[Federal Register Volume 70, Number 42 (Friday, March 4, 2005)]
[Notices]
[Pages 10700-10706]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E5-875]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-51258; File No. SR-Amex-2005-001]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change and Amendment No. 1 Thereto by the American Stock Exchange LLC 
Relating to the Adoption of Generic Listing Standards for Index-Linked 
Securities

February 25, 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 January 6, 2005, the American Stock Exchange LLC (``Amex'' or 
``Exchange'') filed with the Securities and Exchange Commission the 
proposed rule change as described in Items I, II, and III below, which 
Items have been prepared by the self-regulatory organization. On 
February 25, 2005, Amex amended its proposal.\3\ The Commission is 
publishing this notice to solicit comments on the proposed rule change, 
as amended, from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Amendment No. 1, dated February 25, 2005 (``Amendment 
No. 1''). In Amendment No. 1, the Exchange revised the proposed rule 
text and corresponding description. Amendment No. 1 replaced Amex's 
original filing in its entirety.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to add section 107D to the Amex Company Guide 
for the purpose of adopting generic listing standards pursuant to Rule 
19b-4(e) of the Act \4\ in connection with index-linked securities 
(``Index Securities'').
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    \4\ 17 CFR 240.19b-4(e).
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    The text of the proposed rule change, as amended, is set forth 
below. Proposed new language is in italics; proposed deletions are in 
brackets.
* * * * *

Amex Company Guide

Section 107 Other Securities

    The Exchange will consider listing any security not otherwise 
covered by the criteria of sections 101 through 106, provided the issue 
is otherwise suited for auction market trading. Such issues will be 
evaluated for listing against the following criteria:
    A-C. No Change
    D. [Reserved] Index-Linked Securities
    Index-linked securities are securities that provide for the payment 
at maturity of a cash amount based on the performance of an underlying 
index or indexes. Such securities may or may not provide for the 
repayment of the original principal investment amount. The Exchange may 
submit a rule filing pursuant to section 19(b)(2) of the Securities 
Exchange Act of 1934 to permit the listing and trading of index-linked 
securities that do not otherwise meet the standards set forth below in 
paragraphs (a) through (k). The Exchange will consider for listing and 
trading pursuant to Rule 19b-4(e) under the Securities Exchange Act of 
1934, index-linked securities provided:
    (a) Both the issue and the issuer of such security meet the 
criteria set forth above in ``General Criteria,'' except that the 
minimum public distribution shall be 1,000,000 units with a minimum of 
400 public holders, except, if traded in thousand dollar denominations, 
then no minimum number of holders.

    (b) The issue has a minimum term of one (1) year but not greater 
than ten (10) years.
    (c) The issue must be the non-convertible debt of the issuer.
    (d) The payment at maturity may or may not provide for a multiple 
of the positive performance of an underlying index or indexes; however, 
in no event will payment at maturity be based on a multiple of the 
negative performance of an underlying index or indexes.
    (e) The issuer will be expected to have a minimum tangible net 
worth in excess of $250,000,000, and to otherwise substantially exceed 
the earnings requirements set forth in section 101(a) of the Company 
Guide. In the alternative, the issuer will be expected: (i) to have a 
minimum tangible net worth of $150,000,000 and to otherwise 
substantially exceed the earnings requirement set forth in section 
101(a) of the Company Guide, and (ii) not to have issued securities 
where the original issue price of all the issuer's other index-linked 
note offerings (combined with index-linked note offerings of the 
issuer's affiliates) listed on a national securities exchange or traded 
through the facilities of Nasdaq exceeds 25% of the issuer's net worth.
    (f) The issuer is in compliance with Rule 10A-3 under the 
Securities Exchange Act of 1934.
    (g) Initial Listing Criteria--Each underlying index is required to 
have at least ten (10) component securities. In addition, the index or 
indexes to which the security is linked shall either (1) have been 
reviewed and approved for the trading of options or other derivatives 
by the Commission under section 19(b)(2) of the 1934 Act and rules 
thereunder and the conditions set forth in the Commission's approval 
order, including comprehensive surveillance sharing agreements for non-
U.S. stocks, continue to be satisfied, or (2) the index or indexes meet 
the following criteria:
    (i) Each component security has a minimum market value of at least 
$75

