[Federal Register Volume 69, Number 139 (Wednesday, July 21, 2004)]
[Notices]
[Pages 43639-43644]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-16555]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-50016; File No. SR-Amex-2004-43]


Self-Regulatory Organizations; Notice of Filing and Order 
Granting Accelerated Approval of a Proposed Rule Change by the American 
Stock Exchange LLC Relating to the Listing and Trading of Notes Linked 
to the Performance of the Nikkei 225 Index

July 14, 2004.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 
1934, as amended (``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is 
hereby given that on June 3, 2004, the American Stock Exchange LLC 
(``Amex'' or ``Exchange'') filed with the Securities and Exchange 
Commission (``Commission'') the proposed rule change as described in 
Items I and II below, which Items have been prepared by the Exchange. 
The Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons and 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 notes linked to the 
performance of the Nikkei 225 (``Nikkei 225'' or ``Index''). The text 
of the proposed rule change is available at the Office of the 
Secretary, the Amex and at the Commission.

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

[[Page 43640]]

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 linked to the performance of the Nikkei 225 
(the ``Nikkei Notes'' or ``Notes'').\4\ Morgan Stanley will issue the 
Notes under the name ``PLUS\SM\.'' The Nikkei 225 is determined, 
calculated and maintained solely by NKS.\5\ The Notes will provide an 
uncapped multiplier in the positive performance of the Nikkei 225 
during their term. The Notes will not be subject to a maximum payment 
amount or ceiling.
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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\ Morgan Stanley and Nihon Keizai Shimbun, Inc. (``NKS'') have 
entered into a non-exclusive license agreement providing for the use 
of the Nikkei 225 by Morgan Stanley and certain affiliates and 
subsidiaries in connection with certain securities including these 
Notes. NKS is not responsible and will not participate in the 
issuance and creation of the Notes.
    \5\ The Nikkei 225 is calculated, published and disseminated by 
NKS. The Notes are not sponsored, endorsed, sold or promoted by NKS. 
NKS is a recognized service with business information in Japan and 
publishes a large business daily, The Nihon Keizai Shimbon, and four 
other financial newspapers. NKS is not affiliated with a securities 
broker or dealer. The Index measures the composite price performance 
of selected Japanese stocks. The Index is currently based on the 225 
Underlying Stocks trading on the Tokyo Stock Exchange (``TSE'') and 
represents a broad cross-section of Japanese industry. All 225 of 
the stocks underlying the index are stocks listed in the First 
Section of the TSE. Stocks listed in the First Section are among the 
most actively traded stocks on the TSE. The Index is a modified, 
price-weighted index. Each component stock's weight in the Index is 
based on its price per share rather than the total market 
capitalization of the issuers. NKS calculates the Index by 
multiplying the per share price of a component stock by the 
corresponding weighting factor for the stock (a ``Weight Factor''), 
calculating the sum of all these products and dividing that sum by a 
divisor. The divisor, initially set on May 16, 1949 at 225, was 
23.156 as of June 1, 2004, and is subject to periodic adjustments. 
Each Weight Factor is computed by dividing [yen]50 by the par value 
of the relevant component stock, so that the share price of each 
component stock when multiplied by its Weight Factor corresponds to 
a share price based on a uniform par value of [yen]50. Each Weight 
Factor represents the number of shares of the related component 
stock, which are included in one trading unit of the Index. The 
stock prices used in the calculation of the Index are those reported 
by a primary market for the component stocks, which is currently the 
TSE.
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    The Nikkei 225 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 Morgan Stanley. The Notes will have a 
term of not less than one year but no more than ten (10) years and are 
expected to mature on June 30, 2009. Morgan Stanley 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 
