[Federal Register Volume 70, Number 27 (Thursday, February 10, 2005)]
[Notices]
[Pages 7129-7132]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E5-571]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-51133; File No. SR-Amex-2004-101]


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 Dow Jones Industrial Average

February 3, 2005.
    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 December 10, 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.
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    \1\ 15 U.S.C. 78s(b)(1).
    \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 under Section 107A of the 
Amex Company Guide (``Company Guide''), notes linked to the performance 
of the Dow Jones Industrial Average (``DJIA'' 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 Exchange 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 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\ The Amex proposes to list for trading under 
Section 107A of the Company Guide notes issued by Citigroup, linked to 
the performance of the DJIA (the ``DJIA Notes'' or ``Notes'').\4\ The 
DJIA is determined, calculated and maintained solely by Dow Jones.\5\ 
The Notes will provide for a multiplier of 300% (``Upside Participation 
Rate'') of any positive performance of the DJIA during such term 
subject to a maximum payment amount or ceiling expected to be 5.7%, 
which will be determined at the time of issuance (``Capped Value'').\6\

[[Page 7130]]

 The Capped Value limits the portion of any appreciation in the value 
of the DJIA in which an investor can participate to approximately 17.1% 
of the principal amount of the Notes (e.g., a multiplier of 300% of the 
positive performance of the Index subject to the Capped Value of 5.7%). 
If the ending value of the DJIA exceeds the starting value by more than 
the expected Capped Value of 5.7%, then the return on the Notes will be 
limited to 17.1%; thus, if the DJIA appreciates more that 17.1%, the 
return on the Notes will be less than an investment in the underlying 
stocks of the DJIA or a similar security that was directly linked to 
the DJIA but not subject to an appreciation cap. However, for increases 
in the value of the Index equal to or greater than 5.7% and less than 
17.1%, the appreciation on the Notes will be 17.1%; thus, the Notes 
provide more appreciation than an investment in an instrument directly 
linked to the Index. If the DJIA increases by less than 5.7%, the 
appreciation on the Notes will equal three (3) times the appreciation 
of an investment in an instrument directly linked to the Index; thus, 
the Notes will again provide more appreciation than an investment in an 
instrument directly linked to the Index. If the DJIA decreases during 
this period, however, the value of the Notes will decline on a one-to-
one basis with the Index and there is no floor on the depreciation.
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    \3\ See Securities Exchange Act Release No. 27753 (March 1, 
1990), 55 FR 8626 (March 8, 1990) (order approving File No. SR-Amex-
89-29).
    \4\ Citigroup Global Markets Holdings, Inc. (``Citigroup'') and 
Dow Jones & Co. (``Dow Jones'') have entered into a non-exclusive 
license agreement providing for the use of the DJIA by Citigroup and 
certain affiliates and subsidiaries in connection with certain 
securities including these Notes. Dow Jones is not responsible and 
will not participate in the issuance and creation of the Notes.
    \5\ The DJIA is a price-weighted index comprised of 30 common 
stocks chosen by the editors of the Wall Street Journal (``WSJ'') as 
representative of the broad market of U.S. industry. A price-
weighted index refers to an index that assigns weights to component 
stocks based on the price per share rather than total market 
capitalization of such component stock. The corporations represented 
in the DJIA tend to be leaders within their respective industries 
and their stocks are typically widely held by individuals and 
institutional investors. Changes in the composition of the DJIA are 
made solely by the editors of the WSJ. In addition, changes to the 
common stocks included in the DJIA tend to be made infrequently with 
most substitutions the result of mergers and other extraordinary 
corporate actions. However, over time, changes are made to more 
accurately represent the broad market of U.S. industry. In choosing 
a new corporation for the DJIA, the editors of the WSJ focus on the 
leading industrial companies with a successful history of growth and 
wide interest among investors. Dow Jones, publisher of the WSJ, is 
not affiliated with Citigroup and has not participated in any way in 
the creation of the Notes. The number of common stocks in the DJIA 
has remained at 30 since 1928, and, in an effort to maintain 
continuity, the constituent corporations represented in the DJIA 
have been changed on a relatively infrequent basis.
    \6\ Telephone conversation between Jeff Burns, Associate General 
Counsel, Amex, and Florence E. Harmon, Senior Special Counsel, 
Division of Market Regulation (``Division''), SEC, dated January 31, 
2005 (as to expected amount payable at maturity under various 
scenarios).
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    The Notes will conform to the initial listing guidelines under 
Section 107A \7\ and continued listing guidelines under Sections 1001-
1003 \8\ of the Company Guide. The Notes are senior non-convertible 
debt securities of Citigroup. The Notes will have a term of at least 
one but no more than ten years.\9\ The original public offering price 
will be $10 per Note. The Notes will entitle the owner at maturity to 
receive an amount based upon the percentage change of the DJIA. 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.\10\ The Notes are also not 
callable by the issuer, Citigroup, or redeemable by the holder.
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    \7\ Section 107A of the Amex Company Guide requires: (1) A 
minimum public distribution of one million units; (2) a minimum of 
400 shareholders because the Notes are issued in $10 denominations; 
(3) a market value of at least $4 million; and (4) a term of at 
least one year. In addition, the listing guidelines provide that the 
issuer has assets in excess of $100 million, stockholder's equity of 
at least $10 million, and pre-tax income of at least $750,000 in the 
last fiscal year or in two of the three prior fiscal years. In the 
case of an issuer 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.
    \8\ 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.
    \9\ The term of the Notes is expected to be 21 months and will 
be disclosed in the pricing supplement.
    \10\ A negative return of the DJIA will reduce the redemption 
amount at maturity with the potential that the holder of the Note 
could lose his entire investment amount.
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    The payment that a holder or investor of a Note will be entitled to 
receive (the ``Redemption Amount'') will depend on the relation of the 
level of the DJIA at the close of the market on a single business day 
(the ``Valuation Date'') shortly prior to maturity of the Notes (the 
``Final Index Level'') and the closing value of the Index on the date 
the Notes are priced for initial sale to the public (the ``Initial 
Index Level''). If there is a ``market disruption event'' \11\ when 
determining the Final Index Level, the Final Index Level maybe deferred 
up to two (2) business days if deemed appropriate by the calculation 
agent.
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    \11\ A ``market disruption event'' is defined as (i) the 
occurrence of a suspension, absence or material limitation of 
trading of 20% or more of the component stocks of the Index on the 
primary market for more than two hours of trading or during the one-
half hour period preceding the close of the principal trading 
session on such primary market; (ii) a breakdown or failure in the 
price and trade reporting systems of any primary market as a result 
of which the reported trading prices for 20% or more of the 
component stocks of the Index during the last one-half hour 
preceding the close of the principal trading session on such primary 
market are materially inaccurate; and (iii) the suspension, material 
limitation, or absence of trading on any major securities market for 
trading in options contracts, future contracts, or any options on 
such futures contracts related to the Index for more than two hours 
of trading or during the one-half hour period preceding the close of 
the principal trading session on such market.
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    If the percentage change of the Index is positive (i.e., the Final 
Index Level is greater than the Initial Index Level), the Redemption 
Amount per Note will equal:
[GRAPHIC] [TIFF OMITTED] TN10FE05.000

