[Federal Register Volume 69, Number 239 (Tuesday, December 14, 2004)]
[Notices]
[Pages 74544-74547]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-27312]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-50812; File No. SR-AMEX-2004-81]


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 Nasdaq-100 Index

December 7, 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 October 4, 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.

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

    The Exchange proposed to list and trade notes, the performance of 
which is linked to the Nasdaq-100 Index (``Nasdaq-100'' 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 that cannot 
be readily categorized under the listing criteria for common and 
preferred

[[Page 74545]]

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 Nasdaq-100 (the ``LUNARS'' or ``Notes'').\4\ The 
Nasdaq-100 is determined, calculated and maintained solely by 
Nasdaq.\5\ The Notes will provide for a multiplier of any positive 
performance of the Nasdaq-100 during such term subject to a maximum 
payment amount or ceiling.
---------------------------------------------------------------------------

    \3\ See Securities Exchange Act Release No. 27753 (March 1, 
1990), 55 FR 8626 (March 8, 1990) (File No. SR-Amex-89-29) 
(``Approving Order'').
    \4\ Wachovia Corporation (``Wachovia'') and The Nasdaq Stock 
Market, Inc. (``Nasdaq'') have entered into a non-exclusive license 
agreement providing for the use of the Nasdaq-100 by Wachovia and 
certain affiliates and subsidiaries in connection with certain 
securities including these Notes. Nasdaq is not responsible and will 
not participate in the issuances and creation of the Notes.
    \5\ The Nasdaq-100 is a modified capitalization-weighted index 
of 100 of the largest and most active non-financial domestic and 
international issues listed on Nasdaq. The Index is determined, 
comprised and calculated by Nasdaq without regard to the Notes. The 
Index is calculated and disseminated every fifteen seconds to market 
information vendors. The Exchange states that the Nasdaq-100 
reflects the largest growth companies across major industry groups 
with all index components of domestic issuers having a market 
capitalization of at least $500 million and an average daily trading 
volume of at least 100,000 shares. For foreign issuers, the 
worldwide market capitalization must be at least $10 billion with a 
U.S. market capitalization of at least $4 billion and an average 
daily trading volume of at least 200,000 shares. In addition, no 
single security comprising the Nasdaq-100 is permitted to have more 
than a 24% weighting. The nasdaq-100 was originally developed with a 
base value of 125 on February 1, 1985. Originally a capitalization-
weighted index, on December 21, 1998, the Nasdaq-100 changed to a 
modified capitalization-weighted index. A modified capitalization-
weighted index is a hybrid between equal weighting and 
capitalization-weighting. This type of methodology is expected to: 
(1) retain the economic attributes of capitalization weighting; (2) 
promote portfolio weight diversification; (3) reduce Nasdaq-100 
performance distortion by preserving the capitalization ranking of 
companies; and (4) reduce market impact on the smallest Nasdaq-100 
securities from necessary weight rebalancings. A quarterly 
examination of the Nasdaq-100 is performed to gauge whether 
requirements are not met, then the Index is rebalanced. These 
requirements are as follows: (1) the current weight of the single 
largest market capitalization index security must be less than or 
equal to 24%, and (2) the collective weight of those index 
securities whose individual current weights are in excess of 4.5%, 
when added together, must be less than or equal to 48%.
---------------------------------------------------------------------------

    The ``LUNARS'' or ``Leveraged Upside Indexed Accelerated Return 
Securities'' 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 Wachovia. The Notes will have a term of not less 
than one or more than ten years. The original public offering price 
will be $1,000 per Note. The Notes will entitle the owner at maturity 
to receive an amount based upon the percentage change of the Nasdaq-
100. At maturity, if the value of the Nasdaq-100 has increased over the 
term of the Notes, a beneficial owner will be entitled to receive a 
payment on the Notes equal to three (3) times the amount of that 
percentage increase, not to exceed a maximum payment at maturity (the 
``Maximum Payment'') to be determined at the time of issuance of the 
Notes. It is expected that the Maximum Payment will be between 116-122% 
of the principal amount, in the other words between $1,160 to $1,220 
per $1,000 Note. 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 
because the final payment per Note will be exposed to the full decrease 
of the Index.\8\ The Notes are also not callable by the Issuer, or 
redeemable by the holder.
---------------------------------------------------------------------------

    \6\ Section 107A of the Amex Company Guide requires: (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. However, when the instrument will be 
issued in $1,000 denominations, as here, 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 that 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 Nasdaq-100 will reduce the 
redemption amount at maturity with the potential that the holder of 
the Note could lose his entire investment. The Notes are not 
``principal protected'' and are fully exposed to any decline in the 
level of the Nasdaq-100.
---------------------------------------------------------------------------

