[Federal Register Volume 69, Number 73 (Thursday, April 15, 2004)]
[Notices]
[Pages 20089-20091]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-8521]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-49548; File No. SR-Amex-2004-02]


Self Regulatory Organizations; Order Granting Approval to 
Proposed Rule Change and Amendment No. 1 by the American Stock Exchange 
LLC Relating to the Listing and Trading of Notes Linked to the 
Performance of the Select Utility Index

April 9, 2004.
    On January 8, 2004, the American Stock Exchange LLC (``Amex'' or

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``Exchange''), filed with the Securities and Exchange Commission 
(''Commission''), pursuant to section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'')\1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change 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 in the Amex's proposal (the ``Select Utility Index''). 
On February 12, 2004, the Exchange filed Amendment No. 1 to the 
proposed rule change.\3\
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    \1\ 15 U.S.C. 78s(b)(1).
    \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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    The proposed rule change was published for comment in the Federal 
Register on February 23, 2004.\4\ The Commission received no comments 
on the proposal.
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    \4\ See Securities Exchange Act Release No. 49239 (February 12, 
2004), 69 FR 8245 (February 23, 2004) (``Notice'').
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    Based on the description of the Notes, the Select Utility Index 
methodology, and the listing and trading criteria set forth in the 
Notice, the Commission finds that the proposed rule change, as amended, 
is consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a national securities exchange \5\ 
and, in particular, the requirements of section 6 of the Act \6\ and 
the rules and regulations thereunder. The Commission finds specifically 
that the proposed rule change is consistent with section 6(b)(5) of the 
Act,\7\ which requires, among other things, that the rules of an 
exchange be designed to facilitate transactions in securities, 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 a national market system, 
and in general to protect investors and the public interest. The 
Commission believes that the Amex's proposal to list and trade notes 
based on the Select Utility Index gives investors exposure to the 
dividend paying stocks in the S&P Utilities Sector and the ability to 
make additional unique investment choices in a manner consistent with 
the requirements of section 6(b)(5)\8\ of the Act.
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    \5\ In approving this proposed rule change, the Commission notes 
that it has considered the proposed rule's impact on efficiency, 
competition, and capital formation. 15 U.S.C. 78c(f).
    \6\ 15 U.S.C. 78f.
    \7\ 15 U.S.C. 78f(b)(5).
    \8\ Id.
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    As described in the Notice, at maturity, the holder of a Note will 
receive an amount based upon the percentage change of the Select 
Utility Index. 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. The 
Notes are cash-settled in U.S. dollars and do not give the holders any 
right to receive a portfolio security or any other ownership right or 
interest in the portfolio of securities comprising the Select Utility 
Index. As described in the Notice, the Select Utility Index is 
initially constituted and reconstituted in a manner to reduce market 
impact and provide a better process for the Issuer to hedge its market 
risk in connection with the Notes. While the Exchange states that there 
will be limited change in the component stocks of the Select Utility 
Index, there may be significant changes in the weightings because the 
market capitalization weighting is adjusted so that no one component 
exceeds 10%. However, the Commission finds that this initial 
constitution and the quarterly reconstitutions are disclosed, and the 
process of constitutions and reconstitutions should help to alleviate 
both market impact and Issuer risk.
    Subject to the criteria in the Prospectus for the Notes, the Amex 
has sole discretion regarding changes to the Select Utility Index due 
to reconstitutions and adjustments to the Index and the multipliers of 
the individual components. Thus, the Amex is determining, calculating, 
and selecting the component stocks of Index based on the 20 highest 
combined dividends scores on the relevant determination date. 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.
    As of April 8, 2004, the market capitalization of the securities 
included in the Index ranged from a high of $22 billion to a low of $1 
billion. The average daily trading volume for these same securities for 
the last six (6) months ranged from a high of 564,568 shares to a low 
of 124,400 shares.\9\ Given that large trading volume and 
capitalization of the component securities underlying the Index, the 
Commission believes that the listing and trading of the Notes that are 
linked to the Select Utility Index should not unduly impact the market 
for the underlying securities or raise manipulative concerns. Moreover, 
the issuers of the underlying securities comprising the Select Utility 
Index, are subject to reporting requirements under the Act, and all of 
the component stocks are either listing or traded on, or traded through 
the facilities of, U.S. securities markets. In addition, the Exchange's 
equity margin and trading rules will apply to the Notes. The Commission 
also believes that the Exchange has appropriate surveillance procedures 
in place to detect and deter potential manipulation for similar index-
lined products. By applying these procedures to the Notes, the 
Commission believes that the potential for manipulation of the 
underlying securities is minimal, thereby protecting investors and the 
public interest.
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    \9\ Telephone Conversation between Jeffrey P. Burns, Associate 
General Counsel, Amex, and Florence Harmon, Senior Special Counsel, 
Division, Commission, on April 8, 2004.
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    Furthermore, the Commission notes that the Notes are dependant upon 
the individual credit of the issuer, Merrill Lynch. To some extent this 
credit risk is minimized by the Exchange's listing standards in Section 
107A of the Company Guide which provide that only issuers satisfying 
substantial asset and equity requirements may issue securities such as 
the Notes. In any event, financial information regarding Merrill Lynch, 
in addition to the information on the component stocks comprising the 
Index, will be publicly available.\10\
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    \10\ The Commission notes that the 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 Merrill Lynch, 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,\11\ the Commission believes that this concern 
is minimal given the size of the Notes issued in relation to the net 
worth of Merrill Lynch.
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    \11\ See Securities Exchange Act Release No. 47983 (June 4, 
2003), 68 FR 5032 (June 11, 2003).
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    Finally, the Commission notes that the value of the Index will be

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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 
products.
    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\12\ that the proposed rule change (File No. SR-Amex-2004-02), as 
amended, be, and it hereby is, approved.
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    \12\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\13\
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    \13\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 04-8521 Filed 4-14-04; 8:45 am]
BILLING CODE 8010-01-P