    The Upside Participation Rate, determined at the time of issuance, 
is expected to be approximately 300%.
    If the percentage change of the Index is zero or negative (i.e., 
the Final Index Level is less than or equal to the Initial Index 
Level), the Redemption Amount per Note will equal:
[GRAPHIC] [TIFF OMITTED] TN10FE05.001

    The Notes are cash-settled in U.S. dollars and do not give the 
holder any right to receive a portfolio security, dividend payments, or 
any other ownership right or interest in the portfolio or index of 
securities comprising the DJIA. The Notes are designed for investors 
who want to participate in or gain enhanced upside exposure to the 
DJIA, subject to a cap, and who are willing to forego principal 
protection and market interest payments on the Notes during such term. 
The Commission has previously approved the listing of securities and 
related options linked to the performance of the DJIA.\12\
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    \12\ See Securities Exchange Act Release Nos. 39011 (September 
3, 1997), 62 FR 47840 (September 11, 1997) (approving the listing 
and trading of options on the DJIA); 39525 (January 8, 1998), 63 FR 
2438 (January 15, 1998) (approving the listing and trading of 
DIAMONDS SM Trust Units, portfolio depositary receipts 
based on the DJIA); 46883 (November 21, 2002), 67 FR 71216 (November 
29, 2002) (approving the listing and trading of Market Recovery 
Notes on the DJIA) and 49453 (March 19, 2004), 69 FR 15913 (March 
26, 2004) (approving the listing and Trading of Contingent Principal 
Protection Notes Linked to the Performance of the DJIA).

