[Federal Register Volume 69, Number 59 (Friday, March 26, 2004)]
[Notices]
[Pages 15913-15916]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-6765]



[[Page 15913]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-49453; File No. SR-Amex-2004-13]


Self-Regulatory Organizations; Notice of Filing and Order 
Granting Accelerated Approval of 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 Dow Jones 
Industrial Average (DJIA)

March 19, 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 February 18, 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 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 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 Exchange proposes to list and trade, contingent principal 
protected notes (``Notes''), the return which is based upon the 
performance of which is linked to the Dow Jones Industrial Average 
(``DJIA'' 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 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.\3\ The Amex proposes 
to list for trading under section 107A of the Company Guide notes, the 
performance of which is linked to the DJIA that provide for contingent 
principal protection (``Contingent Principal Protected Notes'' or 
``Notes'').\4\ Citigroup will issue the Notes under the name ``Index 
Leading StockMarket Securities'' or ``Index LASERS.'' The DJIA is 
determined, calculated and maintained solely by Dow Jones.\5\ The Notes 
will provide for an uncapped participation in the positive performance 
of the DJIA 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 (the ``Contingent Level''). 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 (the ``Initial Level''). The Issuer expects that the 
Contingent Level will be between 70 and 75 percent of the initial value 
of the Index. A decline of the Index to the Contingent Level is 
referred to as a ``Contingent Event.''
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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\ Citigroup Global Markets Holdings, Inc. (``Citigroup'') and 
Dow Jones & Co. (``Dow Jones'') have entered into a non-exclusive 
license agreement providing for the use of the DJIA by Citigroup and 
certain affiliates and subsidiaries in connection with certain 
securities including these Notes. Dow Jones is not responsible and 
will not participate in the issuance and creation of the Notes.
    \5\ The DJIA is a price-weighted index comprised of 30 common 
stocks chosen by the editors of the Wall Street Journal (``WSJ'') as 
representative of the broad market of U.S. industry. A price-
weighted index refers to an index that assigns weights to component 
stocks based on the price per share rather than total market 
capitalization of such component stock. The corporations represented 
in the DJIA tend to be leaders within their respective industries 
and their stocks are typically widely held by individuals and 
institutional investors. Changes in the composition of the DJIA are 
made solely by the editors of the WSJ. In addition, changes to the 
common stocks included in the DJIA tend to be made infrequently with 
most substitutions the result of mergers and other extraordinary 
corporate actions. However, over time, changes are made to more 
accurately represent the broad market of U.S. industry. In choosing 
a new corporation for the DJIA, the editors of the WSJ focus on the 
leading industrial companies with a successful history of growth and 
wide interest among investors. Dow Jones, publisher of the WSJ, is 
not affiliated with Citigroup and has not participated in any way in 
the creation of the Notes. The number of common stocks in the DJIA 
has remained at 30 since 1928, and, in an effort to maintain 
continuity, the constituent corporations represented in the DJIA 
have been changed on a relatively infrequent basis.
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    The Notes will conform to the initial listing guidelines under 
section 107A \6\ and continued listing guidelines under sections 1001-
1003 \7\ of the Company Guide. The Notes are senior non-convertible 
debt securities of Citigroup. The Notes will have a term of no more 
than ten (10) years. Citigroup will issue the Notes in denominations of 
whole units (a ``Unit''), with each Unit representing a single Note. 
The original public offering price will be $10 per Unit. The Notes will 
entitle the owner at maturity to receive at least 100 percent of the 
principal investment amount as long as the DJIA never experiences a 
Contingent Event. In the case of a positive Index return, the holder 
would receive the full principal investment amount of the Note plus the 
product of $10, the percentage change of the DJIA during the term, and 
the upside participation rate (expected to be between 110 and 120 
percent). Accordingly, even if the Index declines but never reaches the 
Contingent Level, the holder will receive the principal investment 
amount of the Notes at maturity. If however, the Notes experience a 
Contingent Event during the term, the holder loses the ``principal 
protection'' and will be entitled to receive a payment based on the 
percentage change of the Index, positive or negative. In this case, the 
Notes will not have a minimum principal investment amount that will be 
repaid,

