[Federal Register Volume 69, Number 8 (Tuesday, January 13, 2004)]
[Notices]
[Pages 2020-2023]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-614]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-49017; File No. SR-Amex-2003-93]


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

January 2, 2004.
    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 October 27, 2003, the American Stock Exchange LLC (``Amex'') filed 
with the Securities and Exchange Commission (``Commission'') the 
proposed rule change as described in Items I and II below, which the 
Amex has prepared. The Commission is publishing this notice to solicit 
comments on the proposed rule change from interested persons and is 
approving the proposal on an accelerated basis.
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    \1\ 15 U.S.C. 78s(b)(l).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Amex proposes to list and trade, under Section 107A of the Amex 
Company Guide, Targeted Efficiency Equity Securities (or ``Notes'') of 
Wachovia Corporation, the return on which is based on the performance 
of the Standard & Poor's 500 Stock Index,\3\ (``S&P 500 Index''), 
subject to an annual reset provision and cap.
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    \3\ The S&P 500 Index is a broad-based stock index, which 
provides an indication of the performance of the U.S. equity market. 
The S&P 500 Index is a capitalization-weighted index reflecting the 
total market value of 500 widely held component stocks relative to a 
particular base period. The S&P 500 Index is computed by dividing 
the total market value of the 500 stocks by an S&P 500 Index 
Divisor. The Index Divisor keeps the S&P 500 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 S&P 500 
Index are listed on the Amex, the New York Stock Exchange, Inc., or 
traded through the Nasdaq Stock Market, Inc. (``Nasdaq''). The S&P 
500 Index reflects the price of the common stocks of 500 companies 
without taking into account the value of the dividend paid on such 
stocks.
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II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the Amex included statements 
concerning the purpose of, and basis for, the proposed rule change and 
discussed any comments it had 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 the 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    Under section 107A of the Amex Company Guide, the Amex may approve 
for listing and trading securities which cannot be readily categorized 
under the listing criteria for common and preferred stocks, bonds, 
debentures, or warrants.\4\ The Amex proposes to list Notes for trading 
based on the S&P 500 Index.\5\ The Notes are senior non-convertible 
debt securities of Wachovia that will have a term of three years.\6\ 
The Notes will conform to the listing guidelines under section 107A of 
the Amex Company Guide \7\ and the continued listing guidelines under 
sections 1001-1003 of the Amex Company Guide.\8\
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    \4\ See Securities Exchange Act Release No. 27753 (March 1, 
1990), 55 FR 8626 (March 8, 1990) (SR-Amex-89-29).
    \5\ The S&P 500 Index is determined, calculated, and maintained 
by Standard & Poor's, a division of the McGraw-Hill Companies, Inc.
    \6\ Wachovia Corporation and Standard & Poor's have entered into 
a non-exclusive license agreement providing for the use of the S&P 
500 by Wachovia and certain affiliates and subsidiaries in 
connection with certain securities, including these Notes. Standard 
and Poor's is not responsible for and will not participate in the 
creation and issuance of the Notes.
    \7\ The initial listing standards for the Notes require: (1) A 
minimum public distribution of one million units; (2) A minimum of 
400 shareholders; (3) a market value of at least $4 million; and (4) 
a term of at least one year. In addition, the listing guidelines 
provide that the issuer 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 that is unable to 
satisfy the earning criteria stated in section 101 of the Amex 
Company Guide, the Amex 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.
    \8\ The Amex's continued listing guidelines are set forth in 
sections 1001 through 1003 of part 10 to the Amex Company Guide. 
Section 1002(b) of the Amex Company Guide states that the Amex will 
consider removing from listing any security where, in the opinion of 
the Amex, it appears that the extent of public distribution or 
aggregate market value has become so reduced to make further 
dealings on the Amex inadvisable. With respect to continued listing 
guidelines for distribution of the Notes, the Amex will rely, in 
part, on the guidelines for bonds in section 1003(b)(iv). Section 
1003(b)(iv)(A) provides that the Amex will normally consider 
suspending dealings in, or removing from the list, a security if the 
aggregate market value or the principal amount of bonds publicly 
held is less than $400,000.
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    Wachovia will issue the Notes in denominations of whole ``Units,'' 
with each Unit representing a single Note. The original public offering 
price will be $5 per Note. The Notes will provide for an annual 
calculation of the percentage change of the S&P 500 Index so that any 
positive performance of the S&P 500 Index during each Annual 
Calculation Period will be doubled subject to a maximum payment amount 
or ceiling. An investor in the Notes will be subject to the full extent 
of a negative return of the S&P 500 Index in any Annual Calculation 
Period. According to the Amex, the S&P 500 Index value is disseminated 
at least once every fifteen seconds throughout the trading day over the 
Consolidated Tape Association's Network B.\9\
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    \9\ Telephone conversation between Jeffrey P. Burns, Associate 
General Counsel, Amex, and Patrick M. Joyce, Special Counsel, 
Division of Market Regulation, Commission, on November 10, 2003.

