[Federal Register Volume 69, Number 229 (Tuesday, November 30, 2004)]
[Notices]
[Pages 69655-69659]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E4-3379]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-50724; File No. SR-NASD-2004-132]


Self-Regulatory Organizations; National Association of Securities 
Dealers, Inc.; Notice of Filing and Order Granting Accelerated Approval 
of a Proposed Rule Change and Amendment No. 1 Thereto Relating to the 
Listing and Trading of Accelerated Return Notes Linked to the Russell 
2000 Index

November 23, 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 August 31, 2004, the National Association of Securities Dealers, 
Inc. (``NASD''), through its subsidiary, The Nasdaq Stock Market, Inc. 
(``Nasdaq''), filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in items I, II, 
and III below, which items have been prepared by Nasdaq. On October 22, 
2004, Nasdaq filed an amendment to the proposed rule change.\3\ The 
Commission is publishing this notice to solicit comments on the 
proposed rule change, as amended, from interested persons and is 
approving the proposal, as amended, on an accelerated basis.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See letter from Alex Kogan, Associate General Counsel, 
Office of General Counsel, Nasdaq, to Katherine A. England, 
Assistant Director, Division of Market Regulation, Commission, dated 
October 21, 2004 (``Amendment No. 1''). In Amendment No. 1, Nasdaq 
clarified the calculation of the Russell 2000 Index and the 
application of its continued listing standards to the Notes.
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I. Self-Regulatory Organization's Statement of the Terms of the 
Substance of the Proposed Rule Change

    Nasdaq proposes to list and trade accelerated return notes linked 
to the Russell 2000 Index (``Notes'') issued by Merrill Lynch & Co., 
Inc. (``Merrill Lynch'').

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, Nasdaq 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. Nasdaq 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 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    Nasdaq proposes to list and trade the Notes, which may provide for 
a return based upon the market performance of the Russell 2000 Index 
(``Index'').

The Index

    The Index is a capitalization-weighted index maintained by Frank 
Russell Company (``FRC''). It is designed to track the performance of 
2,000 common stocks of corporations with small market capitalizations 
relative to other stocks in the U.S. equity market. The companies 
represented in the Index are domiciled in the U.S. and its territories 
and cover a wide range of industries. All 2,000 stocks underlying the 
Index are traded on the New York Stock Exchange, Inc., the American 
Stock Exchange, LLC, or Nasdaq and form a part of the Russell 3000 
Index. The Russell 3000 Index is comprised of the 3,000 largest U.S. 
companies based on market capitalization, and it represents

[[Page 69656]]