[[Page 15914]]

and accordingly, payment on the Notes prior to or at maturity may be 
less than the original issue price of the Notes. Accordingly, if the 
Index experiences a negative return and a Contingent Event, the Notes 
would be fully exposed to any decline in the level of the DJIA.\8\ The 
Notes, however, are not leveraged on the downside.\9\ The Notes are 
also not callable by the Issuer.
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    \6\ The initial listing standards for the Notes 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.
    \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.
    \8\ A negative return of the Global Titan Index, together with a 
Contingent Event, will reduce the redemption amount at maturity with 
the potential that the holder of the Note could lose his entire 
investment amount.
    \9\ Telephone Conversation between Jeffrey P. Burns, Associate 
General Counsel, Amex, and Florence Harmon, Senior Special Counsel, 
Division, Commission, on March 19, 2004.
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    The payment that a holder or investor of a Note will be entitled to 
receive (the ``Redemption Amount'') will depend on the relation of the 
level of the DJIA at the close of the market on a single business day 
(the ``Valuation Date'') shortly before maturity of the Notes (the 
``Final Level'') and the 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 DJIA ever experiences a 
Contingent Event during the term of the Notes.
    If the percentage change of the Index is positive and the Index 
never experiences a Contingent Event, the Redemption Amount per Unit 
will equal: 
[GRAPHIC] [TIFF OMITTED] TN26MR04.025

    If the percentage change of the Index is zero or negative and the 
Index never experiences a Contingent Event, the redemption amount per 
unit will equal the principal investment amount of $10.
    If the Index experiences a Contingent Event, the Redemption Amount 
per Unit will equal: 
[GRAPHIC] [TIFF OMITTED] TN26MR04.026

    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 DJIA. The Notes are designed for investors 
who want to participate or gain exposure to the DJIA while partially 
limiting their investment risk, and who are willing to forego market 
interest payments on the Notes during the term of the Notes. The 
Commission has previously approved the listing of securities and 
options linked to the performance of the DJIA.\10\
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    \10\ See Securities Exchange Act Release Nos. 46883 (November 
21, 2002), 67 FR 71216 (November 29, 2002) (approving the listing 
and trading of Market Recovery Notes on the DJIA); 39525 (January 8, 
1998), 63 FR 2438 (January 15, 1998) (approving the listing and 
trading of DIAMONDSSM Trust Units, portfolio depositary 
receipts based on the DJIA); and 39011 (September 3, 1997), 62 FR 
47840 (September 11, 1997) (approving the listing and trading of 
options on the DJIA).
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    As of February 6, 2004, the market capitalization of the securities 
included in the DJIA ranged from a high of approximately $333.2 billion 
to a low of approximately $8.4 billion. The average daily trading 
volume for these same securities for the last six (6) months ranged 
from a high of approximately 127.74 million shares to a low of 
approximately 0.31 million shares. The Index levels will be 
disseminated at least once every fifteen (15) seconds throughout the 
trading day.
    Because the 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.\11\ Second, the Notes will be subject to the equity margin 
rules of the Exchange.\12\ 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, Citigroup will deliver a prospectus in 
connection with the initial sales of the Notes.
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    \11\ 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.
    \12\ 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 is consistent 
with section 6 of the Act \13\ in general and furthers the objectives 
of section 6(b)(5) \14\ in particular in that it is designed to prevent 
fraudulent and manipulative acts and practices, to promote just and 
equitable principles of trade, to foster cooperation and coordination 
with persons engaged in facilitating transactions in securities, and to 
remove impediments to and perfect the mechanism of a free and open 
market and a national market system.
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    \13\ 15 U.S.C. 78f(b).
    \14\ 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 
result in 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. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposal is 
consistent with the Act. Persons making written submissions should file 
six copies thereof with the Secretary, Securities and Exchange 
Commission,

[[Page 15915]]