    The payment that a holder or investor of a Note will be entitled to 
receive (the ``Maturity Payment'') depends entirely on the relation of 
the value of the Nasdaq-100 at the close of the fifth scheduled trading 
day before the maturity date (the ``Index Ending Level'') and the 
closing value of the Index on the date the Notes are priced for initial 
sale to the public (the ``Index Starting Level''). In the event that 
the valuation date occurs on a non-trading day or if a market 
disruption event \9\ occurs on such date, the valuation date will be 
the next trading day on which no market disruption event occurs.
---------------------------------------------------------------------------

    \9\ A ``market disruption event'' is defined as the failure of 
the primary market or related markets to open for trading during 
regular trading hours or the occurrence or existence of any of the 
following events: (i) a trading disruption, if material, at any time 
during the one hour period that ends at the close of trading for the 
applicable exchange; (ii) an exchange disruption, if material, at 
any time during the one hour period that ends at the close of 
trading for the applicable exchange; or (iii) an early closure. A 
``trading disruption'' generally means any suspension of, or 
limitation, imposed on trading by the primary exchange or related 
exchange or otherwise, whether by reason of movements in price 
exceeding limits permitted by the relevant exchange or related 
exchange or otherwise (i) relating to securities that comprise 20% 
or more of the level of the Index or (ii) in options contracts or 
futures contracts relating to the Index on any relevant related 
exchange. An ``exchange disruption'' means any event (other than a 
scheduled early closure) that disrupts or impairs the ability of 
market participants in general to (i) effect transactions in, or 
obtain market values on, any primary exchange or related exchange in 
securities that comprise 20 percent or more of the level of the 
Index or (ii) effect transactions in options contracts or futures 
contracts relating to the Index on any relevant related exchange. A 
``related exchange'' is an exchange or quotation system on which 
futures or options contracts relating to the Index are traded.
---------------------------------------------------------------------------

    If the Index Ending Level is greater than the Index Starting Level, 
the Mandatory Payment per Note will equal:
[GRAPHIC] [TIFF OMITTED] TN14DE04.156

subject to the Maximum Payment.
    If the Index Ending Level is less than or equal to the Index 
Starting Level, the Maximum Payment per Note will equal:

[[Page 74546]]

[GRAPHIC] [TIFF OMITTED] TN14DE04.157

    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 Nasdaq-100. The Notes are designed for 
investors who want to participate or gain exposure to the Nasdaq-100, 
subject to a cap, and who are willing to forgo market interest payments 
on the Notes during such term. The Commission has previously approved 
the listing of options on, and securities the performance of which have 
been linked to or based on, the Nasdaq-100.\10\
---------------------------------------------------------------------------

    \10\ Approval of the Nasdaq-100 for underlying an option 
contract was originally granted to the Chicago Board Options 
Exchange (``CBOE'') in 1994. See Securities Exchange Act Release 
Nos. 33428 (January 4, 1994), 59 FR 1576 (January 11, 1994 (approval 
to list and trade options on the Nasdaq-100); 34052 (May 12, 1994), 
59 FR 25972 (May 18, 1994) (approval to list and trade Flex Options 
on the Nasdaq-100); 40157 (July 1, 1998), 63 FR 37426 (July 10, 
1998) (approval to list and trade options on ETFs); 41119 (February 
26, 1999), 64 FR 11510 (March 9, 1999) (approval to list and trade 
QQQ); 43000 (June 30, 2000), 65 FR 42409 July 10, 2000) (approval of 
a Reduced Value Nasdaq-100); and 45966 (May 20, 2002), 67 FR 36942 
(May 28, 2002) (approval to list and trade notes linked to the 
performance of the Nasdaq-100).
---------------------------------------------------------------------------

    As of September 24, 2004, the market capitalization of the 
securities included in the Nasdaq-100 ranged from a high of $297.5 
billion to a low of $1.4 billion. The average daily trading volume for 
these same securities for the last six (6) months, as of the same date, 
ranged from a high of 14.4 million shares to a low of 1 million shares.
    Because the Notes are issued in $1,000 denominations, the Amex's 
existing debt 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, even though the Exchange's debt trading rules apply, 
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, Wachovia will deliver a prospectus in 
connection with the initial sales of the Notes.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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, remove impediments to and perfect the 
mechanism of a free and open market and a national market system, and, 
in general, protect investors and the public interest.
---------------------------------------------------------------------------

    \13\ 15 U.S.C. 78f(b).
    \14\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

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.

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 proposed rule 
change 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 
SR-Amex-2004-81 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 SR-Amex-2004-81. This file 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 Commissions 
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 office of the 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 SR-Amex-2004-81 and should be submitted on or before 
January 4, 2005.