approximately 98% of the U.S. equity market.
    The Index measures the price performance of the shares of common 
stock of the smallest 2,000 companies included in the Russell 3000 
Index, which represented approximately 8% of the total market 
capitalization of the Russell 3000 Index as of August 31, 2004.\4\ The 
Index is designed to track the performance of the small capitalization 
segment of the U.S. equity market. The Index is defined, assembled, and 
calculated by FRC without regard to the Notes.
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    \4\ As of August 31, 2004, the total market capitalization of 
the Index was $953.34 billion.
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    Only companies domiciled in the U.S. and its territories are 
eligible for inclusion in the Index. Companies domiciled in other 
countries are excluded from the Index, even if their common stock 
shares are traded on U.S. markets. Preferred stock, convertible 
preferred stock, participating preferred stock, paired shares, 
warrants, and rights are also excluded. Trust receipts, Royalty Trusts, 
limited liability companies, OTC Bulletin Board and Pink Sheets' quoted 
stock, closed-end mutual funds, and limited partnerships that are 
traded on U.S. exchanges are also ineligible for inclusion in the 
Index. Real Estate Investment Trusts and Beneficial Trusts are eligible 
for inclusion, however. In general, only one class of shares of a 
company is allowed in the Russell 3000 Index, although exceptions to 
this general rule have been made where FRC has determined that each 
class of shares acts independently.
    The primary criteria used to determine the initial list of 
securities eligible for the Russell 3000 Index is total market 
capitalization, which is defined as the price of the shares times the 
total number of shares outstanding. Based on closing values on May 31 
of each year, FRC reconstitutes the composition of the Russell 3000 
Index using the then existing market capitalizations of eligible 
companies to reflect changes in capitalization rankings and shares 
available. If a stock ceases to trade as a result of a merger or 
acquisition during the year, then the stock would be deleted from the 
Index immediately, but would not be replaced until the subsequent 
annual recapitalization. No interim replacements will be made. As of 
June 30 of each year, the Index is adjusted to reflect the 
reconstitution of the Russell 3000 Index for that year.
    As of August 19, 2004, the market capitalization of the Index 
components ranged from approximately $70 million to approximately $3.92 
billion. As of the same date, the Index's highest weighted component 
stock constituted approximately 0.195% of the Index's market 
capitalization, and the top five component stocks constituted 
approximately 0.956% of the Index's market capitalization. For a 30-day 
period prior to August 19, 2004, the average daily trading volume of an 
``average'' Index component was approximately 195,000 shares.\5\
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    \5\ To obtain this average daily trading volume figure, the 
average daily trading volume of all of the Index's components was 
averaged over a 30-day period. Telephone conversation between 
Florence E. Harmon, Senior Special Counsel, Division of Market 
Regulation, Commission, and Alex Kogan, Associate General Counsel, 
Office of General Counsel, Nasdaq, on November 16, 2004.
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    As a capitalization-weighted index, the Index reflects changes in 
the capitalization, or market value, of the component stocks relative 
to the capitalization on a base date. The current Index value is 
calculated by adding the market values of the Index's component stocks, 
which are derived by multiplying the price of each stock by the number 
of shares outstanding to arrive at the total market capitalization of 
the 2,000 stocks. The total market capitalization is then divided by a 
divisor, which represents the ``adjusted'' capitalization of the Index 
on the base date of December 31, 1986. To calculate the Index, last 
sale prices are used for exchange-traded and Nasdaq stocks. If a 
component stock is not open for trading, the most recently traded price 
for that security is used in calculating the Index. To provide 
continuity for the Index's value, the divisor is adjusted periodically 
to reflect certain events, including changes in the number of common 
shares outstanding for component stocks, company additions or 
deletions, corporate restructurings, and other capitalization changes. 
As of August 19, 2004, the divisor was 1,735,296.
    The Index value is widely disseminated throughout the trading day 
because complete, ``real-time'' dissemination of the Index value, 
updated at least every 15 seconds, is available from numerous 
independent sources, such as vendors, including Bloomberg and Reuters. 
The value of the Index on a delayed basis can be accessed by individual 
investors at http://finance.yahoo.com/q?s=[caret]RUT&d=t. The last sale 
information for the Notes is disseminated on a real time basis on Tape 
C and a variety of other sources.\6\ In the event that the calculation 
and this type of dissemination of the Index is discontinued, Nasdaq 
will delist the Notes.\7\
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    \6\ Telephone conversation between Florence E. Harmon, Senior 
Special Counsel, Division of Market Regulation, Commission, and Alex 
Kogan, Associate General Counsel, Office of General Counsel, Nasdaq, 
on November 16, 2004.
    \7\ Telephone conversation between Florence E. Harmon, Senior 
Special Counsel, Division of Market Regulation, Commission, and Alex 
Kogan, Associate General Counsel, Office of General Counsel, Nasdaq, 
on November 16, 2004.
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Other Information

    Under NASD Rule 4420(f) (``Other Securities''), Nasdaq may approve 
for listing and trading securities that cannot be categorized readily 
under traditional listing guidelines.\8\ Nasdaq proposes to list the 
Notes for trading under the initial listing criteria of NASD Rule 
4420(f). Specifically, under NASD Rule 4420(f)(1):
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    \8\ See Securities Exchange Act Release No. 32988 (Sept. 29, 
1993), 58 FR 52124 (Oct. 6, 1993).
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    (A) The issuer shall have assets in excess of $100 million and 
stockholders' equity of at least $10 million.\9\ In the case of an 
issuer that is unable to satisfy the income criteria set forth in 
paragraph (a)(1), Nasdaq generally will require the issuer to have the 
following: (i) Assets in excess of $200 million and stockholders' 
equity of at least $10 million; or (ii) assets in excess of $100 
million and stockholders' equity of at least $20 million;
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    \9\ Merrill Lynch satisfies this listing criterion.
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    (B) There must be a minimum of 400 holders of the security; 
provided, however, that if the instrument is traded in $1,000 
denominations, there must be a minimum of 100 holders;
    (C) For equity securities designated pursuant to this paragraph, 
there must be a minimum public distribution of 1,000,000 trading units; 
and
    (D) The aggregate market value/principal amount of the security 
will be at least $4 million.
    In addition, Merrill Lynch satisfies the listed marketplace 
requirement set forth in NASD Rule 4420(f)(2).\10\ Pursuant to NASD 
Rule 4420(f)(3), prior to the commencement of trading of the Notes, 
Nasdaq will distribute a circular to members to provide guidance on 
compliance responsibilities and requirements, including suitability 
recommendations, and to highlight the special risks and characteristics 
of trading in the Notes. In particular, Nasdaq will advise members