[[Page 10701]]

million, except that for each of the lowest weighted component 
securities in the index that in the aggregate account for no more than 
10% of the weight of the index, the market value can be at least $50 
million;
    (ii) Each component security shall have trading volume in each of 
the last six months of not less than 1,000,000 shares, except that for 
each of the lowest weighted component securities in the index that in 
the aggregate account for no more than 10% of the weight of the index, 
the trading volume shall be at least 500,000 shares in each of the last 
six months;
    (iii) In the case of a capitalization weighted index, the lesser of 
the five highest weighted component securities in the index or the 
highest weighted component securities in the index that in the 
aggregate represent at least 30% of the total number of component 
securities in the index, each have an average monthly trading volume of 
at least 2,000,000 shares over the previous six months;
    (iv) No underlying component security will represent more than 25% 
of the weight of the index, and the five highest weighted component 
securities in the index do not in the aggregate account for more than 
50% of the weight of the index (60% for an index consisting of fewer 
than 25 component securities);
    (v) 90% of the index's numerical value and at least 80% of the 
total number of component securities will meet the then current 
criteria for standardized option trading set forth in Exchange Rule 
915;
    (vi) Each component security shall be a 1934 Act reporting company 
which is listed on a national securities exchange or is traded through 
the facilities of a national securities system and is subject to last 
sale reporting; and
    (vii) Foreign country securities or American Depository Receipts 
(``ADRs'') that are not subject to comprehensive surveillance 
agreements do not in the aggregate represent more than 20% of the 
weight of the index.
    (h) Continued Listing Criteria--(1) The Exchange will commence 
delisting or removal proceedings (unless the Commission has approved 
the continued trading of the subject index-linked security), if any of 
the standards set forth above in paragraph (g) are not continuously 
maintained, except that:
    (i) The criteria that no single component represent more than 25% 
of the weight of the index and the five highest weighted components in 
the index can not represent more than 50% (or 60% for indexes with less 
than 25 components) of the weight of the Index, need only be satisfied 
for capitalization weighted and price weighted indexes as of the first 
day of January and July in each year;
    (ii) The total number of components in the index may not increase 
or decrease by more than 33\1/3\ percent from the number of components 
in the index at the time of its initial listing, and in no event may be 
less than ten (10) components;
    (iii) The trading volume of each component security in the index 
must be at least 500,000 shares for each of the last six months, except 
that for each of the lowest weighted components in the index that in 
the aggregate account for no more than 10% of the weight of the index, 
trading volume must be at least 400,000 shares for each of the last six 
months; and
    (iv) In a capitalization-weighted index, the lesser of the five 
highest weighted component securities in the index or the highest 
weighted component securities in the index that in the aggregate 
represent at least 30% of the total number of stocks in the index have 
had an average monthly trading volume of at least 1,000,000 shares over 
the previous six months.
    (2) In connection with an index-linked security that is listed 
pursuant to paragraph (g)(1) above, the Exchange will commence 
delisting or removal proceedings (unless the Commission has approved 
the continued trading of the subject index-linked security) if an 
underlying index or indexes fails to satisfy the maintenance standards 
or conditions for such index or indexes as set forth by the Commission 
in its order under section 19(b)(2) of the 1934 Act approving the index 
or indexes for the trading of options or other derivatives.
    (3) The Exchange will also commence delisting or removal 
proceedings (unless the Commission has approved the continued trading 
of the subject index-linked security), under any of the following 
circumstances:
    (i) If the aggregate market value or the principal amount of the 
securities publicly held is less than $400,000;
    (ii) If the value of the index or composite value of the indexes is 
no longer calculated or widely disseminated on at least a 15-second 
basis; or
    (iii) If such other event shall occur or condition exists which in 
the opinion of the Exchange makes further dealings on the Exchange 
inadvisable.
    (i) Index Methodology and Calculation--(i) Each index will be 
calculated based on either a capitalization, modified capitalization, 
price, equal-dollar or modified equal-dollar weighting methodology. 
(ii) Indexes based upon the equal-dollar or modified equal-dollar 
weighting method will be rebalanced at least quarterly. (iii) If the 
index is maintained by a broker-dealer, the broker-dealer shall erect a 
``firewall'' around the personnel who have access to information 
concerning changes and adjustments to the index and the index shall be 
calculated by a third party who is not a broker-dealer. (iv) The 
current value of an index will be widely disseminated at least every 15 
seconds. (v) If the value of an index-linked security is based on more 
than one (1) index, then the composite value of such indexes must be 
widely disseminated at least every 15 seconds.
    (i) Surveillance Procedures. The Exchange will implement written 
surveillance procedures for index-linked securities, including adequate 
comprehensive surveillance sharing agreements for non-U.S. securities, 
as applicable.
    (k) Index-linked securities will be treated as equity instruments.
    E. No Change
* * * * *

