[Federal Register Volume 69, Number 35 (Monday, February 23, 2004)]
[Notices]
[Pages 8245-8248]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-3780]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-49239; File No. SR-Amex-2004-02])


Self-Regulatory Organizations; Notice of Filing of a Proposed 
Rule Change and Amendment No. 1 Thereto by the American Stock Exchange 
LLC Relating to the Listing and Trading of Notes Linked to the 
Performance of the Select Utility Index

February 12, 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 January 8, 2004, the American Stock Exchange LLC (``Amex'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission'') the proposed rule change as described in 
Items I, II and III below, which Items have been prepared by the 
Exchange. On February 12, 2004, the Exchange filed Amendment No. 1 to 
the proposed rule change.\3\ The Commission is publishing this notice 
to solicit comments on the proposed rule change from interested 
persons.
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    \1\ 15 U.S.C. 78s(b)(l).
    \2\ 17 CFR 240.19b-4.
    \3\ See Letter from Jeffrey P. Burns, Associate General Counsel, 
Amex, to Nancy Sanow, Assistant Director, Division of Market 
Regulation (``Division''), Commission, dated February 11, 2004 
(``Amendment No. 1''). In Amendment No. 1, the Amex clarified its 
earlier comparison of the Select Utility Index proposed herein with 
an existing index, the Select Sector Utilities Index. The Amex also 
included a representation that the Exchange would consult with the 
Commission in the event that the number of Index components falls to 
ten (10) or fewer stocks.
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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 notes, the return on which 
is based upon a modified market capitalization-weighted portfolio of 20 
dividend paying common stocks selected from the Standard & Poor's 
(``S&P'') Utilities Sector, as reconstituted from time to time in the 
manner set forth below (the ``Select Utility Index'' 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 IV 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 (``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.\4\ The Amex proposes 
to list for trading under Section 107A of the Company Guide notes, the 
performance of which is linked to the Select Utility Index (the 
``Select Utility Index Notes'' or ``Notes''). The Select Utility Index 
will be calculated and maintained solely by the Amex.\5\
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    \4\ See Securities Exchange Act Release No. 27753 (March 1, 
1990), 55 FR 8626 (March 8, 1990) (order approving File No. SR-Amex-
89-29).
    \5\ Subject to the criteria in the prospectus regarding the 
construction of the Index, the Exchange has sole discretion 
regarding changes to the Index due to reconstitutions and 
adjustments to the Index and the multipliers of the individual 
components. Amex represents that it maintains and enforces 
appropriate policies and trading restrictions that address the use 
of non-public information by its employees, such as non-public 
knowledge derived in the component selection and maintenance of the 
Select Utilities Index. Telephone Conversation between Jeffrey P. 
Burns, Associate General Counsel, Amex, and Florence Harmon, Senior 
Special Counsel, Division, Commission, on February 10, 2004.
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    The Notes will initially conform to the listing guidelines under 
Section 107A \6\ and continued listing guidelines

[[Page 8246]]