[[Page 69657]]

recommending a transaction in the Notes to customers to have reasonable 
grounds for believing that the recommendation is suitable for such 
customer based on the facts, if any, disclosed by such customer of his 
or her other security holdings and of his or her financial situation 
and needs. In addition, pursuant to NASD Rule 2310(b), before executing 
a transaction in the Notes that has been recommended to a non-
institutional customer, a member shall make reasonable efforts to 
obtain information concerning: (1) The customer's financial status; (2) 
the customer's tax status; (3) the customer's investment objectives; 
and (4) such other information used or considered to be reasonable by 
such member in making recommendations to the customer.
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    \10\ NASD Rule 4420(f)(2) requires issuers of securities 
designated pursuant to this paragraph to be listed on the Nasdaq 
National Market or the New York Stock Exchange, Inc., or be an 
affiliate of a company listed on the Nasdaq National Market or the 
New York Stock Exchange, Inc.; provided, however, that the 
provisions of NASD Rule 4450 will be applied to sovereign issuers of 
``other'' securities on a case-by-case basis.
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    The Notes also will be subject to Nasdaq's continued listing 
criterion for other securities pursuant to NASD Rule 4450(c). Under 
this criterion, the aggregate market value or principal amount of 
publicly held units must be at least $1 million. The Notes also must 
have at least two registered and active market makers, which is a 
continued listing requirement under NASD Rule 4310(c)(1). In addition, 
the Notes will be subject to the NASD's existing trading halt 
rules.\11\ Nasdaq will consider prohibiting the continued listing of 
the Notes if Merrill Lynch is not able to meet its obligations on the 
Notes.
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    \11\ See NASD Rule 4120.
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Description of the Notes

    The Notes are a series of senior non-convertible debt securities 
that will be issued by Merrill Lynch and will not be secured by 
collateral. The Notes will have a term to maturity of approximately 
fourteen months. The Notes will be issued in denominations of whole 
units (``Unit''), with each Unit representing a single Note. The 
initial public offering price will be $10 per Unit. The Notes will not 
pay interest and are not subject to redemption by Merrill Lynch or at 
the option of any beneficial owner before maturity.
    At maturity, if the value of the Index has increased, a beneficial 
owner will be entitled to receive a payment on the Notes based on 
triple the amount of that percentage increase, not to exceed a maximum 
payment per Unit (the ``Capped Value'') that is expected to be $11.45. 
Thus, Nasdaq believes that the Notes provide investors the opportunity 
to obtain leveraged returns based on the Index subject to a cap that is 
expected to represent an appreciation of 14.5% over the original public 
offering price of the Notes. Unlike ordinary debt securities, the Notes 
do not guarantee any return of principal at maturity. However, the 
Notes are not leveraged on the downside; rather, the value of the Notes 
declines on a one-to-one basis with the Index. Therefore, if the value 
of the Index has declined at maturity, a beneficial owner will lose 
some, and possibly all, of the original public offering price of $10 
per Unit.
    The payment that a beneficial owner will be entitled to receive 
(the ``Redemption Amount'') depends entirely on the relation of the 
average of the values of the Index at the close of the market on five 
business days before the maturity of the Notes (the ``Ending Value'') 
and the closing value of the Index on the date the Notes are priced for 
initial sale to the public (the ``Starting Value'').
    If the Ending Value is less than or equal to the Starting Value, 
the Redemption Amount per Unit will equal:
[GRAPHIC] [TIFF OMITTED] TN30NO04.072

    If the Ending Value is greater than the Starting Value, the 
Redemption Amount per Unit will equal:
[GRAPHIC] [TIFF OMITTED] TN30NO04.073