an amount based upon the percentage change of the Nikkei 225. The Notes 
will not have a minimum principal amount that will be repaid, and 
accordingly, payment on the Notes prior to or at maturity may be less 
than the original issue price of the Notes.\8\ The Notes are also not 
callable by the issuer, Morgan Stanley, or redeemable by the holder.
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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 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 Nikkei 225 will reduce the 
redemption amount at maturity with the potential that the holder of 
the Note could lose his entire investment amount.
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    The payment that a holder or investor of a Note will be entitled to 
receive (the ``Redemption Amount'') will depend on the relation of the 
level of the Nikkei 225 at the close of the market on the second 
trading day \9\ prior to maturity of the Notes (the ``Final Level'') 
and the closing value of the Index on the trading day immediately 
following the day the Notes are priced for initial sale to the public 
(the ``Initial Value''). At maturity, if the Final Level is greater 
than the Initial Value, the investor will receive for each $10 
principal amount of PLUS that he holds, a payment equal to $10 plus the 
percentage increase in the value of the Nikkei 225 Index multiplied by 
the ``Upside Leverage Factor,'' which is expected to be 170-180% of the 
Initial Value. If the Final Value is equal to the Initial Value, the 
investor will receive a payment of $10 equal to the principal amount 
invested for each PLUS. If the Final Value declines from the Initial 
Value, the investor will receive proportionally less at maturity than 
the $10 principal invested. Thus, the Notes are not principal protected 
because the payment at maturity is linked to the performance of the 
Nikkei 225 Index. If there is a ``market disruption event'' \10\ when 
determining the Final Level of the Index, the Final Level will be 
determined on the next available trading day during which no ``market 
disruption event'' occurs.
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    \9\ A ``trading day'' is generally a day on which trading is 
conducted on the TSE and on any exchange on which futures or options 
related to the Index are traded, other than a day on which trading 
on any such exchange is scheduled to close prior to its regular 
final weekday closing time.
    \10\ A ``market disruption event'' is defined as (i) the 
occurrence of a suspension, absence, or material limitation of 
trading of 20% or more of the component stocks of the Index on the 
primary market for more than two hours of trading or during the one-
half hour period preceding the close of the principal trading 
session on such primary market; (ii) a breakdown or failure in the 
price and trade reporting systems of any primary market as a result 
of which the reported trading prices for 20% or more of the 
component stocks of the Index during the last one-half hour 
preceding the close of the principal trading session on such primary 
market are materially inaccurate; (iii) the suspension, material 
limitation, or absence of trading on any major securities market for 
trading in futures or options contracts or exchange traded funds 
related to the Index for more than two hours of trading or during 
the one-half hour period preceding the close of the principal 
trading session on such market; and (iv) a determination by Morgan 
Stanley & Co., Incorporated that any event described in clauses (i)-
(iii) above materially interfered with the ability of Morgan Stanley 
or any of its affiliates to unwind or adjust all or a material 
portion of the hedge position with respect to the Notes.
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    Thus, if the percentage change of the Index is positive (i.e., 
Final Level is greater than the Initial Level), the Redemption Amount 
per Unit will equal:
[GRAPHIC] [TIFF OMITTED] TN21JY04.000


[[Page 43641]]


The Upside Leverage Factor, determined at the time of issuance, is 
expected to be between 170-180%.

    If the percentage change of the Index is zero or negative (i.e., 
Final Level is less than or equal to the Initial Level), the Redemption 
Amount per Unit will equal:
[GRAPHIC] [TIFF OMITTED] TN21JY04.001