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 IV 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
    The Exchange proposes to add new Section 107D to the Amex Company 
Guide to provide generic listing standards to permit the listing and 
trading of Index Securities pursuant to Rule 19b-4(e) under the Act.\5\ 
Rule 19b-4(e) provides that the listing and trading of a new derivative 
securities product by a self-regulatory organization shall not be 
deemed a proposed rule change, pursuant to paragraph (c)(1) of Rule 
19b-4,\6\ if the Commission has approved, pursuant to section 19(b) of 
the Act,\7\ the self-regulatory

[[Page 10702]]

organization's trading rules, procedures and listing standards for the 
product class that would include the new derivatives securities 
product, and the self-regulatory organization has a surveillance 
program for the product class.\8\
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    \5\ 17 CFR 240.19b-4(e).
    \6\ 17 CFR 240.19b-4(c)(1).
    \7\ 15 U.S.C. 78s(b).
    \8\ See Securities Exchange Act Release No. 40761 (December 8, 
1998), 63 FR 70952 (December 22, 1998) (the ``19b-4(e) Order'').
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    The Commission has previously approved the listing and trading of 
several Index Securities by the Exchange based on a variety of debt 
structures and market indexes.\9\ In approving these securities for 
Exchange trading, the Commission thoroughly considered the structures, 
their usefulness to investors and to the markets, and Amex rules that 
govern their trading. The Exchange believes that adopting generic 
listing standards for these securities and applying Rule 19b-4(e) 
should fulfill the intended objective of that Rule by allowing those 
Index Securities that satisfy the proposed generic listing standards to 
commence trading, without the need for the public comment period and 
Commission approval.\10\ This has the potential to reduce the time 
frame for bringing Index Securities to market and thereby reducing the 
burdens on issuers and other market participants. The failure of a 
particular index to comply with the proposed generic listing standards 
under Rule 19b-4(e), however, would not preclude the Exchange from 
submitting a separate filing pursuant to section 19(b)(2), requesting 
Commission approval to list and trade a particular index-linked 
product.
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    \9\ See infra notes 14, 15 and 19.
    \10\ The Exchange has previously received Commission approval to 
list and trade certain index options, exchange-traded fund shares 
and trust issued receipts pursuant to Rule 19b-4(e). See Securities 
Exchange Act Release Nos. 41091 (February 23, 1999), 64 FR 10515 
(March 4, 1999) (Index Options); 42787 (May 15, 2000), 65 FR 33598 
(May 24, 2000) (ETFs); and 43396 (September 29, 2000), 65 FR 60230 
(October 10, 2000) (TIRs).
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    Under section 107A of the Amex Company Guide, the Exchange may 
approve for listing and trading securities that cannot be readily 
categorized under the listing criteria for common and preferred 
securities, bonds, debentures, or warrants.\11\ The Amex proposes in 
this rule filing to adopt generic listing standard for Index Securities 
under new Section 107D.\12\ Index Securities are designed for investors 
who desire to participate in a specific market segment or combination 
of market segments through index products. Each Index Security is 
intended to provide investors with exposure to an identifiable 
underlying market index. Index Securities may or may not make interest 
payments to the holder during their term. Despite the fact that Index 
Securities are linked to an underlying index, each will trade as a 
single, exchange-listed security.
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    \11\ See Securities Exchange Act Release No. 27753 (March 1, 
1990), 55 FR 8624 (March 8, 1990) (order approving File No. SR-Amex-
89-29).
    \12\ See Securities Exchange Act Release No. 32343 (May 20, 
1993), 58 FR 30833 (May 27, 1993) (first Commission order approving 
equity linked notes (``Original ELN Order'')). See also Securities 
Exchange Act Release Nos. 42582 (March 27, 2001), 65 FR 17685 (April 
4, 2000) (permitting ELN on up to 20 securities) and 47055 (December 
19, 2002), 67 FR 79669 (December 30, 2002) (increasing allowable ELN 
basket to 30 securities).
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    The Exchange proposes that generic listing standards appropriate 
for Index Securities provide that each index or combination of indexes 
(the ``Underlying Index'' or ``Underlying Indexes'') meet the criteria 
set forth in proposed section 107D(g) or be an index previously 
approved for the trading of options or other derivative securities by 