450 Fifth Street, NW., Washington, DC 20549-0609. Comments may also be 
submitted electronically at the following e-mail address: [email protected]. All comment letters should refer to File No. SR-Amex-
2004-13. 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 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 Exchange. All 
submissions should refer to the File No. SR-Amex-2004-13 and should be 
submitted by April 16, 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.\15\ The Commission finds that this proposal is similar to 
several approved instruments currently listed and traded on the 
Amex.\16\ Accordingly, the Commission finds that the listing and 
trading of the Notes based on the DJIA is consistent with the Act and 
will promote just and equitable principles of trade, foster cooperation 
and coordination with persons engaged in regulating, clearing, 
settling, processing information with respect to and facilitating 
transactions in securities, and, in general, protect investors and the 
public interest consistent with section 6(b)(5) of the Act.\17\
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    \15\ 15 U.S.C. 78f(b)(5).
    \16\ See, e.g., Securities Exchange Act Release No. 48152 (July 
10, 2003), 68 FR 42435 (July 17, 2003) (order approving File No. SR-
Amex-2003-62); Securities Exchange Act Release No. 48486 (September 
11, 2003), 68 FR 54758 (September 18, 2003) (order approving File 
No. SR-Amex-2003-74).
    \17\ In approving the proposed rule, the Commission 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 an amount of at least 100 percent of the principal 
investment amount as long as the DJIA never experiences a Contingent 
Event. If the Index has a negative or positive return and the Index 
never experience a Contingent Event, the holder would receive the full 
principal investment amount of the Notes plus the product of $10, the 
percentage change of the DJIA during the term, and the upside 
participation rate (which is expected, according to Amex, to be between 
110-120 percent). If the Index declines but never reaches the 
Contingent Level, the holder will receive the principal investment 
amount of the Notes at maturity. However, if the Notes experience a 
Contingent Event during the term, the holder loses the principal 
protection and will be entitled to receive a payment based on the 
percentage change of the Index. Accordingly, a negative return, 
together with a Contingent Event, will reduce the redemption amount at 
maturity with the potential that the holder of the Note could lose 
their entire investment amount.
    The Amex requests that the Commission approve the proposal, on an 
accelerated basis to accommodate the timetable of listing the Notes. 
The Commission notes that it has previously approved the listing of 
options on, and securities the performance of which have been linked to 
or based on, the DJIA.\18\ The Commission has also previously approved 
the listing of securities with a structure substantially the same as 
that of the Notes.\19\
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    \18\ See supra note 10.
    \19\ See supra note 16.
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    The Commission notes that the Notes are non-principal protected 
instruments, but are not leveraged on the downside. The Notes are debt 
instruments, the price of which will be derived from and based upon the 
value of the DJIA. 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. 
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 30 common 
stocks underlying the DJIA, 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. However, for the reasons 
discussed below, the Commission believes that the Amex's proposal 
adequately addresses the concerns raised by this type of product.
    The Commission notes that the Exchange'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 Commission believes that the Exchange has 
addressed adequately the potential problems that could arise from the 
hybrid nature of the Notes.
    Moreover, the Commission notes that the Exchange will distribute a 
circular to its membership calling attention to the specific risks 
associated with the Notes. The Commission also notes that Citigroup 
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, 
which have been deemed adequate under the Act.
    In approving the product, the Commission recognizes that the DJIA 
is a price-weighted index comprised of 30 common stocks chosen by the 
editors of the Wall Street Journal (``WSJ'') as representative of the 
broad market of U.S. industry, with each stock affecting the DJIA in 
proportion to its market price. The Commission notes that the changes 
in the composition of the DJIA as made solely by the editors of the 
WSJ. The changes to these common stocks tend to be made infrequently 
with most substitutions the result of mergers and other extraordinary 
corporate actions. Further, the Commission notes that the DJIA has 
remained at 30 since 1928. As of February 6, 2004, the market 
capitalization of the securities included in the DJIA ranged from a 
high of approximately $333.2 billion to a low of approximately $8.4 
billion. In addition, the average daily trading volume for these same 
securities for the last six (6) months ranged from a high of 
approximately 127.74 million shares to a low of approximately 0.31 
million shares. Given the compositions of the stocks underlying the 
DJIA, the Commission believes that the listing and trading of the Notes 
that are linked to the DJIA, should not unduly impact the market for 
the underlying securities comprising the DJIA or raise manipulative 
concerns. As discussed more fully above, the underlying stocks 
comprising the DJIA are well-capitalized, highly liquid stocks.

[[Page 15916]]

Moreover, the issuers of the underlying securities comprising the DJIA, 
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, Citigroup. 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 
Citigroup, in addition to the information on the 30 common stocks 
comprising the DJIA, will be publicly available.\21\
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    \20\See Company Guide Section 107A.
    \21\ The SEC notes that the 30 component stocks that comprise 
the DJIA 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 Citigroup, 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 Citigroup.
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    \22\ 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 DJIA will be 
disseminated at least once every fifteen seconds throughout the trading 
day. The Commission believes that providing access to the value of the 
DJIA at least once every fifteen seconds throughout the trading day is 
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 of filing thereof in the Federal Register. 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. In addition, the 
Commission notes that it has previously approved the listing and 
trading of similar Notes and other hybrid securities based on the 
Index.\23\ Accordingly, the Commission believes that there is good 
cause, consistent with sections 6(b)(5) and 19(b)(2) of the Act,\24\ to 
approve the proposal, on an accelerated basis.
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    \23\ See supra note 22.
    \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-2004-13) is hereby 
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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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 04-6765 Filed 3-25-04; 8:45 am]
BILLING CODE 8010-01-P