under Sections 1001-1003 \7\ of the Company Guide. The Notes are senior 
non-convertible debt securities of Merrill Lynch & Co., Inc. (``Merrill 
Lynch''). 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 of the Index over the term of 
the Notes. The starting value (the ``Starting Value'') of the Select 
Utility Index initially will be set to 100 on the date the Notes are 
priced for initial sale to the public (the ``Origination Date''). The 
ending value (the ``Ending Value'') is the value of the Select Utility 
Index over a period of five business days shortly before the expiration 
of the Notes. The Ending Value will be used in calculating the amount 
owners will receive upon maturity (the ``Redemption Amount''). The 
Notes will not have a minimum principal amount that will be repaid and, 
accordingly, payments on the Notes prior to or at maturity may be less 
than the original issue price of the Notes. During an approximately 
two-week period in the designated month each year, investors will have 
the right to require the Issuer to repurchase the Notes at an amount 
based on the value of the Index at such repurchase date. The Notes are 
not callable by the issuer.
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    \6\ 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 have 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.
    \7\ The Exchange's continued listing guidelines are set forth in 
Sections 1001 through 1003 of Part 10 to the Exchange's Company 
Guide. 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.
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    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 of securities comprising the Index. 
The Notes are designed for investors who want to participate or gain 
exposure to specific securities within the S&P Utilities Sector and who 
are willing to forego market interest payments on the Notes during such 
term. The Commission has previously approved the listing of the 
Utilities Select Sector SPDR Fund based on the Utilities Select Sector 
Index.\8\ Although the Select Sector Utilities Index and the proposed 
Select Utility Index are similar by providing exposure to the utility 
industry sector of the economy, the methodology of each index differs 
so that the number of index components as well as the component stocks 
are not the same.\9\ The Exchange also lists and trades options on the 
Utilities Select Sector SPDR Fund.
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    \8\ See Securities Exchange Act Release No. 40749 (December 4, 
1998), 63 FR 68483 (December 11, 1998) and Investment Company Act 
Release No. 23492 (October 20, 1998), 63 FR 57332 (October 27, 
1998).
    \9\ The proposed Select Utility Index is comprised of twenty 
(20) dividend paying securities of the S&P Utilities Sector while 
the Select Sector Utilities Index is comprised of thirty-seven (37) 
utility Securities that may or may not be included within the S&P 
Utilities Sector.
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    The securities contained in the Select Utility Index (the ``Select 
Utility Stocks'') initially were determined on December 17, 2003 (the 
``Initial Determination Date'').\10\ The Index will thereafter be 
reconstituted quarterly in January, April, July and October (each a 
``Reset Period'') on the second business day prior to the start of the 
Reset Period (each a ``Determination Date''). A weighting will be 
assigned to each Select Utility Stock based upon the market 
capitalization of such stock relative to the other newly determined 
Select Utility Stocks, subject to a maximum weighting for any single 
stock of no more than 10% of the aggregate market capitalization of the 
newly determined Select Utility Stocks (the ``Select Utility 
Portfolio''). The market capitalization will be the product of the 
total number of shares outstanding for the Select Utility Stocks, as 
published by S&P, and the closing market price for such stock on the 
Determination Date. The aggregate amount, if any, by which all Select 
Utility Stocks are reduced due to this 10% limitation will be 
redistributed proportionately across the remaining stocks that 
represent less than 10% of the aggregate market capitalization. If any 
other stock comes to exceed this 10% limit as a result of such 
redistribution, the weights for such stock will be set to 10% of the 
aggregate market capitalization, and the redistribution will be 
repeated. The ``Share Multiplier'' for each Select Utility Stock will 
be determined over five business days included in any Reset Period or 
the Origination Period.\11\ Each Share Multiplier will be determined by 
using the weighting of each Select Utility Stock fixed on a 
Determination Date and the applicable closing prices of such Select 
Utility Stock observed on each day during any Reset Period or 
Origination Period. After any Reset Period or Origination Period, each 
Share Multiplier will remain constant unless adjusted for quarterly 
dividends, quarterly reconstitutions or certain corporate events.
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    \10\ As of the Initial Determination Date, the Select Utility 
Index consisted of the following stocks: Atmos Energy Corporation 
(ATO); Black Hills Corporation (BKH); Consolidated Edison Inc. (ED); 
Constellation Energy Group (CEG); Energy East Corporation (EAS); 
FirstEnergy Corp. (FE); FPL Group, Inc. (FP); National Fuel Gas 
Company (NFG); Nicor Inc. (GAS); NiSource Inc. (NI); Northeast 
Utilities System (NU); NSTAR (NST); Oneok, Inc. (OKE); Pinnacle West 
Capital Corporation (PNW); PPL Corporation (PPL); Progress Energy, 
Inc. (PGN); Questar Corporation (STR); SCANA Corporation (SCG); The 
Southern Company (SO); and TXU Corporation (TXU).
    \11\ The Origination Period is a five (5) day period commencing 
on the Origination Date and lasting for the next four (4) business 
days when the Index is calculated or published.
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    The stocks included in the Select Utility Portfolio will be stocks 
determined by the Amex to be Qualifying Stocks having the twenty (20) 
highest Combined Dividend Scores \12\ on the relevant Determination 
Date. ``Qualifying Stocks'' are all stocks in the S&P Utilities Sector, 
a subset of the S&P Composite 1500 Index composed of stocks classified 
by S&P's as GICS[reg] Utilities Sector companies, except for (i) stocks 
which have not paid dividends in the prior calendar year, (ii) stocks 
which have an Expected Dividend Growth Estimate of zero or less and 
(iii) stocks which have an average daily value traded over the prior 30 
calendar days less than $5,000,000. In the event that less than twenty 
(20) of the S&P Utilities Sector stocks are Qualifying Stocks, the 
Select Utility Index will operate with less than twenty Select Utility 
Stocks until such time that twenty or more Qualifying Stocks are 
identified on a Determination Date. In addition, the Amex represents 
that if the number of Index components falls to ten (10) or fewer 
stocks, Amex will consult with the Commission.\13\ The ``Expected 
Dividend Growth Estimate'' for each S&P Utilities Sector stock will 
equal the quotient of the expected dividend for the subsequent fiscal 
year, published by Institutional Brokers' Earnings System, over the 
Current Dividend minus one.
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    \12\ The ``Combined Dividend Score'' for each Qualifying Stock 
will equal the sum of the Dividend Yield and the Expected Dividend 
Growth Estimate for such common stock, represented as a percentage. 
The ``Dividend Yield'' for each S&P Utilities Sector stock will be 
determined by annualizing the last quarterly or semi-annual ordinary 
cash dividend for which the ex-dividend date has occurred, excluding 
any dividend which is deemed by the Index Calculation Agent in its 
sole discretion to constitute an extraordinary dividend (the 
``Current Dividend''), and dividing the result by the last available 
sale price for such stock on its primary exchange on the 
Determination Date.
    \13\ See Amendment No. 1, supra n. 3.
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Initial Value of the Select Utility Index