the Commission under section 19(b)(2) of the Act and rules thereunder. 
In all cases, an Underlying Index is required to have a minimum of ten 
(10) component securities. The specific criteria for each underlying 
component security in proposed section 107D(g) is set forth below in 
the section entitled ``Eligibility Standards for Underlying Component 
Securities.'' In general, the criteria for the underlying component 
securities of an Underlying Index is substantially similar to the 
requirements for index options set forth in Commentary .02 to Amex Rule 
901C.
    Description of Index-Linked Securities. Index Securities are the 
non-convertible debt of an issuer that have a term of at least one (1) 
year but not greater than ten (10) years. The issuer of an Index 
Security may or may not provide for periodic interest payments to 
holders based on dividends or other cash distributions paid on the 
securities comprising the Underlying Index or Indexes during a 
prescribed period.\13\ The holder of an Index Security may or may not 
be fully exposed to the appreciation and/or depreciation of the 
underlying component securities. For example, an Index Security may be 
subject to a ``cap'' on the maximum principal amount to be repaid to 
holders or a ``floor'' on the minimum principal amount to be repaid to 
holders at maturity. A typical Index Security listed and traded on the 
Exchange provides for a payment amount in a multiple greater than one 
(1) times the positive index return or performance, subject to a 
maximum gain or cap.\14\
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    \13\ Interest payments may be based on a fixed or floating rate.
    \14\ See, e.g., Securities Exchange Act Release Nos. 50812 
(December 7, 2004), 69 FR 74544 (December 14, 2004) (approving the 
listing and trading of Wachovia Notes linked to the performance of 
the Nasdaq-100); 50278 (August 26, 2004), 69 FR 53751 (September 2, 
2004) (approving the listing and trading of Citigroup Notes linked 
to the performance of the S&P 500); 50019 (July 14, 2004), 69 FR 
43635 (July 21, 2004) (approving the listing and trading of Morgan 
Stanley PLUS Notes linked to the performance of the S&P 500); 50016 
(July 14, 2004), 69 FR 43639 (July 21, 2004) (approving the listing 
and trading of Morgan Stanley PLUS Notes linked to the performance 
of the Nikkei 225 Index); 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); 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); 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); 46883 (November 21, 
2002), 67 FR 71216 (November 29, 2002) (approving the listing and 
trading of Market Recovery Notes on the DJIA) and 45966 (May 20, 
2002), 67 FR 36942 (May 28, 2002) (approving the listing and trading 
of notes linked to the performance of the Nasdaq 100).
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    The proposed generic listing standards will not be applicable to 
Index Securities where the payment at maturity may be based on a 
multiple of negative performance of an underlying index or indexes. An 
Index Security may not provide for a minimum guaranteed amount to be 
repaid, i.e., no ``principal protection.'' Other Index Securities 
provide for participation in the positive return or performance of an 
index with the added protection of receiving a payment guarantee of the 
issuance price or ``principal protection.'' Further iterations may also 
provide ``contingent'' protection of the principal amount, whereby the 
principal protection may disappear if the Underlying Index at any point 
in time during the life of such security reaches a certain pre-
determined level.\15\ The Exchange believes that the flexibility to 
list a variety of Index Securities will offer investors the opportunity 
to more precisely focus their specific investment strategies.
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    \15\ See, e.g., Securities Exchange Act Release Nos. 50850 
(December 14, 2004), 69 FR 76506 (December 21, 2004) (approving the 
listing and trading of Wachovia Trigger Capitals linked to the 
performance of the S&P 500); 50414 (September 20, 2004), 69 FR 58001 
(September 28, 2004) (approving the listing and Trading of Lehman 
Contingent Protection Notes on the S&P 500); 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); 48486 (September 11, 2003), 68 FR 54758 (September 18, 
2003) (approving the listing and trading of CSFB Contingent 
Principal Protection Notes linked to the performance of the S&P 
500); and 48152 (July 10, 2003), 68 FR 42435 (July 17, 2003) 
(approving the listing and trading of a UBS Partial Protection Note 
linked to the performance of the S&P 500).
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    The original public offering price of Index Securities may vary 
with the most

