[Federal Register Volume 69, Number 244 (Tuesday, December 21, 2004)]
[Notices]
[Pages 76506-76509]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-27836]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-50850; File No. SR-Amex-2004-87]


Self-Regulatory Organization; 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 Contingent 
Principal Protected Notes Linked to the Performance of the Standard and 
Poor's 500 Composite Stock Price Index

December 14, 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 November 1, 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 contingent principal 
protected notes, the performance of which is linked to the Standard and 
Poor's 500 Composite Stock Price Index (``S&P 500'' 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, 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. 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 stocks, bonds, debentures, or warrants.\3\ Amex proposes to 
list for trading under Section 107A of the Company Guide notes linked 
to the performance of the S&P 500 that provide for contingent principal 
protection (``Contingent Principal Protected Notes'' or ``Notes'').\4\

[[Page 76507]]

Wachovia will issue the Notes under the name ``Trigger CAPITALS.'' 
TM The Index is determined, calculated, and maintained 
solely by S&P.\5\ The Notes will provide for an uncapped participation 
in the positive performance of the S&P 500 during their term while also 
reducing the risk exposure to the principal investment amount as long 
as the Index does not at any time decline to or below a pre-established 
level to be determined at the time of issuance (``Trigger Level''). 
This Trigger Level will be a pre-determined percentage decline from the 
level of the Index at the close of the market on the date the Notes are 
priced for initial sale to the public (``Index Starting Level''). The 
Issuer expects that the Trigger Level will be approximately 75% of the 
Index Starting Level. A decline of the Index to the Trigger Level is 
referred to as a ``Trigger Event.''
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    \3\ See Securities Exchange Act Release No. 27753 (March 1, 
1990) 55 FR 8624 (March 8, 1990) (order approving File No. SR-Amex-
89-29).
    \4\ Wachovia Corporation (``Wachovia'') and Standard & Poor's, a 
division of The McGraw-Hill Companies, Inc., (``S&P'') have entered 
into a non-exclusive license agreement providing for the use of the 
S&P 500 by Wachovia and certain affiliates and subsidiaries in 
connection with certain securities including these Notes. S&P is not 
responsible for, and will not participate in the issuance and 
creation of, the Notes.
    \5\ The S&P 500 is a broad-based stock index which provides an 
indication of the performance of the U.S. equity market. The S&P 500 
is a capitalization-weighted index reflecting the total market value 
of 500 widely-held component stocks relative to a particular base 
period. The Index reflects the price of the common stocks of 500 
companies without taking into account the value of the dividend paid 
on such stocks. The Index is computed by dividing the total market 
value of the 500 stocks by an Index divisor. The Index divisor keeps 
the Index comparable over time to its base period of 1941-1943 and 
is the reference point for all maintenance adjustments. The 
securities included in the Index are listed on Amex or the New York 
Stock Exchange, Inc. (``NYSE'') or traded through The Nasdaq Stock 
Market, Inc. (``Nasdaq''). The Index is calculated and disseminated 
every 15 seconds to numerous market data vendors. Telephone 
conversation between Jeffrey P. Burns, Associate General Counsel, 
Amex, and Florence E. Harmon, Senior Special Counsel, Division of 
Market Regulation (``Division''), Commission, on December 13, 2004.
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    The Contingent Principal Protected 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 Wachovia. The principal 
amount of each Note is expected to be $1,000. The Notes will have a 
term of at least one (1) but no more than ten (10) years. The Notes 
will entitle the owner at maturity to receive at least 100% of the 
principal investment amount as long as the S&P 500 never experiences a 
Trigger Event. In the case of a positive Index return, the holder would 
receive the full principal investment amount of the Note plus the 
product of $1,000 and the quotient of the Index Ending Level (as 
defined below) divided by the Index Starting Level. In the case of a 
negative Index return, if the Index declines but never reaches the 
Trigger Level, the holder will receive the principal investment amount 
of the Notes at maturity. If, however, the Notes experience a Trigger 
Event at any time during the term, the holder loses the ``principal 
protection'' and will be entitled to receive a payment based on the 
percentage change of the Index, positive or negative. Thus, payment on 
the Notes prior to or at maturity may be less than the original issue 
price of the Notes. Accordingly, if the Index experiences a negative 
return and a Trigger Event, the Notes would be fully exposed to any 
decline in the level of the S&P 500.\8\ The Notes are not callable by 
the Issuer or redeemable by the holder.
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    \6\ The initial listing standards for the Notes require: (1) A 
market value of at least $4 million; and (2) a term of at least one 
year. Because the Notes will be issued in $1,000 denominations, the 
minimum public distribution requirement of one million units and the 
minimum holder requirement of 400 holders do not apply. In addition, 
the listing guidelines provide that the issuer has assets in excess 
of $100 million, stockholder's equity of at least $10 million, and 
pre-tax income of at least $750,000 in the last fiscal year or in 
two of the three prior fiscal years. In the case of an issuer who 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 the aggregate market value has become so reduced as 
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) 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 S&P 500, together with a Trigger 
Event, will reduce the redemption amount at maturity with the 
potential that the holder of the Note could lose the entire 
investment amount.
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    The payment that a holder or investor of a Note will be entitled to 
receive (``Maturity Payment Amount'') will depend on the Index Starting 
Level and the relation of the level of the S&P 500 at the close of the 
market on the fifth business day (``Valuation Date'') prior to maturity 
of the Notes (``Index Ending Level''). In addition, whether the Notes 
retain ``principal protection'' or are fully exposed to the performance 
of the Index is determined by whether the S&P 500 experiences a Trigger 
Event at any time during the term of the Notes. 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.
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    \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 a 
relevant exchange or related exchange; (ii) an exchange disruption, 
if material, at any time during the one hour period that ends at the 
close of trading for a relevant exchange or related exchange; or 
(iii) an early closure. A ``trading disruption'' generally means any 
suspension of, or limitation imposed on trading by, the relevant 
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 relevant exchange 
or related exchange in securities that comprise 20% 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.
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    If the percentage change of the Index is positive, the Maturity 
Payment Amount per Note will equal: 
[GRAPHIC] [TIFF OMITTED] TN21DE04.035