    The Notes are cash-settled in U.S. dollars and do not give the 
holder any right to receive a portfolio security, dividend payments or 
any other ownership right or interest in the portfolio or index of 
securities comprising the Nikkei 225. The Notes are designed for 
investors who want to participate in and gain enhanced upside exposure 
to a broad representation of the Japanese stock market and who are 
willing to forego principal protection and market interest payments on 
the Notes during such term. The Securities and Exchange Commission 
(``Commission'' or ``SEC'') has previously approved the listing of 
securities linked in whole, or in part, to the performance of the 
Nikkei 225 on the Exchange.\11\
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    \11\ See Securities Exchange Act Release Nos. 49670 (May 7, 
2004), 69 FR 27959 (May 17, 2004) (approving the listing and trading 
of Accelerated Return Notes linked to the Nikkei 225); 38940 (August 
15, 1997), 62 FR 44735 (August 22, 1997) (approving the listing and 
trading of notes based on the Major 11 International Index); 34821 
(October 11, 1994), 59 FR 52568 (October 18, 1994) (approving the 
listing and trading of warrants on the Nikkei 300); and 27565 
(December 22, 1989), 55 FR 376 (January 4, 1990) (approving the 
listing and trading of warrants based on the Nikkei 225).
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    As of June 1, 2004, the market capitalization of the securities 
included in the Nikkei 225 ranged from a high of approximately 14.512 
trillion yen ($131.118 billion) to a low of approximately 31.331 
billion yen ($283.082 million). The average daily trading volume for 
these same securities for the last six (6) months ranged from a high of 
approximately 5.996 million shares to a low of approximately 1.190 
million shares. The Index is composed of 225 securities and is broad-
based. The highest weighted stock has a weight of 3.483% while the top 
five (5) stocks in the Index account for 14.283%. The level or value of 
the Index is calculated once per minute during TSE Trading hours \12\ 
and is readily accessible to U.S. investors at http://www.nni.nikkei.co.jp and http://www.bloomberg.com. NKS is under no 
obligation to continue the calculation and dissemination of the Index. 
In the event that NKS ever ceases to maintain the Index, the Exchange 
will contact the Commission staff to consider prohibiting the continued 
trading of the Notes.\13\
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    \12\ TSE Trading hours are currently 9:00 a.m. to 11:00 a.m. and 
from 12:30 p.m. to 3:00 p.m. Tokyo time, Monday through Friday. Due 
to time zone differences, on any normal trading day the TSE will 
close prior to the opening of business in New York City on the same 
calendar day. Therefore, the closing level of the Index on a trading 
day will generally be available in the U.S. by the opening of 
business on the same calendar day.
    \13\ Telephone conversation between Jeffrey Burns, Associate 
General Counsel, Amex, and Florence Harmon, Senior Special Counsel, 
Division, Commission, dated July 12, 2004.
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    In order to maintain continuity in the level of the Index in the 
event of certain changes due to non-market factors affecting the 
Underlying Stocks, such as the addition or deletion of stocks, 
substitution of stocks, stock dividends, stock splits or distributions 
of assets to stockholders, the divisor used in calculating the Index is 
adjusted in a manner designed to prevent any instantaneous change or 
discontinuity in the level of the Index. The divisor remains at the new 
value until a further adjustment is necessary as the result of another 
change. As a result of each change affecting any Underlying Stock, the 
divisor is adjusted in such a way that the sum of all share prices 
immediately after the change multiplied by the applicable Weight Factor 
and divided by the new divisor, i.e., the level of the Index 
immediately after the change, will equal the level of the Index 
immediately prior to the change.\14\
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    \14\ Telephone conversation between Jeffrey Burns, Associate 
General Counsel, Amex, and Florence Harmon, Senior Special Counsel, 
Division, Commission, dated July 12, 2004 (pertaining to discussion 
of the continuity of the level of the Index). Underlying Stocks may 
be deleted or added by NKS. However, to maintain continuity in the 
Index, the policy of NKS is generally not to alter the composition 
of the Underlying Stocks except when an Underlying Stock is deleted 
in accordance with the following criteria. Any stock becoming 
ineligible for listing in the First Section of the TSE due to any of 
the following reasons will be deleted from the Underlying Stocks: 
bankruptcy of the issuer; merger of the issuer into, or acquisition 
of the issuer by, another company; delisting of the stock or 
transfer of the stock to the ``Seiri-Post'' because of excess debt 
of the issuer or because of any other reason; or transfer of the 
stock to the Second Section of the TSE. Upon deletion of a stock 
from the Index, NKS will select, in accordance with certain criteria 
established by it, a replacement for the deleted Underlying Stock. 
In an exceptional case, a newly listed stock in the First Section of 
the TSE that is recognized by NKS to be representative of a market 
may be added to the Underlying Stocks. As a result, an existing 
Underlying Stock with low trading volume and not representative of a 
market will be deleted.
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    Because the Notes are issued in $10 denominations, 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.\15\ Second, the Notes will be subject to the equity margin rules 
of the Exchange.\16\ 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, Morgan Stanley will deliver a prospectus in 
connection with initial sales of the Notes in accordance with its 
standard prospectus delivery procedures.
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    \15\ 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.
    \16\ 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 that include additional monitoring on key pricing dates,\17\ 
which have been deemed adequate under the Act. In addition, the 
Exchange has an effective surveillance sharing agreement with the TSE 
that may be used as a basis for listing and trading securities linked 
to the Nikkei 225.\18\ The Exchange also notes that the TSE is a member 
of the Intermarket Surveillance Group (``ISG'').\19\ As a result, the 
Exchange asserts that market surveillance information is available from 
the TSE, if necessary, due to regulatory concerns that may arise in 
connection with the component stocks. In the event that it becomes 
necessary, the Exchange will seek the Commission's assistance pursuant 
to

