[Federal Register Volume 68, Number 181 (Thursday, September 18, 2003)]
[Notices]
[Pages 54758-54761]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-23798]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-48486; File No. SR-Amex-2003-74]


Self-Regulatory Organizations; Notice of Filing and Order 
Granting Accelerated Approval of a Proposed Rule Change by the American 
Stock Exchange LLC Relating to the Listing and Trading of Contingent 
Principal Protection Notes Linked to the Performance of the Standard & 
Poor's 500 Stock Index

September 11, 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 13, 2003, the American Stock Exchange LLC (``Amex'' or 
``Exchange'') 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 the Exchange. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons and to grant accelerated 
approval of the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240. 19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to list and trade under Section 107A of the 
Amex Company Guide (``Company Guide'') notes linked to the performance 
of the Standard & Poor's 500 Index (``S&P 500'' or ``Index'').

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

    In its filing with the Commission, the Amex included statements 
concerning the purpose of, and basis for, the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item III below. The Amex has prepared summaries, set forth in sections 
A, B, and C below, of the most significant aspects of such statements.

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

1. Purpose
    Under Section 107A of the Company Guide, the Exchange may approve 
for listing and trading securities which cannot be readily categorized 
under the listing criteria for common and preferred stocks, bonds, 
debentures, or warrants.\3\ The Amex proposes to list for trading under 
Section 107A of the Company Guide notes, the performance of which is 
linked to the Index (``Contingent Principal Protected Notes'' or 
``Notes'').\4\ The Exchange represents that the Index value will be 
disseminated at least once every fifteen seconds throughout the trading 
day.\5\ The Index is determined, calculated and maintained solely by 
S&P.\6\ The Notes will provide for an uncapped participation in the 
positive performance of the Index during their term while also reducing 
the risk exposure to the principal investment amount as long as the 
Index does not at any time decline to a pre-established level to be 
determined at the time of issuance (``Contingent Level'').\7\ This 
Contingent Level will be a pre-determined percentage decline from the 
level of the Index at the close of the market on the date the Notes are 
priced for initial sale to the public (``Initial Level''). A decline of 
the Index to the Contingent Level is referred to as a ``Contingent 
Event.'' If there is a Contingent Event, at any time during the term of 
the Notes, then at maturity, the holder's principal investment of 
$1,000 will be reduced to the Contingent Level, even if the Index later 
rises.\8\
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    \3\ See Securities Exchange Act Release No. 27753 (March 1, 
1990), 55 FR 8626 (March 8, 1990) (order approving File No. SR-Amex-
89-29).
    \4\ Credit Suisse First Boston (USA), Inc. (``CSFB'') and 
Standard & Poor's Corporation (``S&P'') have entered into a non-
exclusive license agreement providing for the use of the Index by 
CSFB and certain affiliates and subsidiaries in connection with 
certain securities including these Notes. S&P is not responsible and 
will not participate in the issuance and creation of the Notes.
    \5\ Telephone conversation between Jeffrey P. Burns, Associate 
General Counsel, Amex and Florence Harmon, Senior Special Counsel, 
Division of Market Regulation (``Division''), Commission, dated 
September 11, 2003.
    \6\ Amex represents that the Index is a broad-based stock index, 
which provides an indication of the performance of the U.S. equity 
market. The Index is a capitalization-weighted index reflecting the 
total market value of 500 widely held component stocks relative to a 
particular base period. The Index is computed by dividing the total 
market value of the 500 stocks by an Index divisor. The Index 
Divisor keeps the Index comparable over time to its base period of 
1941-1943 and is the reference point for all maintenance 
adjustments. The securities included in the Index are listed on the 
Amex, New York Stock Exchange, Inc. (``NYSE'') or traded through 
Nasdaq Stock Market, Inc. (``Nasdaq''). The Index reflects the price 
of the common stocks of 500 companies without taking into account 
the value of the dividend paid on such stocks.
    \7\ The issuer represents to Amex that the intended Contingent 
Level will be a decline in the Initial Level of between 55 to 60%. 
Telephone conversation between Jeffrey P. Burns, Associate General 
Counsel, Amex and Florence Harmon, Senior Special Counsel, Division, 
Commission, dated September 11, 2003.
    \8\ Id.
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    The Contingent Principal Protection Notes will initially conform to 
the listing guidelines under Section 107A,\9\ and continued listing 
guidelines under Sections 1001-1003,\10\ of the Company