    If the percentage change of the Index is zero or negative and the 
Index never experience a Trigger Event, the Maturity Payment Amount per 
Note will equal the principal investment amount of $1,000.
    If the Index experiences a Trigger Event at any time during the 
term, the Maturity Payment Amount per Note will equal: 
[GRAPHIC] [TIFF OMITTED] TN21DE04.036

    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 S&P 500. The Notes do not pay interest.\10\ 
The Notes are designed for investors who want to participate or gain 
exposure to the S&P 500 while partially limiting their investment risk 
and who are willing to

[[Page 76508]]

forego market interest payments on the Notes during such term. The 
Commission has previously approved the listing of securities and 
options linked to the performance of the S&P 500.\11\
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    \10\ Telephone conversation between Jeffrey P. Burns, Associate 
General Counsel, Amex, and Florence E. Harmon, Senior Special 
Counsel, Division, Commission, on December 13, 2004.
    \11\ See e.g. Securities Exchange Act Release Nos. 19907 (June 
24, 1983), 48 FR 30814 (July 5, 1983) (approving the listing and 
trading of options on the S&P 500 Index); 31591 (December 18, 1992), 
57 FR 60253 (December 18, 1992) (approving the listing and trading 
of Portfolio Depositary Receipts based on the S&P 500 Index); 27382 
(October 26, 1989), 54 FR 45834 (October 31, 1989) (approving the 
listing and trading of Exchange Stock Portfolios based on the value 
of the S&P 500 Index); 30394 (February 21, 1992), 57 FR 7409 (March 
2, 1992) (approving the listing and trading of a unit investment 
trust linked to the S&P 500 Index) (SPDR); 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); 48152 (July 10, 2003), 
68 FR 42435 (July 17, 2003) (approving the listing and trading of a 
UBS Partial Protection Note linked to the S&P 500); 48486 (September 
11, 2003), 68 FR 54758 (September 18, 2003) (approving the listing 
and trading of CSFB Contingent Principal Protected Notes on the S&P 
500); 50019 (July 14, 2004), 69 FR 43635 (July 21, 2004) (approving 
the listing and trading of Morgan Stanley PLUS Notes); and 50414 
(September 20, 2004), 69 FR 58001 (September 28, 2004) (approving 
the listing and trading of Wachovia Contingent Principal Protected 
Notes on the S&P 500).
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    The Exchange notes that S&P announced a change to its methodology 
so that Index weightings are based on the ``public float'' of a 
component stocks and not those shares of stock that are not publicly 
traded.\12\ On March 1, 2004, S&P announced that it intends to shift 
its major indexes, such as the S&P 500, to a ``float-adjusted'' market 
capitalization index. In the float-adjusted market capitalization 
index, the value of the index will be calculated by multiplying the 
public float of each component by the price per share of the component. 
The result is then divided by the divisor. Accordingly, a float-
adjusted market capitalization index will exclude those blocks of 
stocks that do not publicly trade from determining the weight for a 
stock in the index. The transition from a market capitalization 
weighted index to a float-adjusted capitalization weighted index will 
be implemented over an 18 month period. In September 2004, S&P 
published procedures and float adjustment factors, and began 
calculation of provisional float adjusted indexes.\13\ S&P started 
calculating a provisional index alongside the regular index, although 
there is still only one official set of index values. In March 2005, 
the non-provisional index values will then shift to partial float 
adjustment, using float adjustment factors that represent half of the 
total adjustment, based on the information published in September 2004. 
In September 2005, the shift to float adjustment will be completed so 
that official index values will be fully float-adjusted, and the 
provisional indexes will be discontinued.
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    \12\ See S&P Press Release dated March 1, 2004, available at 
www.standardandpoors.com.
    \13\ The Exchange clarified that S&P published procedures and 
float adjustment factors on September 28, 2004. Telephone 
conversation between Jeffrey P. Burns, Associate General Counsel, 
Amex, and Molly M. Kim, Attorney, Division, Commission, on December 
2, 2004.
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    As of October 18, 2004, the market capitalization of the securities 
included in the S&P 500 ranged from a high of approximately $359.7 
billion to a low of approximately $505 million. The average daily 
trading volume for these same securities for the last six (6) months 
ranged from a high of approximately 9 million shares to a low of 
approximately 819,817 shares. The Exchange represents that the Index 
levels will be disseminated at least once every fifteen (15) seconds 
throughout the trading day.
    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.\14\ Second, even though the Exchange's debt trading rules apply, 
the Notes will be subject to the equity margin rules of the 
Exchange.\15\ 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, 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.
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    \14\ 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.
    \15\ 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, 
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,\16\ in general, and furthers the objectives 
of Section 6(b)(5),\17\ 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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    \16\ 15 U.S.C. 78f(b).
    \17\ 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.