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

    After careful consideration, the Commission finds that the proposed

[[Page 74547]]

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 has approved the listing of securities 
with a structure similar to that of the Notes.\16\ Accordingly, the 
Commission finds that the listing and trading of the Notes based on the 
Index 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\
---------------------------------------------------------------------------

    \15\ Id.
    \16\ See Securities Exchange Act Release Nos. 48152 (July 10, 
2003), 68 FR 42435 (July 17, 2003) (approving the listing and 
trading of the UBS Partial Protection Note linked to the Index); 
47983 (June 4, 2003), 68 FR 35032 (June 11, 2003) (approving the 
listing and trading of a CSFB Accelerated Return Notes linked to 
Index); 47911 (May 22, 2003,), 68 FR 32558 (May 30, 2003) (approving 
the listing and trading of notes (Wachovia TEES) linked to the 
Index).
    \17\ 15 U.S.C. 78f(b)(5). 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).
---------------------------------------------------------------------------

    The requirements of Section 107A of the Company Guide were designed 
to address the concerns attendant to the trading of hybrid securities, 
like the Notes. For example, Section 107A of the Company Guide provides 
that only issuers satisfying substantial asset and equity requirements 
may issue securities such as the Note. In addition, the Exchange's 
``Other Securities'' listing standards further require that the Notes 
have a market value of at least $4 million.\18\ The Commission also 
notes that the 100 component stocks that comprise the Index are 
reporting companies under the Act, and the Notes will be registered 
under Section 12 of the Act. Thus, by imposing the hybrid listing 
standards, suitability, disclosure, nad compliance requirements noted 
above, the Commission believes the Annex has addressed adequately the 
potential problems that could arise from the hybrid nature of the 
Notes.
---------------------------------------------------------------------------

    \18\ See Company Guide Section 107A.
---------------------------------------------------------------------------

    In approving the product, the Commission recognizes that the Index 
is a modified capitalization-weighted index\19\ of 100 of the largest 
and most active non-financial domestic and international companies 
listed on Nasdaq. Given the large trading volume and capitalization of 
the compositions of the stocks underlying the Index, the Commission 
believes that the listing and trading of the Notes that are linked to 
the Index should not unduly impact the market for the underlying 
securities compromising the Index or raise manipulative concerns.\20\ 
Moreover, the issuers of the underlying securities comprising the Index 
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.
---------------------------------------------------------------------------

    \19\ See supra Note 5.
    \20\ the issuer Wachovia 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 
Wachovia'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. Such hedging activity 
must, of course, be conducted in accordance with applicable 
regulatory requirements.
---------------------------------------------------------------------------

    The Commission also believes that any concerns that a broker-
dealer, such as Wachovia, or a subsidiary providing a hedge for the 
issuer, will incur undue position exposure are minimized by the size of 
the Notes issuance in relation to the net worth of Wachovia.\21\
---------------------------------------------------------------------------

    \21\ See 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); 
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).
---------------------------------------------------------------------------

    Finally, the Commission notes that the value of the Index will be 
widely disseminated at least once every fifteen seconds throughout the 
trading day. The Exchange represents that the Nasdaq-100 will be 
determined, calculated and maintained solely by Nasdaq.
    The Commission finds good cause for approving the proposed rule 
change prior to the 30th day after the date of publication of the 
notice of filing thereof in the Federal Register. The Exchange has 
requested accelerated approval because this product is similar to 
several other instruments currently listed and traded on the Amex.\22\ 
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. 
Additionally, the Notes will be listed pursuant to Amex's existing 
hybrid security listing standards as described above. Therefore, the 
Commission finds good cause, consistent with Section 19(b)(2) of the 
Act,\23\ to approve the proposal on an accelerated basis.
---------------------------------------------------------------------------

    \22\ See Securities Exchange Act Release Nos. 45966 (May 20, 
2002), 67 FR 26942 (May 28, 2002)(approval to list and trade notes 
linked to the performance of the Nasdaq-100); 47911 (May 22, 2003), 
68 FR 32558 (May 30, 2003)(approving the listing and trading of 
notes (Wachovia TEES) linked to the S&P 500); 47983 (June 4, 2003), 
68 FR 35032 (June 11, 2003)(approving the listing and trading of a 
CSFB Accelerated Return Notes linked to S&P 500); and 50019 (July 
14, 2004), 69 FR 43635 (July 21, 2004)(approving the listing and 
trading of Morgan Stanley PLUS Notes).
    \23\ 15 U.S.C. 78f(b)(5)and 78s(b)(2).
---------------------------------------------------------------------------

Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\24\ that the proposed rule change (SR-Amex-2004-81) is hereby 
approved on an accelerated basis.
---------------------------------------------------------------------------

    \24\ 15 U.S.C. 78o3(b)(6) and 78s(b)(2).

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\25\
Jill M. Peterson,
Assistant Secretary.
---------------------------------------------------------------------------

    \25\ 17 CFR 300.30-3(a)(12).
---------------------------------------------------------------------------

[FR Doc. 04-27312 Filed 12-13-04; 8:45 am]
BILLING CODE 8010-01-M