Provided, however, that the Redemption Amount cannot exceed the Capped 
Value.
    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 Index. The Notes are designed for investors 
who want to participate or gain exposure to the Index, subject to a 
cap, 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 and trading of other securities in which the 
performance has been linked to the Index and to other Russell 
indexes.\12\
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    \12\ See, e.g., Securities Exchange Act Release Nos. 49388 (Mar. 
10, 2004), 69 FR 12720 (Mar. 17, 2004) (File No. SR-CBOE-2003-51) 
(approving the listing and trading of options on three Russell 
indexes; order contains the list of twelve additional Russell 
indexes that were approved by the Commission at various times in the 
past for option listing and trading); and 31382 (Oct. 30, 1992), 57 
FR 52802 (Nov. 5, 1992) (File No. SR-CBOE-92-02) (approving the 
listing and trading of options on the Index).
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    Since the Notes will be deemed equity securities for the purpose of 
NASD Rule 4420(f), the NASD and Nasdaq's existing equity trading rules 
will apply to the Notes. First, pursuant to NASD Rule 2310 and IM-2310-
2, members must have reasonable grounds for believing that a 
recommendation to a customer regarding the purchase, sale, or exchange 
of any security is suitable for such customer upon the basis of the 
facts, if any, disclosed by such customer as to his other security 
holdings and as to his financial situation and needs.\13\ In addition, 
as previously described, Nasdaq will distribute a circular to members 
providing guidance regarding compliance responsibilities and 
requirements, including suitability recommendations, and highlighting 
the special risks and characteristics of the Notes. Furthermore, the 
Notes will be subject to the equity margin rules. Lastly, the regular 
equity trading hours of 9:30 a.m. to 4 p.m. will apply to transactions 
in the Notes.
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    \13\ NASD Rule 2310(b) requires members to make reasonable 
efforts to obtain information concerning a customer's financial 
status, a customer's tax status, the customer's investment 
objectives, and such other information used or considered to be 
reasonable by such member or registered representative in making 
recommendations to the customer.
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    Pursuant to Rule 10A-3 of the Act \14\ and section 3 of the 
Sarbanes-Oxley Act of 2002,\15\ Nasdaq will prohibit the initial or 
continued listing of any security of an issuer that is not in 
compliance with the requirements set forth therein.
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    \14\ 17 CFR 240.10A-3.
    \15\ Pub. L. 107-204, 116 Stat. 745 (2002).
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    Nasdaq represents that NASD's surveillance procedures are adequate 
to properly monitor the trading of the Notes. Specifically, NASD will 
rely on its current surveillance procedures governing equity securities 
and will include additional monitoring on key pricing dates.

[[Page 69658]]

    Merrill Lynch will deliver a prospectus in connection with the 
initial purchase of the Notes. The procedure for the delivery of a 
prospectus will be the same as Merrill Lynch's current procedure 
involving primary offerings.\16\
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    \16\ Telephone conversation between Alex Kogan, Associate 
General Counsel, Office of General Counsel, Nasdaq, and Richard 
Holley III, Attorney, Division of Market Regulation, Commission, on 
November 1, 2004.
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2. Statutory Basis
    Nasdaq believes that the proposed rule change is consistent with 
the provisions of section 15A of the Act,\17\ in general, and with 
section 15A(b)(6) of the Act,\18\ in particular, in that the proposal 
is designed to prevent fraudulent and manipulative acts and practices, 
to promote just and equitable principles of trade, to remove 
impediments to and perfect the mechanism of a free and open market and, 
in general, to protect investors and the public interest. Specifically, 
the proposed rule change will provide investors with another investment 
vehicle based on the Index.
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    \17\ 15 U.S.C. 78o-3.
    \18\ 15 U.S.C. 78o-3(b)(6).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    Nasdaq does not believe that the proposed rule change will result 
in any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act, as amended.

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

    Written comments were neither solicited nor received.

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-NASD-2004-132 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-NASD-2004-132. 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 Room, 450 Fifth 
Street, NW., Washington, DC 20549. Copies of the filing also will be 
available for inspection and copying at the principal office of the 
NASD. 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-
NASD-2004-132 and should be submitted on or before December 21, 2004.