[[Page 10703]]

common offering price expected to be $10 or $1,000 per unit. As 
discussed above, Index Securities entitle the owner at maturity to 
receive a cash amount based upon the performance of a particular market 
index or combination of indexes. The structure of an Index Security may 
provide ``principal protection'' or provide that the principal amount 
is fully exposed to the performance of a market index. The Index 
Securities 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 Underlying 
Index. The current value of an Underlying Index or composite value of 
the Underlying Indexes will be widely disseminated at least every 15 
seconds during the trading day.
    Index Securities may or may not be structured \16\ with accelerated 
returns, upside or downside, based on the performance of the Underlying 
Index. For example, an Index Security may provide for an accelerated 
return of 3-to-1 if the Underlying Index achieves a positive return at 
maturity. The Exchange submits that Index Securities are ``hybrid'' 
securities whose rates of return are largely the result of the 
performance of an Underlying Index or Indexes comprised of component 
securities. In connection with the listing and trading of Index 
Securities, the Exchange will issue an Information Circular to members 
detailing the special risks and characteristics of the securities. 
Accordingly, the particular structure and corresponding risk of any 
Index Security traded on the Exchange will be highlighted and 
disclosed.\17\
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    \16\ See, e.g., Securities Exchange Act Release Nos. 48280 
(August 1, 2003), 68 FR 47121 (August 7, 2003). As stated, the 
proposed generic listing standards will not be applicable to Index 
Securities that are structured with ``downside'' accelerated 
returns.
    \17\ The Exchange notes that members conducting a public 
securities business are subject to the rules and regulations of the 
NASD, including NASD Rule 2310(a) and (b). Accordingly, NASD Notice 
to Members 03-71 regarding non-conventional investments or ``NCIs'' 
applies to Exchange members recommending/selling index-linked 
securities to public customers. This Notice specifically reminds 
members in connection with NCIs (such as index-linked securities) of 
their obligations to: (1) Conduct adequate due diligence to 
understand the features of the product; (2) perform a reasonable-
basis suitability analysis; (3) perform customer-specific 
suitability analysis in connection with any recommended 
transactions; (4) provide a balanced disclosure of both the risks 
and rewards associated with the particular product, especially when 
selling to retail investors; (5) implement appropriate internal 
controls; and (6) train registered persons regarding the features, 
risk and suitability of these products.
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    Index Securities are expected to trade at a lower cost than the 
cost of trading each of the underlying component securities separately 
(because of reduced commission and custody costs) and are also expected 
to give investors the ability to maintain index exposure without the 
corresponding management or administrative fees and ongoing expenses. 
The initial offering price for an Index Security will be established on 
the date the security is priced for sale to the public. The final value 
of an Index Security will be determined on the valuation date at or 
near maturity consistent with the mechanics detailed in the prospectus 
for such Index Security.
    Eligibility Standards for Issuers. The following standards are 
proposed for each issuer of Index Securities:
    (A) Assets/Equity--The issuer shall have assets in excess of $100 
million and stockholders' equity of at least $10 million. In the case 
of an issuer that is unable to satisfy the earnings criteria set forth 
in Section 101 of the Amex Company Guide, the Exchange 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.
    (B) Distribution--Minimum public distribution of 1,000,000 notes 
with a minimum of 400 public shareholders, except, if traded in 
thousand dollar denominations, then no minimum number of holders.
    (C) Principal Amount/Aggregate Market Value--Not less than $4 
million.
    (D) Term--The issue has a minimum of one (1) year but not greater 
than ten (10) years.
    (E) Tangible Net Worth--The issuer will be expected to have a 
minimum tangible net worth \18\ in excess of $250,000,000 and to 
otherwise substantially exceed the earnings requirements set forth in 
section 101 of the Amex Company Guide. In the alternative, the issuer 
will be expected: (i) to have a minimum tangible net worth of 
$150,000,000 and to otherwise substantially exceed the earnings 
requirement set forth in section 101 of the Amex Company Guide, and 
(ii) not to have issued securities where the original issue price of 
all the issuer's other index-linked note offerings (combined with 
index-linked note offerings of the issuer's affiliates) listed on a 
national securities exchange or traded through the facilities of Nasdaq 
exceeds 25% of the issuer's net worth.
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    \18\ ``Tangible net worth'' is defined as total assets less 
intangible assets and total liabilities. Intangibles include non-
material benefits such as goodwill, patents, copyrights and 
trademarks.
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    Description of Underlying Indexes. Each Underlying Index will 
either be (i) an index meeting the specific criteria set forth below in 
proposed Amex Company Guide section 107D(g) that is similar to current 
Amex Rule Commentary .02 to Rule 901C; or (ii) an index approved for 
the trading of options or other derivatives securities by the 
Commission under section 19(b)(2) of the Act and rules thereunder. 
However, in all cases, an Underlying Index must contain at least ten 
(10) component securities.
    Examples of Underlying Indexes intended to be covered under the 
proposed generic listing standards include the Standard & Poor's 500 
Index (``S&P 500''), Nasdaq-100 Index (``Nasdaq 100''), the Dow Jones 
Industrial Average (``DJIA''), Nikkei 225 Index (``Nikkei 225''), the 
Dow Jones STOXX 50 Index (``DJ STOXX 50''), the Global Titans 50 Index 
(``Global Titans 50''), Amex Biotechnology Index (``Amex Biotech''), 
and certain other indexes that represent various industry and/or market 
segments.\19\ The Exchange will require that all changes to an 
Underlying Index, including the deletion and addition of underlying 
component securities, index rebalancings and changes to the calculation 
of the index, will be made in accordance with the proposed generic 
criteria or the Commission's section 19(b)(2) order, which approved the 
similar derivative product containing the Underlying Index.
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    \19\ See supra notes 14, 15. See also Securities Exchange Act 
Release Nos. 49548 (April 9, 2004), 69 FR 20089 (April 15, 2004) 
(approving the listing and trading of notes linked to the 
performance of the Select Utility Index); 48151 (July 10, 2003), 68 
FR 42438 (July 17, 2003) (approving the listing and trading of notes 
linked to the performance of the Amex Biotechnology Index); 46882 
(November 21, 2002), 67 FR 71219 (November 29, 2002) (approving the 
listing and trading of notes linked to the performance of the Select 
Fifty Index); 45305 (January 17, 2002), 67 FR 3753 (January 25, 
2002) (approving the listing and trading of notes linked to the 
performance of the Biotech-Pharmaceutical Index); 44342 (May 23, 
2001), 66 FR 29613 (May 31, 2001) (Select Ten Index); 44437 (June 
18, 2001), 66 FR 33585 (June 22, 2001) (approving the listing and 
trading of notes linked to the performance of the Industrial 15 
Index); and 46021 (June 3, 2002), 67 FR 39753 (June 10, 2002) 
(approving the listing and trading of notes linked to the 
performance of the Select European 50 Index).
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    In order to satisfy the proposed generic listing standards, the 
Underlying Index will be calculated based on either a market 
capitalization,\20\ modified market

