (October 9, 2001), 66 FR 52469 
(October 15, 2001) (approving the listing and trading of Performance 
Leveraged Upside Securities based upon the performance of the 
Nasdaq-100 Index); Securities Exchange Act Release No. 43000 (June 
30, 2000), 65 FR 42409 (July 10, 2000) (approving the listing and 
trading of options based upon one-tenth of the value of the Nasdaq-
100 Index); Securities Exchange Act Release No. 41119 (February 26, 
1999), 64 FR 11510 (March 9, 1999) (approving the listing and 
trading of Portfolio Depositary Receipts based on the Nasdaq-100 
Index); Securities Exchange Act Release No. 33428 (January 5, 1994), 
59 FR 1576 (January 11, 1994) (approving the listing and trading of 
options on the Nasdaq-100 Index).
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    As of May 31, 2003, the adjusted market capitalization of the 
securities included in the Nasdaq-100 Index ranged from a high of 
$170.3 billion to a low of $2.2 billion. The average daily trading 
volume for these same securities for the last five months, as of the 
same date, ranged from a high of 68.1 million shares to a low of 
527,400 shares.
    Since the Notes will be deemed equity securities for the purpose of 
NASD Rule 4420(f), the NASD and Nasdaq's existing equity trading rules 
will apply to the Notes. Specifically, the Notes will be subject to the 
equity margin rules. In addition, the regular equity trading hours of 
9:30 am to 4:00 pm will apply to transactions in the Notes.
    Due to the leveraged nature of the Notes, Nasdaq proposes requiring 
that the Notes only be sold to investors whose accounts have been 
approved for options trading pursuant to NASD Rule 2860(b)(16). In 
addition, the NASD's options suitability standards will apply to 
recommendations regarding the Notes.\13\ Furthermore, discretionary 
orders in the Notes must be approved and initialed on the day entered 
by the branch office manager or other Registered Options Principal, 
provided that if the branch office manager is not a Registered Options 
Principal, such approval shall be confirmed within a reasonable time by 
a Registered Options Principal.\14\ Lastly, as previously described, 
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.
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    \13\ See NASD Rule 2860(b)(19).
    \14\ See NASD Rule 2860(b)(18).
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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.
    CGMHI will deliver a prospectus in connection with the initial 
purchase of the Notes. The procedure for the delivery of a prospectus 
will be the same as CGMHI's current procedure involving primary 
offerings.
2. Statutory Basis
    Nasdaq believes that the proposed rule change is consistent with 
the provisions of Section 6(b)(5),\15\ in particular, in that it is 
designed to promote just and equitable principles of trade, to foster 
cooperation and coordination with persons engaged in regulating, 
clearing, settling, processing information with respect to, and 
facilitating transaction in securities, and, in general, to protect 
investors and the public interest. Specifically, the proposed rule 
change will provide investors with another investment vehicle based on 
the Nasdaq-100 Index.
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    \15\ 15 U.S.C. 78f(b).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    Nasdaq does not believe that the proposed rule change will impose 
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 on the proposed rule change were neither solicited 
nor received.

[[Page 47124]]

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Nasdaq has requested that the Commission shorten the comment period 
and approve the filing on an accelerated basis in order to allow the 
listing and trading of the Notes to begin the week of August 25th, 
2003. Accordingly, Nasdaq requests that the Commission find good cause 
pursuant to Section 19(b)(2) for approving the proposed rule change 
prior to the 30th day after its publication in the Federal Register.

IV. 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, by August 22, 2003. Persons making 
written ssubmissions 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-2003-119 and should be submitted by August 22, 2003.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\16\
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    \16\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-20183 Filed 8-6-03; 8:45 am]
BILLING CODE 8010-01-P