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[[Page 7131]]

    As of November 30, 2004, the market capitalization of the 
securities included in the DJIA ranged from a high of $373 billion to a 
low of $17.9 million.\13\ The average daily trading volume for these 
same securities for the last six months ranged from a high of 67.123 
million shares to a low of 1.861 million shares. The Index value will 
be widely disseminated at least once every fifteen seconds throughout 
the trading day.
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    \13\ As reported by Dow Jones & Company at http://www.averages.dowjones.com.
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    Because the Notes are issued in $10 denominations, the Amex's 
existing equity floor trading rules will apply to the trading of the 
Notes. First, pursuant to Amex Rule 411, the Exchange will impose a 
duty of due diligence on its members and member firms to learn the 
essential facts relating to every customer prior to trading the 
Notes.\14\ Second, 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: (i) To determine that such 
transaction is suitable for the customer, and (ii) 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, Citigroup will deliver a prospectus in 
connection with 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, 
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 \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.

IV. 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-2004-101 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-2004-101. 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 on 
the Exchange's Web site at http://www.amex.com and for inspection and 
copying at the principal office of the Exchange. 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-2004-101 and should be submitted on or before 
March 3, 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 has approved the listing of securities 
similar to that of the Notes.\19\ Accordingly, the Commission finds 
that the listing and trading of the Notes based on the DJIA 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.\20\
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    \18\ 15 U.S.C. 78f(b)(5).
    \19\ See e.g., Securities Exchange Act Release No. 48152 (July 
10, 2003), 68 FR 42435 (July 17, 2003) (order approving File No. SR-
Amex-2003-62); 48486 (September 11, 2003), 68 FR 54758 (September 
18, 2003) (order approving File No. SR-Amex-2003-74).
    \20\ In approving the proposed rule, the Commission 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 in Section 107A in the Company Guide were designed 
to

[[Page 7132]]

address the special concerns attendant to the trading of hybrid 
securities like the Notes. For example, Section 107A of the Company 
Guide provides that the 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\ 
By imposing the hybrid listing standards, suitability, disclosure, and 
compliance requirements noted above, the Commission believes that the 
Exchange has addressed adequately the potential problems that could 
arise from the hybrid nature of the Notes.
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    \21\ The Commission also notes that the 30 component stocks that 
comprise the DJIA are reporting companies under the Act, and the 
Notes will be registered under Section 12 of the Act.
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    In approving the products, the Commission recognizes that the DJIA 
is a price-weighted index comprised of 30 common stocks chosen by the 
editors of the WSJ as representative of the broad market of U.S. 
industry, with each stock affecting the DJIA in proportion to its 
market price. Given the large trading volume and capitalization of 
compositions of the stocks underlying the DJIA, the Commission believes 
that the listing and trading of the Notes that are linked to the DJIA 
should not unduly impact the market for the underlying securities 
comprising the DJIA or raise manipulative concerns.
    Moreover, the issuers of the underlying securities comprising the 
DJIA, 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 Citigroup, 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 Citigroup.\22\
    Finally, the Commission notes that the value of the DJIA will be 
disseminated at least once every fifteen seconds throughout the trading 
day. The Exchange represents that the DJIA will be determined, 
calculated, and maintained by the editors of the WSJ.
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    \22\ 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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    The Exchange has requested and the Commission finds good cause for 
approving the proposed rule change prior to the thirtieth day after the 
date of publication of notice of filing thereof in the Federal 
Register. The Commission believes that the Notes will provide investors 
with an additional investment choice and that accelerated approval of 
the proposal will allow investors to begin trading the Notes promptly. 
In addition, the Commission notes that it has previously approved the 
listing and trading of similar Notes and other hybrid securities based 
on the Index.\23\ Accordingly, the Commission believes that there is 
good cause, consistent with Sections 6(b)(5) and 19(b)(2) of the 
Act,\24\ to approve the proposal, on an accelerated basis.
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    \23\ See supra note 22.
    \24\ 15 U.S.C. 78f(b)(5) and 78s(b)(2).24
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V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\25\ that the proposed rule change (SR-Amex-2004-101) is hereby 
approved on an accelerated basis.
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    \25\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\26\
Margaret H. McFarland,
Deputy Secretary.
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    \26\ 17 CFR 200.30-3(a)(12).
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 [FR Doc. E5-571 Filed 2-9-05; 8:45 am]
BILLING CODE 8010-01-P