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[[Page 2021]]

    The Notes will entitle the owner at maturity to receive an amount 
based upon the sum of annual percentage changes of the S&P 500 Index 
during the term of the Notes, not to exceed a maximum payment (the 
``Capped Amount''), to be determined on the date of issuance of the 
Notes. During each Annual Calculation Period, if the value of the S&P 
500 Index has increased as compared to the Initial Index Value, the 
annual return will equal two times the amount of that percentage 
increase, not to exceed the Capped Amount. If the value of the S&P 500 
Index has decreased as compared to the Initial Index Value during the 
annual calculation period, the annual return will equal the full 
negative or downside percentage change. This negative return will not 
be limited by a floor. The Notes will not have a minimum principal 
amount that will be repaid, and accordingly, are fully exposed to any 
decline in the level of the S&P 500 Index.\10\ The Notes are not 
callable by the Issuer.
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    \10\ A negative return of the S&P 500 Index reduce the 
redemption amount at maturity with the potential that the holder of 
the Note could lose his entire investment.
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    The Redemption Amount is the payment that the holder or investor 
will receive based on the sum of the annual returns (``Index Return'') 
of the S&P 500 Index determined at each Annual Calculation Period. For 
each Annual Calculation Period, the Initial Index Value will be the 
closing level of the S&P 500 Index on the first day of the Annual 
Calculation Period. The Final Index Value is the closing value of the 
S&P 500 Index on the last day of the Annual Calculation Period. If the 
Final Index Value is greater than the Initial Index Value, the 
calculation of the Index Return is set forth below:
[GRAPHIC] [TIFF OMITTED] TN13JA04.000

    If the Final Index Value is less than the Initial Index Value, the 
calculation of the Index Return is set forth below:
[GRAPHIC] [TIFF OMITTED] TN13JA04.001

    The Redemption Amount for a Note equals the principal amount per 
Note multiplied by the sum of one plus the Index Return: $5 x [1 + 
Index Return]
    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 S&P 500 Index. The Notes are designed for 
investors who want to participate or gain exposure to the S&P 500 
Index, subject to a cap, 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 the S&P 500 Index, as well as 
securities the performance of which is linked to or based on the S&P 
500 Index.\11\
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    \11\ See Securities Exchange Act Release No. 47911 (May 22, 
2003), 68 FR 32558 (May 30, 2003) (approving the listing and trading 
of Wachovia ``TEES'' Notes linked to the S&P 500 Index). See also 
Securities Exchange Act Release Nos. 19907 (June 24, 1983), 48 FR 
30814 (July 5, 1983) (approving the listing and trading of options 
on the S&P 500 Index); 31591 (December 11, 1992), 57 FR 60253 
(December 18, 1992) (approving the listing and trading of Portfolio 
Depositary Receipts based on the S&P 500 Index); 27382 (October 26, 
1989), 54 FR 45834 (October 31, 1989) (approving the listing and 
trading of Exchange Stock Portfolios based on the value of the S&P 
500 Index); 30394 (February 21, 1992), 57 FR 7409 (March 2, 1992) 
(approving the listing and trading of SPDR, a unit investment trust 
linked to the S&P 500 Index); 47983 (June 4, 2003), 68 FR 35032 
(June 11, 2003) (approving the listing and trading of CSFB 
Accelerated Return Notes linked to S&P 500 Index); 48152 (July 10, 
2003), 68 FR 42435 (July 17, 2003) (approving the listing and 
trading of UBS Partial Protection Notes linked to the S&P 500 
Index); and 48486 (September 11, 2003), 68 FR 54758 (September 18, 
2003) (approving the listing and trading of contingent principal 
protection notes linked to the S&P 500 Index).
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    As of November 20, 2003, the market capitalization of the 
securities included in the S&P 500 ranged from a high of $289.478 
billion to a low of $629 million. The average daily trading volume for 
these same securities for the last six months ranged from a high of 
44.909 million shares to a low of 10.673 million shares and from a high 
of 1.966 million shares to a low of 0.127 million shares, respectively.
    Because the Notes are linked to an equity index and are issued in a 
denomination other than $1,000, the Amex's existing equity floor 
trading rules will apply to the trading of the Notes. First, pursuant 
to Amex Rule 411, the Amex would 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.\12\ Second, the Notes would be 
subject to the equity margin rules of the Amex.\13\ Third, the Amex 
would, 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 Amex would 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, Wachovia 
will deliver a prospectus in connection with the initial sales of the 
Notes.
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    \12\ Amex Rule 411 requires that every member, member firm, or 
member corporation use due diligence to learn the essential facts 
relative to every customer and to every order or account accepted.
    \13\ See Amex Rule 462 and section 107B of the Amex Company 
Guide.
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    The Amex represents that its surveillance procedures are adequate 
to properly monitor the trading of the Notes. Specifically, the Amex 
will rely on its existing surveillance procedures governing equities, 
which have been deemed adequate under the Act. In addition, the Amex 
also has a general policy which prohibits the distribution of material, 
non-public information by its employees.
2. Statutory Basis
    The Amex believes that the proposed rule change is consistent with 
section 6(b) of the Act \14\ and furthers the objectives of section 
6(b)(5) of the Act \15\ 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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    \14\ 15 U.S.C. 78f(b).
    \15\ 15 U.S.C. 78f(b)(5).