[[Page 43642]]

memoranda of understanding or similar inter-governmental agreements or 
arrangements that may exist between the Commission and the Japanese 
securities regulators.
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    \17\ Telephone conversation between Jeffrey Burns, Associate 
General Counsel, Amex, and Florence Harmon, Senior Special Counsel, 
Division, Commission, dated July 12, 2004 (pertaining to key pricing 
dates).
    \18\ See Information Sharing Agreement between the Amex and the 
TSE dated September 25, 1990.
    \19\ ISG membership obligates an exchange to compile and 
transmit market surveillance information and resolve in good faith 
any disagreements regarding requests for information or responses 
thereto.
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    The Exchange also has a general policy that 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 \20\ in general and furthers the objectives 
of Section 6(b)(5) \21\ 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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    \20\ 15 U.S.C. 78f.
    \21\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purposes of the Act.

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

    The Exchange did not solicit or 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, as amended, is consistent with the Act. Comments may be 
submitted by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an e-mail to [email protected]. Please include 
File Number SR-Amex-2004-43 on the subject line.

Paper Comments

     Send paper comments in triplicate to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, 450 Fifth Street, NW., 
Washington, DC 20549-0609.
    All submissions should refer to File Number SR-Amex-2004-43. This 
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, please use only one method. The Commission will post all 
comments on the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). 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 Section, 450 Fifth 
Street, NW., Washington, DC 20549. Copies of such filing also will be 
available for inspection and copying at the principal offices of Amex. 
All comments received will be posted without change; the Commission 
does not edit personal identifying information from submissions. You 
should submit only information that you wish to make available 
publicly. All submissions should refer to File Number SR-Amex-2004-43 
and should be submitted on or before August 11, 2004.