[[Page 10704]]

capitalization,\21\ price,\22\ equal-dollar \23\ or modified equal-
dollar \24\ weighting methodology. If a broker-dealer is responsible 
for maintaining (or has a role in maintaining) the Underlying Index, 
such broker-dealer is required to erect and maintain a ``firewall,'' in 
a form satisfactory to the Exchange, to prevent the flow of information 
regarding the Underlying Index from the index production personnel to 
the sales and trading personnel.\25\ In addition, an Underlying Index 
that is maintained by a broker-dealer is also required to be calculated 
by an independent third party who is not a broker-dealer.
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    \20\ A ``market capitalization'' index is the most common type 
of stock index. The components are weighted according to the total 
market value of the outstanding shares, i.e., share price times the 
number of shares outstanding. This type of index will fluctuate in 
line with the price moves of the component stocks.
    \21\ A ``modified market capitalization'' index is similar to 
the market capitalization index, except that an adjustment to the 
weights of one or more of the components occurs. This is typically 
done to avoid having an index that has one or a few stocks 
representing a disproportionate amount of the index value.
    \22\ A ``price weighted'' index is an index in which the 
component stocks are weighted by their share price. The most common 
example is the DJIA.
    \23\ An ``equal dollar weighted'' index is an index structured 
so that share quantities for each of the component stocks in the 
index are determined as if one were buying an equal dollar amount of 
each stock in the index. Equal dollar weighted indexes are usually 
rebalanced to equal weightings either quarterly, semi-annually, or 
annually.
    \24\ A ``modified equal-dollar weighted'' index is designed to 
be a fair measurement of the particular industry or sector 
represented by the index, without assigning an excessive weight to 
one or more index components that have a large market capitalization 
relative to the other index components. In this type of index, each 
component is assigned a weight that takes into account the relative 
market capitalization of the securities comprising the index. The 
index is subsequently rebalanced to maintain these pre-established 
weighting levels. Like equal-dollar weighted indexes, the value of a 
modified equal-dollar weighted index will equal the current combined 
market value of the assigned number of shares of each of the 
underlying components divided by the appropriate index divisor. A 
modified equal-dollar weighted index will typically be re-balanced 
quarterly.
    \25\ For certain indexes, an index provider, such as Dow Jones, 
may select the components and calculate the index, but overseas 
broker-dealer affiliates of U.S. registered broker-dealers may sit 
on an ``advisory'' committee that recommends component selections to 
the index provider. In such case, the Exchange should ensure that 
appropriate information barriers and insider trading policies exist 
for this advisory committee. See Securities Exchange Act Release No. 
50501 (October 7, 2004), 69 FR 61533 (October 19, 2004) (approving 
NASD 2004-138, pertaining to index linked notes on the Dow Jones 
Euro Stoxx 50 Index). Telephone conversation between Jeffrey Burns, 
Associate General Counsel, Amex, and Florence Harmon, Senior Special 
Counsel, Division of Market Regulation, Commission, on February 23, 
2005.
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    Eligibility Standards for Underlying Securities. Index Securities 
will be subject to the criteria in proposed Amex Company Guide section 
107D(g) and (h) for initial and continued listing. For an Underlying 
Index to be appropriate for the initial listing of an Index Security, 
such Index must either be approved for the trading of options or other 
derivative securities by the Commission under section 19(b)(2) of the 
Act and rules thereunder or meet the following requirements:
     A minimum market value of at least $75 million, except 
that for each of the lowest weighted Underlying Securities in the index 
that in the aggregate account for no more than 10% of the weight of the 
index, the market value can be at least $50 million;
     Trading volume in each of the last six months of not less 
than 1,000,000 shares, except that for each of the lowest weighted 