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 
File Number SR-Amex-2004-87 on the subject line.

Paper Comments

     Send paper comments in triplicate to Jonathan G. Katz, 
Secretary,

[[Page 76509]]

Securities and Exchange Commission, 450 Fifth Street, NW., Washington, 
DC 20549-0609.
    All submissions should refer to File Number SR-Amex-2004-87. 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-2004-87 
and should be submitted on or before January 11, 2005.

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

    After careful consideration, the Commission finds that the proposed 
rule change is consistent with the requirements of the Act and the 
rules and regulations thereunder applicable to a national securities 
exchange and, in particular, with the requirements of Section 6(b)(5) 
of the Act.\18\ The Commission notes that the proposal is similar to 
several approved instruments currently listed and traded on Amex.\19\ 
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 
securities, and, in general, protect investors and the public interest 
consistent with Section 6(b)(5) of the Act.\20\
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    \18\ Id.
    \19\ See Securities Exchange Act Release Nos. 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); 48152 
(July 10, 2003), 68 FR 42435 (July 17, 2003) (approving the listing 
and trading of a UBS Partial Protection Note linked to the S&P 500); 
48486 (September 11, 2003), 68 FR 54758 (September 18, 2003) 
(approving the listing and trading of CSFB Contingent Principal 
Protected Notes on the S&P 500); 50019 (July 14, 2004), 69 FR 43635 
(July 21, 2004) (approving the listing and trading of Morgan Stanley 
PLUS Notes); and 50414 (September 20, 2004), 69 FR 58001 (September 
28, 2004) (approving the listing and trading of Wachovia Contingent 
Principal Protected Notes on the S&P 500).
    \20\ 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).
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    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 Notes. In addition, the Exchange's 
``Other Securities'' listing standards further require that the Notes 
have a market value of at least $4 million.\21\ The Commission also 
notes that the 500 component stocks that comprise the Index are 
reporting companies under the Act, and the Notes will be registered 
under Section 12 of the Act.\22\ Thus, by imposing the hybrid listing 
standards, suitability, disclosure, and compliance requirements noted 
above, the Commission believes Amex has addressed adequately the 
potential problems that could arise from the hybrid nature of the 
Notes.
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    \21\ See Company Guide Section 107A.
    \22\ 15 U.S.C. 78l.
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    In approving the product, the Commission recognizes that the Index 
is a capitalization-weighted index of 500 companies listed on Nasdaq, 
NYSE, and Amex. 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. 
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.
    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.\23\
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    \23\ 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-
40); and 37744 (September 27, 1996), 61 FR 52480 (October 7, 1996) 
(order approving the listing and trading of notes whose return is 
based on a weighted portfolio of healthcare/biotechnology industry 
securities) (File No. SR-Amex-96-27).
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    Finally, the Commission notes that the value of the Index will be 
widely disseminated, at least once every fifteen (15) seconds 
throughout the trading day. The Exchange represents that the Index will 
be determined, calculated, and maintained by S&P.
    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 Amex.\24\ 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,\25\ to approve the proposal on an accelerated basis.
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    \24\ See supra, note 17.
    \25\ 15 U.S.C. 78f(b)(5) and 78s(b)(2).
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V. Conclusion

    It is therefore ordered, pursuant to section 19(b)(2) of the Act 
\26\ that the proposed rule change (SR-Amex-2004-87) is hereby approved 
on an accelerated basis.
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    \26\ Id.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\27\
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    \27\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 04-27836 Filed 12-20-04; 8:45 am]
BILLING CODE 8010-01-P