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

    Nasdaq has asked the Commission to approve the proposal on an 
accelerated basis to accommodate the timetable for listing the Notes. 
After careful consideration, the Commission finds that the proposal is 
consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a registered securities 
association, and, in particular, with the requirements of section 
15A(b)(6) of the Act,\19\ 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.\20\ 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, subject to the Capped Value. Specifically, as described more 
fully above, if the value of the Russell 2000 Index has increased, a 
beneficial owner will be entitled to receive at maturity a payment on 
the Notes based on triple the amount of any percentage increase in the 
Index, not to exceed the Capped Value. The Commission notes that the 
effect of the Capped Value limits an investor in the Notes to an 
appreciation of 14.5% over the original offering price of the Notes.
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    \19\ 15 U.S.C. 78o-3(b)(6).
    \20\ In approving this rule, the Commission notes that it has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
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    The Commission notes that the Notes are non-principal protected 
instruments and 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 Russell 2000 Index. The Notes will not have a minimum 
principal amount that will be repaid at maturity, and accordingly, 
payment on the Notes at maturity may be less than the original issue 
price of the Notes. Accordingly, the Commission believes that 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 
and based on the performance of the 2,000 stocks underlying the Russell 
2000 Index, the Notes are instruments that do not guarantee a return of 
principal, and the return on the Notes is limited by the maximum 
payment at maturity, there are several issues regarding the trading of 
this type of product. However, for the reasons discussed below, the 
Commission believes that Nasdaq's proposal adequately addresses those 
concerns.
    First, the Commission notes that the protections of NASD Rule 
4420(f) were designed to address the concerns attendant to the trading 
of hybrid securities like the Notes. In particular, by imposing the 
hybrid listing standards, suitability, disclosure, and compliance 
requirements noted above, the Commission believes that Nasdaq has 
addressed adequately the potential problems that could arise from the 
hybrid nature of the Notes. Nasdaq states that it will distribute a 
circular to its membership calling attention to the specific risks 
associated with the Notes. Specifically, among other things, the 
circular will note that the Notes do not guarantee a total return of 
principal at maturity, that they are subject to maximum total payment 
at maturity, that the Notes do not pay interest, and that the Notes 
will provide exposure to the Index. Distribution of the circular should 
help to ensure that only customers with an understanding of the

[[Page 69659]]