[[Page 54759]]

Guide. The Notes are senior non-convertible debt securities of CSFB. 
The Notes will have a term of five (5) years. CSFB will issue the Notes 
in denominations of whole units (``Unit''), with each Unit representing 
a single Note. The original public offering price will be $1,000 per 
Unit. The Notes will entitle the owner at maturity to receive at least 
100% of the principal investment amount, as long as the Index never 
experiences a Contingent Event. In this case, the holder of the Notes 
would receive the full principal investment amount of the Notes plus 
the percentage change of the Index during the term. Accordingly, even 
if the Index declines substantially but never reaches the Contingent 
Level, the holder will receive the principal investment amount of the 
Notes at maturity. If however, the Index experiences a Contingent Event 
during the term, the holder loses the ``principal protection'' and will 
be entitled to receive a payment on the Notes based on the percentage 
change of the Index, positive or negative. The Notes will not have a 
minimum principal investment amount that will be repaid, and 
accordingly, payment on the Notes prior to or at maturity may be less 
than the original issue price of the Notes. Accordingly, the Notes are 
not ``principal protected'' and are fully exposed to any decline in the 
level of the Index.\11\ The Notes are also not callable by the Issuer.
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    \9\ Pursuant to Section 107A of the Company Guide, the initial 
listing standards for the Notes will require: (1) A market value of 
at least $4 million; and (2) a term of at least one year. Because 
the Notes will be issued in $1,000 denominations, the minimum public 
distribution requirement of one million units and the minimum holder 
requirement of 400 holders do not apply. In addition, the listing 
guidelines provide that the issuer has assets in excess of $100 
million, stockholder's equity of at least $10 million, and pre-tax 
income of at least $750,000 in the last fiscal year or in two of the 
three prior fiscal years. In the case of an issuer which is unable 
to satisfy the earning criteria stated in Section 101 of the Company 
Guide, the Exchange will require the issuer to have the following: 
(1) Assets in excess of $200 million and stockholders' equity of at 
least $10 million; or (2) assets in excess of $100 million and 
stockholders' equity of at least $20 million.
    \10\ The Exchange's continued listing guidelines are set forth 
in Sections 1001 through 1003 of Part 10 to the Exchange's Company 
Guide. Specifically, Section 1002(b) of the Company Guide states 
that the Exchange will consider removing from listing any security 
where, in the opinion of the Exchange, it appears that the extent of 
public distribution or aggregate market value has become so reduced 
to make further dealings on the Exchange inadvisable. With respect 
to continued listing guidelines for distribution of the Notes, the 
Exchange will rely, in part, on the guidelines for bonds in Section 
1003(b)(iv). Section 1003(b)(iv)(A) provides that the Exchange will 
normally consider suspending dealings in, or removing from the list, 
a security if the aggregate market value or the principal amount of 
bonds publicly held is less than $400,000.
    \11\ A negative return of the Index will reduce the redemption 
amount at maturity with the potential that the holder of the Note 
could lose his entire investment amount.
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    The payment that a holder or investor of a Note would be entitled 
to receive (the ``Redemption Amount'') will depend on the relation of 
the level of the Index at the close of the market on a single business 
day (``Valuation Date'') shortly before maturity of the Notes (``Final 
Level'') and the closing level of the Index on the date the Notes are 
priced for initial sale to the public Initial Level. In addition, 
whether the Notes retain ``principal protection'' or are fully exposed 
to the performance of the Index is determined by whether the Index ever 
experiences a Contingent Event during the term of the Notes.
    If the Index never experiences a Contingent Event, the Redemption 
Amount per Unit will equal:
[GRAPHIC] [TIFF OMITTED] TN18SE03.000

subject to a minimum payment amount of $1,000.