    The Select Utility Index will not fully reflect changes in the 
value of the Select

[[Page 8247]]

Utility Portfolio until the end of the Origination Period. During the 
Origination Period, the Select Utility Index will be calculated as 
though it tracked the value of (a) a decreasing pool of cash and (b) an 
increasing investment in the Select Utility Stocks. The Select Utility 
Portfolio Value will be allocated to the Select Utility Portfolio over 
a period of five (5) business days, with 20% of the value being so 
allocated at the close of business on each such day.
    For example, at the close of business on the Origination Date, the 
first Origination Period Day, the Select Utility Index will be 
calculated as though it tracked the value of, for instance, an initial 
$100 investment, $80 of which remained in cash and $20 of which was 
deemed to have been invested in the Select Utility Stocks at the close 
of the market on such day and in proportion to the respective weight 
for each Select Utility Stock. At the close of business on the next, or 
second, Origination Period Day, the Select Utility Index will be 
calculated as though it tracked the value of the same initial $100 
investment, $60 of which remained in cash, $20 of which was deemed to 
have been invested in the Select Utility Stocks at the close of the 
market on such day and $20 of which had been previously purchased at 
the previous day's closing price. At the close of business on the third 
business day, the Select Utility Index will be calculated as though it 
tracked the value of the same initial $100 investment, $40 of which 
remained in cash, $20 of which was deemed to have been invested in the 
Select Utility Stocks at the close of the market on such day and $40 of 
which had been previously purchased at the prior closing prices. At the 
close of business on the fourth business day, the Select Utility Index 
will be calculated as though it tracked the value of the same initial 
$100 investment, $20 of which remained in cash, $20 of which was deemed 
to have been invested in the Select Utility Stocks at the close of the 
market on such day and $60 of which had been purchased at the prior 
closing prices. At the close of business on the fifth business day, the 
Select Utility Index will be calculated as though it tracked the value 
of the same initial $100 investment, $0 of which remained in cash, $20 
of which was deemed to have been invested in the Select Utility Stocks 
at the close of the market on such day and $80 of which had been 
purchased at the prior closing prices. In this way, only on the sixth 
business day and thereafter will the Select Utility Index fully reflect 
full exposure to the changes in the values of the Select Utility 
Portfolio.
    On any Origination Period Day, the value of the Select Utility 
Index will equal (i) The sum of the products of the current market 
price for each of the Select Utility Stocks and the applicable interim 
Share Multiplier, plus (ii) the value of the hypothetical pool of cash, 
plus (iii) an amount equal to Current Quarter Dividends,\14\ and less 
(iv) a pro rata portion of the annual Index Adjustment Factor.\15\ Each 
interim Share Multiplier will equal the number of shares of the related 
Select Utility Stock included in the Select Utility Portfolio. The 
Share Multiplier for any Select Utility Stock will be determined as 
follows, continuing the example provided in the paragraph above. Of the 
daily $20 investment in the Select Utility Stocks to be made at the 
close of business on the first Origination Period Day, a percentage of 
such daily investment equal to the percentage weighting of the specific 
Select Utility Stock will be used to purchase the number of shares of 
that Select Utility Stock that can be purchased at the closing market 
price of that Select Utility Stock on such Origination Period Day. The 
number of shares purchased is the Share Multiplier for the first 
Origination Period Day. This process will be repeated on each day 
during the Origination Period and the sum of such deemed stock 
purchases on any Origination Period Day and previously determined 
interim Share Multiplier will equal the interim Share Multiplier for 
that Select Utility Stock. In this way, the interim Share Multiplier 
will increase at the close of business on each Origination Period Day, 
and at the end of the Origination Period, the Share Multiplier will 
thereafter be fixed until adjusted for quarterly dividends, quarterly 
reconstitutions or certain corporate events.
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    \14\ ``Current Quarter Dividends'' for any day will be 
determined by the Exchange and will equal the sum of the products 
for each Select Utility Stock of the cash dividend paid by an issuer 
on one share of stock during the quarterly period containing the day 
for which the applicable Current Quarter Dividends are being 
determined multiplied by the Share Multiplier applicable to that 
stock on the ex-dividend date.
    \15\ The Index Adjustment Factor is 1.5% per annum and will 
reduce the value of the Select Utility Index each day by the pro 
rata amount. The Exchange will use an index divisor to reduce the 
Select Utility Index daily by the pro rata portion of the Index 
Adjustment Factor.
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Quarterly Index Reconstitution