IV. Commission's Findings and Order Granting Accelerated Approval of 
Proposed Rule Change

    Amex has asked the Commission to approve the proposal on an 
accelerated basis to accommodate the timetable for listing the Notes. 
The Commission notes that it has previously approved the listing of 
securities the performance of which have been linked to, or based on, 
the Index.\22\ The Commission has also previously approved the listing 
of securities with a structure similar to that of the Notes.\23\
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    \22\ See Securities Exchange Act Release Nos. 49999 (July 9, 
2004) (approving the listing and trading of Contingent Principal 
Protection Notes Linked to the Performance of the Nikkei 225 Index); 
49670 (May 7, 2004), 69 FR 27959 (May 17, 2004) (approving the 
listing and trading of Accelerated Return Notes linked to the Nikkei 
225 for Nasdaq); and 38940 (August 15, 1997), 62 FR 44735 (August 
22, 1997) (approving the listing and trading of Market Index Target-
Term Securities the return on which is based on changes in the value 
of a portfolio of 11 foreign indexes, including the Nikkei 225 
Index).
    \23\ See Securities Exchange Act Release Nos. 47464 (March 7, 
2003), 68 FR 12116 (March 13, 2003) (approving the listing and 
trading of Market Recovery Notes Linked to the S&P 500 Index); 47009 
(December 16, 2002), 67 FR 78540 (December 24, 2002) (approving the 
listing and trading of Market Recovery Notes linked to the Nasdaq-
100 Index); and 46883 (November 21, 2002), 67 FR 71216 (November 29, 
2002) (approving the listing and trading of Market Recovery Notes 
linked to the Dow Jones Industrial Average).
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    After careful consideration, 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, and, in particular, with the requirements of 
Section 6(b)(5) of the Act,\24\ in that it is designed 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.\25\ The Commission believes that the 
Notes will provide investors with a means to participate in any 
percentage increase in the Index that exists at the maturity of the 
Notes.
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    \24\ 15 U.S.C. 78f(b)(5).
    \25\ 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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    The Notes are non-principal protected debt instruments, the price 
of which will be derived from and based upon the value of the Nikkei 
225 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. 
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 225 common 
stocks underlying the Nikkei 225 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. However, 
for the reasons discussed below, the Commission believes that Amex's 
proposal adequately addresses the concerns raised by this type of 
product.
    The Commission notes that the protections of Amex Rule 107A were 
designed to address the concerns attendant to the trading hybrid 
securities like the Notes. In particular, by imposing the hybrid 
listing standards, suitability, disclosure, and compliance requirements 
noted above, the Commission believes that Amex has addressed adequately 
the potential problems that could arise from the hybrid nature of the 
Notes. The Commission notes that Amex will distribute a circular to its 
membership calling attention to the specific risks

[[Page 43643]]