    If the Index experiences a Contingent Event at any time during the 
term of the Notes, the Redemption Amount per Unit will equal:
[GRAPHIC] [TIFF OMITTED] TN18SE03.001

    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 Index. The Notes are designed for investors 
who want to participate or gain exposure to the Index, subject to a 
cap, and while partially limiting their investment risk and who are 
willing to forego market interest payments on the Notes during such 
term. The Commission has previously approved the listing of options on, 
and securities the performance of which have been linked to or based 
on, the Index.\12\
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    \12\ See Securities Exchange Act Release Nos. 46883 (November 
21, 2002), 67 FR 71216 (November 29, 2002) (approving the listing 
and trading of non-principal protected notes linked to the DJIA); 
46882 (November 21, 2002), 67 FR 71219 (November 29, 2002) 
(approving the listing and trading of non-principal protected notes 
linked to the Select Fifty Index); 45160 (December 17, 2001), 66 FR 
66485 (December 26, 2001) (approving the listing and trading of non-
principal protected exchangeable notes linked to the Balanced 
Strategy Index); and 44342 (May 23, 2001), 66 FR 29613 (May 31, 
2001) (approving the listing and trading of non-principal protected 
exchangeable notes linked to the Select Ten Index).
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    As of August 5, 2003, the market capitalization of the securities 
included in the Index ranged from a high of $279.526 billion to a low 
of $356 million. The average daily trading volume for these same 
securities for the last six (6) months ranged from a high of 39.915 
million shares to a low of 0.040 million shares respectively.
    Because the Notes are issued in $1,000 denominations, the Amex's 
existing floor trading rules will apply to the trading of the Notes. 
First, pursuant to Amex Rule 411, the Exchange will impose a duty of 
due diligence on its members and member firms to learn the essential 
facts relating to every customer prior to trading the Notes.\13\ 
Second, even though the Exchange's debt trading rules apply, the Notes 
will be subject to the equity margin rules of the Exchange.\14\ Third, 
the Exchange will, prior to trading the Notes, distribute a circular to 
the membership providing guidance with regard to member firm compliance 
responsibilities (including suitability recommendations) when handling 
transactions in the Notes and highlighting the special risks and 
characteristics of the Notes. With respect to suitability 
recommendations and risks, the Exchange will require members, member 
organizations and employees thereof recommending a transaction in the 
Notes: (1) To determine that such transaction is suitable for the 
customer, and (2) to have a reasonable basis for believing that the 
customer can evaluate the special characteristics of, and is able to 
bear the financial risks of such transaction. In addition, CSFB will 
deliver a prospectus in connection with the initial sales of the Notes.
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    \13\ Amex Rule 411 requires that every member, member firm or 
member corporation use due diligence to lean the essential facts, 
relative to every customer and to every order or account accepted.
    \14\ See Amex Rule 462 and Section 107B of the Company Guide.
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    The Exchange represents that its surveillance procedures are 
adequate to properly monitor the trading of the Notes. Specifically, 
the Amex will rely

[[Page 54760]]

on its existing surveillance procedures governing equities, which have 
been deemed adequate under the Act. In addition, the Exchange also has 
a general policy, which prohibits the distribution of material, non-
public information by its employees.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b) of the Act \15\ in general, and furthers the 
objectives of Section 6(b)(5),\16\ in particular, in that it is 
designed to prevent fraudulent and manipulative acts and practices, to 
promote just and equitable principles of trade, to remove impediments 
to and perfect the mechanism of a free and open market and, in general, 
to protect investors and the public interest.
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    \15\ 15 U.S.C. 78f(b).
    \16\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants or Others

    The Exchange has not solicited and did not receive any written 
comments on the proposed rule change.

III. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Persons making written submissions 
should file six copies thereof with the Secretary, Securities and 
Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549-0609. 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for inspection and copying at the 
Commission's Public Reference Room. Copies of such filing will also be 
available for inspection and copying at the principal office of the 
Exchange. All submissions should refer to the File No. SR-Amex-2003-74 
and should be submitted by October 9, 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 6(b)(5) 
of the Act.\17\ The Commission believes that the proposal is similar to 
several approved instruments currently listed and traded on the 
Amex.\18\ Accordingly, the Commission finds that the listing and 
trading of the Notes based on the Index 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 securities, and, in general, protect investors and the 
public interest consistent with Section 6(b)(5) of the Act.\19\
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    \17\ 15 U.S.C. 78f(b)(5).
    \18\ See Securities Exchange Act Release Nos. 48152 (July 10, 
2003), 68 FR 42435 (July 17, 2003) (approving the listing and 
trading of the UBS Partial Protection Note linked to the Index); 
47983 (June 4, 2003), 68 FR 35032 (June 11, 2003) (approving the 
listing and trading of a CSFB Accelerated Return Notes linked to 
Index); 47911 (May 22, 2003), 68 FR 32558 (May 30, 2003) (approving 
the listing and trading of notes (Wachovia TEES) linked to the 
Index); 31591 (December 18, 1992), 57 FR 60253 (December 18, 1992) 
(approving the listing and trading of Portfolio Depositary Receipts 
based on the Index); 30394 (February 21, 1992), 57 FR 7409 (March 2, 
1992) (approving the listing and trading of a unit investment trust 
linked to the Index)(SPDR); 27382 (October 26, 1989), 54 FR 45834 
(October 31, 1989) (approving the listing and trading of Exchange 
Stock Portfolios based on the value of the Index); and 19907 (June 
24, 1983), 48 FR 30814 (July 5, 1983) (approving the listing and 
trading of options on the Index).
    \19\ 15 U.S.C. 78f(b)(5). In approving this rule, the Commission 
notes that it has considered the proposed rule's impact on 
efficiency, competition, and capital formation. 15 U.S.C.78c(f).
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    As described more fully above, at maturity, the holder of the Note 
will receive at least 100% principal investment amount as long as the 
Index never experiences a Contingent Event. Specifically, at maturity, 
the holder would receive a full principal investment amount of the 
Notes plus the percentage change of the Index during the term. Also, if 
the Index declines substantially but never reaches the Contingent 
Level, the holder will receive the principal investment amount of the 
Notes at maturity. However, if the Index declines at any time during 
the term of the Notes, between 55 to 65% of the Initial Level (the 
exact percentage amount will be specified in the prospectus), this is a 
Contingent Event and the holder's principal will be reduced accordingly 
at maturity. The Notes will provide investors who are willing to forego 
market interest payments during the term of the Notes with a means to 
participate or gain exposure to the Index, subject to a minimum payment 
amount.
    The Commission notes that the Notes are non-convertible debt 
securities whose price will be derived and based upon the Initial 
Level. In addition, if the level of the Index experiences a Contingent 
Event during the term, the holder of the Notes will lose the principal 
protection and will be entitled to receive a payment on the Notes based 
on the percentage change of the Index. Thus, the Commission notes that 
the Notes will not have a minimum principal investment amount that will 
be repaid, and payment on the Notes prior to or at maturity may be less 
than the original issue price of the Notes. 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, but the Note holder's 
principal is permanently reduced if there is a Contingent Event at any 
time during the term of the Note. Because the final level of return of 
the Notes is derivatively priced and based upon the performance of an 
index of securities because the Notes are debt instruments that do not 
guarantee a return of principal, and because investors' potential 
return is limited by minimum payment amount, if the value of the Index 
has increased over the term of such Note, there are several issues 
regarding the trading of this type of product. However, for the reasons 
discussed below, the Commission believes the Exchange's proposal 
adequately addresses the concerns raised by this type of product.
    In approving the product, the Commission recognizes that the Index 
is a capitalization-weighted index of 500 companies listed on Nasdaq, 
the NYSE, and the Amex. The Exchange represents that the Index will be 
determined, calculated, and maintained by S&P.
    As of August 5, 2003, the market capitalization of the securities 
included in the Index ranged from a high of $279.526 billion to a low 
of $356 million. The average daily trading volume for these same 
securities for the last six (6) months ranged from a high of 39.915 
million shares to a low of 0.040 million shares respectively.
    Given the large trading volume and capitalization of the 
compositions of the stocks underlying the Index, the Commission 
believes that the listing and trading of the Notes that are linked to 
the Index, should not unduly impact the