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[[Page 2022]]

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Amex 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 Amex 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. 
Comments may also be submitted electronically a the following e-mail 
address: [email protected]. All comment letters should refer to 
File No. SR-Amex-2003-93. The file number should be included on the 
subject line if e-mail is used. To help the Commission process and 
review your comments more efficiently, comments should be sent in 
hardcopy or by e-mail but not by both methods. 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 Amex. All 
submissions should refer to the File No. SR-Amex-2003-93 and should be 
submitted by February 3, 2004.

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.\16\ The Commission finds that this proposal is similar to 
several approved notes whose value is linked to an equity index 
currently listed and traded on the Amex.\17\ Accordingly, the 
Commission finds that the listing and trading of the Notes based on the 
S&P 500 Index are 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 6(b)(5) of the Act.\18\
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    \16\ 15 U.S.C. 78f(b)(5).
    \17\ See Securities Exchange Act Release Nos. 47911 (May 22, 
2003), 68 FR 32558 (May 30, 2003) (approving the listing and trading 
of notes (Wachovia TEES) linked to the S&P 500); 47983 (June 4, 
2003), 68 FR 35032 (June 11, 2003) (approving the listing and 
trading of a CSFB Accelerated Return Notes linked to S&P 500); 48152 
(July 10, 2003), 68 FR 42435 (July 17, 2003) (approving the listing 
and trading of a UBS Partial Protection Note linked to the S&P 500); 
and 48486 (September 11, 2003), 68 FR 54758 (September 18, 2003) 
(approving the listing and trading of CSFB contingent principal 
protection notes linked to the S&P 500).
    \18\ 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, 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 S&P 500 
Index, subject to a cap. At maturity, the holder of a Note will receive 
an amount based upon the Index Return determined at each Annual 
Calculation period of the S&P 500 Index. Specifically, the holder of a 
Note will be entitled to receive a payment based on whether the Final 
Index Value is greater or less than the Initial Index Value. If the 
Final Index Value is greater than the Initial Index Value, the holder 
of the Notes will receive the Index Return equal to two times the 
amount of that percentage increase, not to exceed the Capped Amount. If 
the Final Index Value is less than or equal to the Initial Index Value, 
the annual return will equal the full negative or downside percentage 
change.
    The Commission notes that the Notes are not leveraged and are not 
principal-protected instruments. The Notes are debt instruments whose 
price will be derived and based upon the value of the S&P 500 Index. 
The Notes do not have a minimum principal amount that will be repaid at 
maturity, and the payments of the Notes prior to or at maturity may be 
less than the original issue price of the Notes. Thus, if the value of 
the S&P 500 has declined at maturity, the holder of the Note will 
receive 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 500 common 
stocks underlying the S&P 500 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. For the 
reasons discussed below, however, the Commission believes that the 
Amex's proposal adequately addresses the concerns raised by this type 
of product.
    The Commission notes that the Amex'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 Amex, in the Commission's view, has 
addressed adequately the potential problems that could arise from the 
hybrid nature of the Notes. The Amex will require members, member 
organizations, and employees thereof recommending a transaction in the 
Notes to: (1) Determine that such transaction is suitable for the 
customer, and (2) have a reasonable basis for believing that the 
customer can evaluate the special characteristics and bear the 
financial risks of such transaction.
    Moreover, the Commission notes that the Amex will distribute a 
circular to its membership calling attention to the specific risks 
associated with the Notes. The Commission also notes that Wachovia will 
deliver a prospectus in connection with the initial sales of the Notes. 
In addition, the Commission notes that Amex will incorporate and rely 
upon its existing surveillance procedures governing equities. The 
Commission believes that the Amex has appropriate surveillance 
procedures in place to detect and deter potential manipulation for 
similar index-linked products.
    As discussed more fully above, the underlying stocks that make up 
the S&P 500 Index are well-capitalized, highly liquid securities. 
Moreover, the issuers of the underlying securities that make up the S&P 
500 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, the NYSE, the Amex, or the Nasdaq National 
Market. The Commission notes that the S&P 500 Index is determined, 
calculated, and