    The Select Utility Index will be reconstituted quarterly after a 
fixed date in January, April, July and October of each year during the 
term of the Notes (each a ``Reset Date''). The Exchange will select the 
twenty (20) Qualifying Stocks having the highest Combined Dividend 
Scores (the ``New Stocks'') on the sixth scheduled business day prior 
to the applicable Reset Date (the ``Quarterly Determination Date'') 
using the methodology described above.
    The Select Utility Index will not fully reflect changes in the 
Select Utility Portfolio until the end of the Reset Period. Each Reset 
Period begins on the fourth business day prior to the Reset Date and 
ends on the Reset Date. During the Reset Period, the Select Utility 
Stocks comprising the Select Utility Portfolio for the quarter ending 
on such Reset Date (the ``Old Stocks'') will be sold at the close of 
business each day in an amount equal to approximately 20% of the 
position represented by the applicable Share Multipliers as of the 
commencement of the Reset Period. The proceeds from such deemed daily 
stock sales, the value of which will equal the product of one-fifth of 
the Share Multiplier for each of the Old Stocks and the closing price 
of such Old Stock on such day, will be invested in the New Stocks 
through a deemed daily purchase of such New Stocks, based upon the 
percentage weighting of each New Stock determined on the Quarterly 
Determination Date and the closing prices of each New Stock observed on 
the applicable Reset Period Day (as the initial Select Utility Stocks 
were deemed to have been purchased as described above). Therefore, 
during the Reset Period, the Select Utility Index will be calculated as 
though it tracked the value of (a) a decreasing investment in the Old 
Stocks and (b) an increasing investment in the New Stocks.
    On any business day, except during the Origination Period, the 
value of the Index will equal (i) the sum of the products of the 
current market price for each of the Select Utility Stocks and the 
applicable Share Multiplier, plus (ii) an amount equal to Current 
Quarter Dividends less (iii) a pro rata portion of the annual Index 
Adjustment Factor.
    Merrill Lynch proposes to initially constitute and reconstitute the 
Select Utility Index in this manner in order reduce the market impact. 
In addition, this process will also provide a better process for the 
Issuer to hedge its market risk in connection with the Notes. Although 
we believe that there will be limited change in the component stocks of 
the Index, there may be significant changes in the weightings of the 
Index components. Accordingly, the process of constitutions and 
reconstitutions described above, should help to alleviate both market 
impact and Issuer risk.

[[Page 8248]]

    The Exchange will calculate the Select Utility Index and, similar 
to other stock index values published by the Exchange, the value of the 
Select Utility Index will be calculated continuously and disseminated 
every fifteen (15) seconds on the Consolidated Tape Association's 
Network B.
    Because the Select Utility Index Notes are linked to a portfolio of 
equity securities, the Amex's existing equity 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.\16\ Second, the Notes will be subject to 
the equity margin rules of the Exchange.\17\ 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, Merrill 
Lynch will deliver a prospectus in connection with the initial sales of 
the Notes.
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    \16\ 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.
    \17\ 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 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, as amended is 
consistent with section 6 of the Act \18\ in general and furthers the 
objectives of section 6(b)(5) \19\ in particular in that it is designed 
to prevent fraudulent and manipulative acts and practices, promote just 
and equitable principles of trade, remove impediments to and perfect 
the mechanisms of a free and open market and a national market system.
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    \18\ 15 U.S.C. 78f(b).
    \19\ 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, as 
amended, 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 did not receive any written comments on the proposed 
rule change.

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

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    A. By order approve the proposed rule change, as amended, or
    B. Institute proceedings to determine whether the proposed rule 
change, as amended, should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule 
change, as amended, is consistent with the Act. Persons making written 
submissions should file six copies thereof with the Secretary, 
Securities and Exchange Commission, 450 Fifth Street, NW., Washington, 
DC 20549-0609. Comments may also be submitted electronically to the 
following e-mail address: [email protected]. All comment letters 
should refer to File No. SR-Amex-2004-02. 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-2004-02 and should be 
submitted by March 15, 2004.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\20\
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    \20\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 04-3780 Filed 2-20-04; 8:45 am]
BILLING CODE 8010-01-P