[[Page 54761]]

market for the underlying securities comprising the Index or raise 
manipulative concerns. As discussed more fully above, the underlying 
stocks comprising the Index are well-capitalized, highly liquid stocks. 
Moreover, the issuers of the underlying securities comprising the Index 
are subject to reporting requirements under the Act, and all of the 
component stocks are either listed or traded on, or traded through the 
facilities of, U.S. securities markets. Additionally, the Amex's 
surveillance procedures will serve to deter as well as detect any 
potential manipulation.
    Furthermore, the Commission notes that the Notes are depending upon 
the individual credit of the issuer, CSFB. To some extent this credit 
risk is minimized by the Exchange's listing standards in Section 107A 
of the Company Guide which provide the only issuers satisfying 
substantial asset and equity requirements may issue securities such as 
the Notes. In addition, the Exchange's ``Other Securities'' listing 
standards further require that the Notes have a market value of at 
least $4 million.\20\ In any event, financial information regarding 
CSFB in addition to the information on the 500 common stocks comprising 
the Index will be publicly available.\21\
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    \20\ See Company Guide Section 107A.
    \21\ The Commission notes that the 500 component stocks that 
comprise the 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 CSFB, 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,\22\ the Commission believes that this concern is 
minimal given the size of the Notes issuance in relation to the net 
worth of CSFB.
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    \22\ See Securities Exchange Act Release Nos. 44913 (October 9, 
2001), 66 FR 52469 (October 15, 2001) (order approving the listing 
and trading of notes whose return is based on the performance of the 
Nasdaq-100 Index) (File No. SR-NASD-2001-73); 44483 (June 27, 2001), 
66 FR 35677 (July 6, 2001) (order approving the listing and trading 
of notes whose return is based on a portfolio of 20 securities 
selected from the Amex Institutional Index) (File No. SR-Amex-2001-
40); and 37744 (September 27, 1996), 61 FR 52480 (October 7, 1996) 
(order approving the listing and trading of notes whose return is 
based on a weighted portfolio of healthcare/biotechnology industry 
securities) (File No. SR-Amex-96-27).
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    Finally, the Commission notes that the value of the 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 
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 the 
notice of filing thereof in the Federal Register. The Exchange has 
requested accelerated approval because this product is similar to 
several other instruments currently listed and traded on the Amex.\23\ 
The Commission believes that the Notes will provide investors with an 
additional investment choice and that accelerated approval of the 
proposal will allow investors to begin trading the Notes promptly. 
Additionally, the Notes will be listed pursuant to Amex's existing 
hybrid security listing standards as described above. Therefore, the 
Commission finds good cause, consistent with Section 19(b)(2) of the 
Act,\24\ to approve the proposal on an accelerated basis.
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    \23\ See supra note 17.
    \24\ 15 U.S.C. 78f(b)(5) and 78s(b)(2).
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V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\25\ that the proposed rule change (SR-Amex-2003-74), is approved 
on an accelerated basis.
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    \25\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\26\
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    \26\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-23798 Filed 9-17-03; 8:45 am]
BILLING CODE 8010-01-P