[[Page 2023]]

maintained by Standard and Poor's. As of November 20, 2003, the market 
capitalization of the securities included in the S&P 500 ranged from a 
high of $289.478 billion to a low of $629 million. The average daily 
trading volume for these same securities for the last six months ranged 
from a high of 44.909 million shares to a low of 10.673 million shares 
and from a high of 1.966 million shares to a low of 0.127 million 
shares, respectively.
    Given the large trading volume and capitalization of the 
compositions of the stocks underlying the S&P 500 Index, the Commission 
believes that the listing and trading of Notes based on the performance 
of the S&P 500 Index should not unduly impact the market for the 
underlying securities comprising the S&P 500 Index or raise 
manipulative concerns. Additionally, the Commission believes that the 
Amex's surveillance procedures will serve to deter as well as detect 
any potential manipulation.
    Furthermore, the Commission notes that the Notes depend upon the 
individual credit of the issuer, Wachovia. To some extent this credit 
risk is minimized by the listing standards in section 107A of the Amex 
Company Guide, which provide that only issuers satisfying substantial 
asset and equity requirements may issue securities such as the Notes. 
In addition, the Amex's ``Other Securities'' listing standards further 
require that the Notes have a market value of at least $4 million.\19\ 
In any event, financial information regarding Wachovia, in addition to 
the information on the 500 common stocks comprising the S&P 500 Index, 
will be publicly available.\20\
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    \19\ See Amex Company Guide Section 107A.
    \20\ The Commission notes that the 500 stocks that make up the 
S&P 500 Index are reporting companies under the Act, and that the 
Notes will be registered under Section 12 of the Act.
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    The Commission does have a concern, however, that a broker-dealer 
such as Wachovia, or a subsidiary providing a hedge for the issuer, 
will incur position exposure. As the Commission has concluded in 
previous approval orders for other hybrid instruments issued by broker-
dealers,\21\ however, the Commission believes that this concern is 
minimal given the size of the Notes issuance in relation to the net 
worth of Wachovia.
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    \21\ 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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    Finally, the Commission notes that the value of the S&P 500 Index 
will be disseminated at least once every fifteen seconds throughout the 
trading day over the Consolidated Tape Association's Network B. The 
Commission believes that providing access to the value of the S&P 500 
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. The Amex has requested 
accelerated approval because this product is similar to several other 
instruments currently listed and traded on the Amex. 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. Based on the above, the 
Commission believes that there is good cause, consistent with sections 
6(b)(5) and 19(b)(2) of the Act,\22\ to approve the proposal on an 
accelerated basis.
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    \22\ 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,\23\ that the proposed rule change (SR-Amex-2003-93) is hereby 
approved on an accelerated basis.
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    \23\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\24\
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    \24\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 04-614 Filed 1-12-04; 8:45 am]
BILLING CODE 8010-01-U