associated with the Notes. The Commission also notes that Morgan 
Stanley 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 Index 
is a stock index calculated, published and disseminated by NKS, which 
measures the composite price performance of selected Japanese stocks. 
The Index is currently based on 225 common stocks traded on the TSE and 
represents a broad cross-section of Japanese industry. All 225 
underlying stocks are listed in the First Section of the TSE and are, 
therefore, among the most actively traded stocks on the TSE. The Nikkei 
is a modified, price-weighted index, which means a component stock's 
weight in the Nikkei is based on its price per share rather than total 
market capitalization of the issuers. NKS calculates the Index by 
multiplying the per share price of a component stock by the 
corresponding weighting factor for the stock, calculating the sum of 
all these products, and dividing that sum by a divisor.
    As stated above, NKS is under no obligation to continue the 
calculation and dissemination of the Index. In the event the 
calculation and dissemination every minute of the Index is 
discontinued, Amex represents that it will contact Commission staff and 
consider prohibiting the continued listing of the Notes. The Commission 
notes that the changes in the composition of the Nikkei 225 Index is 
made solely by NKS. The changes to these common stocks tend to be made 
infrequently with most substitutions the result of mergers and other 
extraordinary corporate actions. As of June 1, 2004, the market 
capitalization of the securities included in the Nikkei 225 ranged from 
a high of approximately 14.512 trillion yen ($131.118 billion) to a low 
of approximately 31.331 billion yen ($283.082 million). The average 
daily trading volume for these same securities for the last six (6) 
months ranged from a high of approximately 5.996 million shares to a 
low of approximately 1.190 million shares. The Index is composed of 225 
securities and is broad-based. The highest weighted stock has a weight 
of 3.483% while the top five (5) stocks in the Index account for 
14.283%. Given the composition of the stocks underlying the Nikkei 225 
Index, the Commission believes that the listing and trading of the 
Notes that are linked to the Nikkei 225 Index should not unduly impact 
the market for the underlying securities comprising the Nikkei 225 
Index or raise manipulative concerns.\26\ As discussed more fully 
above, the underlying stocks comprising the Nikkei 225 Index are well-
capitalized, highly liquid stocks.
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    \26\ The issuer Morgan Stanley disclosed in the prospectus that 
the original issue price of the Notes includes commissions, and the 
secondary market prices are likely to exclude commissions, and 
Morgan Stanley's costs of hedging its obligations under the Notes. 
These costs could increase the Initial Value of the Notes, thus 
affecting the payment investors receive at maturity. The Commission 
expects such hedging activity to be conducted in accordance with 
applicable regulatory requirements.
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    In light of the fact that the Nikkei is a foreign index, the 
Commission believes adequate surveillance sharing agreements between 
the Amex and the TSE is a necessary prerequisite to deter and detect 
potential manipulations or other improper or illegal trading involving 
the Notes. While many of the issuers of the underlying securities 
comprising the Nikkei 225 are not subject to reporting requirements 
under the Act, Amex represents that an adequate surveillance sharing 
agreement exists through the ISG between the Amex and the TSE to deter 
and detect potential manipulations or other improper trading in the 
underlying components. Therefore, Amex's surveillance procedures will 
serve to deter as well as detect any potential manipulation. This 
agreement obligates the Amex and TSE to compile and transmit market 
surveillance information and resolve in good faith any disagreements 
regarding requests for information. Accordingly, the Commission 
believes that the surveillance sharing Agreement through ISG is 
adequate for the Amex to surveil the components of the Nikkei 225 for 
potential manipulation or other trading abuses between the markets with 
respect to the trading of the Notes based on the Nikkei 225.
    Furthermore, the Commission notes that the Notes are dependent upon 
the individual credit of the issuer, Morgan Stanley. To some extent 
this credit risk is minimized by the Amex's listing standards in Amex 
Rule 107A, which provide the only issuers satisfying substantial asset 
and equity requirements may issue securities such as the Notes. In 
addition, the Amex's hybrid listing standards further require that the 
Notes have a market value of at least $4 million. In any event, 
financial information regarding Morgan Stanley, in addition to the 
information on the 225 common stocks comprising the Nikkei 225 Index, 
including the dissemination of the Index value once per minute, will be 
publicly available.\27\
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    \27\ See http://www.nni.nikkei.co.jp and http://www.bloomberg.com.
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    The Commission also has a systemic concern, however, that a broker-
dealer such as Morgan Stanley, 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,\28\ the Commission believes that this concern 
is minimal given the size of the Notes issuance in relation to the net 
worth of Morgan Stanley.
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    \28\ 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, as the Commission noted, the value of the Nikkei 225 Index 
will be disseminated at least once every minute throughout the trading 
day. Because the Nikkei 225 Index contains foreign securities and is 
composed of highly liquid and well-capitalized securities, the 
Commission believes that providing access to the value of the Index at 
least once every minute throughout the trading day is sufficient 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 other derivative securities based on the Index and 
securities with a structure similar to that of the Notes.\29\ 
Accordingly, the Commission believes that there is good cause, 
consistent with Sections 6(b)(5) and 19(b)(2) of the Act,\30\ to 
approve the proposal, on an accelerated basis.
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    \29\ See supra notes 22 and 23.
    \30\ 15 U.S.C. 78f(b)(5) and 78s(b)(2).

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[[Page 43644]]

V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\31\ that the proposed rule change (SR-Amex-2004-43) is hereby 
approved on an accelerated basis.
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    \31\ 15 U.S.C. 78s(b)(2).

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\32\
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    \32\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 04-16555 Filed 7-20-04; 8:45 am]
BILLING CODE 8010-01-P