risks attendant to the trading of the Notes and who are able to bear 
the financial risks associated with transactions in the Notes will 
trade the Notes. Nasdaq also represents that Merrill Lynch will deliver 
a prospectus in connection with the initial sales of the Notes. In 
addition, Nasdaq has represented that it will incorporate and rely upon 
its existing surveillance procedures governing equity trading for the 
surveillance of the Notes, which includes surveillance on key pricing 
dates.
    Second, the Commission believes that the listing and trading of the 
Notes should not unduly impact the market for the securities underlying 
the Index or raise manipulative concerns. In approving the product, the 
Commission recognizes that the Index is a capitalization-weighted stock 
index that is calculated, published, and disseminated by FRC that 
measures the composite price performance of the smallest 2,000 
companies included in the Russell 3000 Index.\21\ The Commission notes 
that the Index represents a broad cross-section of domestic small to 
mid-sized stocks, and no single industry group or stock dominates the 
Index. Only companies domiciled in the U.S. and its territories, which 
are listed and trade on the New York Stock Exchange, Inc., the American 
Stock Exchange, LLC, or Nasdaq, are eligible for inclusion in the 
Index. Changes in the composition of the Russell 2000 Index are made 
solely by FRC.
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    \21\ The Russell 3000 Index is composed of the 3,000 largest 
U.S. companies, based on market capitalization, and represents 
approximately 98% of the U.S. equity market. The Russell 2000 Index 
represented approximately 8% of the total market capitalization of 
the Russell 3000 Index as of August 31, 2004.
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    Nasdaq also represents that the primary criteria used to determine 
the initial list of securities eligible for the Russell 3000 Index is 
total market capitalization, and the Index is adjusted to reflect the 
reconstitution of the Russell 3000 Index for a given year. As of August 
19, 2004, the market capitalization of the Index components ranged from 
approximately $70 million to approximately $3.92 billion. As of the 
same date, the Index's highest weighted component stock constituted 
approximately 0.195% of the Index's market capitalization, and the top 
five component stocks constituted approximately 0.956% of the Index's 
market capitalization. Nasdaq further states that the average daily 
trading volume of the average of Index components was approximately 
195,000 shares. Given the composition of the stocks underlying the 
Russell 2000 Index, the Commission believes that the listing and 
trading of the Notes that are linked to the Russell 2000 Index should 
not unduly impact the market for the underlying securities comprising 
the Russell 2000 Index or raise manipulative concerns.\22\
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    \22\ See also Securities Exchange Act Release No. 31382 (Oct. 
30, 1992), 57 FR 52802 (Nov. 5, 1992) (File No. SR-CBOE-92-02) 
(classifying the Index as broad-based).
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    Third, the Commission notes that the Notes are dependent upon the 
individual credit of the issuer, Merrill Lynch. To some extent, this 
credit risk is minimized by the NASD's listing standards in NASD Rule 
4420(f), which provide that only issuers satisfying substantial asset 
and equity requirements may issue securities such as the Notes. In 
addition, the NASD's hybrid listing standards further require that the 
Notes have a market value of at least $4 million. In any event, 
financial information regarding Merrill Lynch, in addition to the 
information on the 2000 stocks comprising the Russell 2000 Index, will 
be publicly available.\23\ 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 could incur position exposure. 
However, as the Commission has concluded in previous approval orders 
for other hybrid instruments issued by broker-dealers,\24\ the 
Commission believes that this concern is minimal given the size of the 
issuance of the Notes in relation to the net worth of Merrill Lynch.
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    \23\ See http://www.russell.com/US/Indexes/US/Membership/default.asp asp.
    \24\ See, e.g., Securities Exchange Act Release Nos. 50278 (Aug. 
24, 2004), 69 FR 53751 (Sept. 2, 2004) (File No. SR-Amex-2004-64) 
(order approving the listing and trading of notes linked to the 
performance or the Standard & Poor's 500 Index); 49670 (May 7, 
2004), 69 FR 27959 (May 17, 2004) (File No. SR-NASD-2001-68) (order 
approving the listing and trading of notes linked to the Nikkei 225 
Index); 44913 (Oct. 9, 2001), 66 FR 52469 (Oct. 15, 2001) (File No. 
SR-NASD-2001-73) (order approving the listing and trading of notes 
whose return is based on the performance of the Nasdaq-100 Index); 
and 44483 (June 27, 2001), 66 FR 25677 (July 6, 2001) (File No. SR-
Amex-2001-40) (order approving the listing and trading of notes 
whose return is based upon a portfolio of 20 securities selected 
from the Amex Institutional Index).
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    Finally, the Commission notes that the value of the Russell 2000 
Index will be widely disseminated at least once every 15 seconds 
throughout the trading day. Nasdaq has stated that it will delist the 
Notes in the event that the calculation and dissemination of the Index 
from a source independent of the issuer and Nasdaq is discontinued. The 
Commission believes that the availability of this disclosure is 
sufficient and should benefit investors in the product.
    The Commission finds good cause for approving the proposed rule 
change, as amended, prior to the 30th 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 \25\ and 
securities with a structure similar to that of the Notes.\26\ 
Accordingly, the Commission believes that there is good cause, 
consistent with sections 15A(b)(6) and 19(b)(2) of the Act,\27\ to 
approve the proposal, as amended, on an accelerated basis.
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    \25\ See Securities Exchange Act Release Nos. 46306 (Aug. 2, 
2002), 67 FR 51916 (Aug. 9, 2002) (File No. SR-NYSE-2002-28) 
(approving the listing and trading of an exchange traded fund based 
on the Index); 32694 (July 29, 1993), 58 FR 41814 (Aug. 5, 1993) 
(File No. SR-CBOE-93-16) (approving the listing and trading of 
Flexible Exchange Options on the Index); 32693 (July 29, 1993), 58 
FR 41817 (Aug. 5, 1993) (File No. SR-CBOE-93-15) (approving the 
listing and trading of QIX options on the Index); and 31382 (Oct. 
30, 1992), 57 FR 52802 (Nov. 5, 1992) (File No. SR-CBOE-92-02) 
(approving the listing and trading of options on the Index).
    \26\ See Securities Exchange Act Release Nos. 49670 (May 7, 
2004), 69 FR 27959 (May 17, 2004) (File No. SR-NASD-2004-068) 
(approving the listing and trading of notes linked to the Nikkei 225 
Index); 47464 (Mar. 7, 2003), 68 FR 12116 (Mar. 13, 2003) (File No. 
SR-NASD-2003-22) (approving the listing and trading of Market 
Recovery Notes Linked to the S&P 500 Index); 47009 (Dec. 16, 2002), 
67 FR 78540 (Dec. 24, 2002) (File No. SR-NASD-2002-175) (approving 
the listing and trading of Market Recovery Notes linked to the 
Nasdaq-100 Index); and 46883 (Nov. 21, 2002), 67 FR 71216 (Nov. 29, 
2002) (File No. SR-Amex-2002-68) (approving the listing and trading 
of Market Recovery Notes linked to the Dow Jones Industrial 
Average).
    \27\ 15 U.S.C. 78o-3(b)(6) and 78s(b)(2).
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V. Conclusion

    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\28\ that the proposed rule change, as amended, (SR-NASD-2004-132) 
is hereby approved on an accelerated basis.
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    \28\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\29\
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    \29\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. E4-3379 Filed 11-29-04; 8:45 am]
BILLING CODE 8010-01-P