Underlying Securities in the index that in the aggregate account for no 
more than 10% of the weight of the index, the trading volume shall be 
at least 500,000 shares in each of the last six months;
     In the case of a capitalization-weighted index, the lesser 
of the five highest weight Underlying Securities in the index or the 
highest weighted Underlying Securities in the index that in the 
aggregate represent at least 30% of the total number of Underlying 
Securities in the index, each have an average monthly trading volume of 
at least 2,000,000 shares over the previous six months;
     No component security will represent more than 25% of the 
weight of the index, and the five highest weighted component securities 
in the index will not in the aggregate account for more than 50% of the 
weight of the index (60% for an index consisting of fewer than 25 
Underlying Securities);
     90% of the index's numerical index value and at least 80% 
of the total number of component securities will meet the then current 
criteria for standardized options trading set forth in Exchange Rule 
915;
     Each component security shall be a 1934 Act reporting 
company which is listed on a national securities exchange or is traded 
through the facilities of a national securities system and is subject 
to last sale reporting; and
     Foreign country securities or American Depository Receipts 
(``ADRs'') that are not subject to comprehensive surveillance 
agreements do not in the aggregate represent more than 20% of the 
weight of the index.
    As described above in the section entitled ``Description of 
Underlying Indexes,'' all Underlying Indexes are required to have at 
least ten (10) component securities.
    The proposed continued listing criteria set forth in proposed Amex 
Company Guide section 107D(h)(1) regarding the underlying components of 
an Underlying Index provides that the Exchange will commence delisting 
or removal proceedings of an Index Security (unless the Commission has 
approved the continued trading of the Index Security) if any of the 
standards set forth in the initial eligibility criteria of proposed 
Amex Company Guide section 107D(g) are not continuously maintained, 
except that:
     The criteria that no single component represent more than 
25% of the weight of the index and the five highest weighted components 
in the index can not represent more than 50% (or 60% for indexes with 
less than 25 components) of the weight of the Index, need only be 
satisfied for capitalization weighted and price weighted indexes as of 
the first day of January and July in each year;
     The total number of components in the index may not 
increase or decrease by more than 33\1/3\% from the number of 
components in the index at the time of its initial listing, and in no 
event may be less than ten (10) components;
     The trading volume of each component security in the index 
must be at least 500,000 shares for each of the last six months, except 
that for each of the lowest weighted components in the index that in 
the aggregate account for no more than 10% of the weight of the index, 
trading volume must be at least 400,000 shares for each of the last six 
months; and
     In a capitalization-weighted index, the lesser of the five 
highest weighted component securities in the index or the highest 
weighted component securities in the index that in the aggregate 
represent at least 30% of the total number of stocks in the index have 
had an average monthly trading volume of at least 1,000,000 shares over 
the previous six months.
    In connection with an Index Security that is listed pursuant to 
proposed Amex Company Guide section 107D(g)(1), the Exchange will 
commence delisting or removal proceedings (unless the Commission has 
approved the continued trading of the Index Security) if an underlying 
index or indexes fails to satisfy the maintenance standards or 
conditions for such index or indexes as set forth by the Commission in 
its order under section 19(b)(2) of the Act approving the index or 
indexes for the trading of options or other derivatives.
    As set forth in proposed Amex Company Guide section 107D(h)(3), the 
Exchange will also commence delisting or removal proceedings of an 
Index Security (unless the Commission has approved the continued 
trading of the Index Security), under any of the following 
circumstances:

[[Page 10705]]

     If the aggregate market value or the principal amount of 
the securities publicly held is less than $400,000;
     If the value of the Underlying Index or composite value of 
the Underlying Indexes is no longer calculated and widely disseminated 
on at least a 15-second basis; or
     If such other event shall occur or condition exists which 
is the opinion of the Exchange makes further dealings on the Exchange 
inadvisable.
    The Amex represents that Index Securities listed and traded on the 
Exchange will be required to be in compliance with Rule 10A-3 under the 
Act.\26\
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    \26\ See Rule 10A-3(c)(7), 17 CFR 240.10A-3(c)(7).
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    Exchange Rules Applicable to Index-Linked Securities. Index 
Securities will be treated as equity instruments and will be subject to 
all Exchange rules governing the trading of equity securities, 
including, among others, rules governing priority, parity and 
precedence of orders, market volatility related trading halt provisions 
pursuant to Amex Rule 117, and responsibilities of the specialist. 
Exchange equity margin rules and the regular equity trading hours of 
9:30 a.m. to 4 p.m. will apply to transactions in Index Securities.
    In addition, the Exchange will evaluate the nature and complexity 
of each Index Security and, if appropriate, distribute a circular to 
the membership, prior to the commencement of trading, providing 
guidance with respect to, among other things, member firm compliance 
responsibilities when handling transactions in Index Securities and 
highlighting the special risks and characteristics. Specifically, the 
circular, among other things, will discuss and emphasize the structure 
and operation of the Index Security, the requirement that members and 
member firms deliver a prospectus to investors purchasing an Index 
Security prior to or concurrently with the confirmation of a 
transaction, applicable Amex rules, dissemination information regarding 
the Underlying Index, trading information and applicable suitability 
rules.
    In particular, the circular will set forth the Exchange's 
suitability rule that requires member and member organizations and 
employees thereof recommending a transaction in Index Securities: (1) 
To determine that such transaction is suitable for the customer (Amex 
Rule 411) 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.
    The Exchange will closely monitor activity in Index Securities to 
identify and deter any potential improper trading activity in Index 
Securities. The Exchange represents that its surveillance procedures 
are adequate to properly monitor the trading of Index Securities. 
Specifically, the Amex will rely on its existing surveillance 
procedures governing equities, options and exchange-traded funds, which 
have been deemed adequate under the Act. The Exchange has developed 
procedures to closely monitor activity in the Index Security and 
related Underlying Securities to identify and deter potential improper 
trading activity. Proposed Amex Company Guide section 107D(j) provides 
that the Exchange will implement written surveillance procedures for 
Index Securities.
    The Exchange also has a general policy prohibiting the distribution 
of material, non-public information by its employees. As detailed above 
in the description of the generic standards, if the issuer or a broker-
dealer is responsible for maintaining (or has a role in maintaining) 
the Underlying Index, such issuer or broker-dealer is required to erect 
and maintain a ``firewall'' in a form satisfactory to the Exchange, in 
order to prevent the flow of information regarding the Underlying Index 
from the index production personnel to sales and trading personnel. In 
addition, the Exchange will require that calculation of Underlying 
Indexes be performed by an independent third party who is not a broker-
dealer.
    The Exchange submits that several Index Securities based on both 
broad-based and market segment indexes are currently trading on the 
Exchange.\27\ Each of these products separately received approval for 
trading by the Commission. Amex believes that the proposed generic 
listing standards for Index Securities will serve to streamline and 
increase the efficiency of listing index-linked products on the 
Exchange.
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    \27\ See, e.g., Securities Exchange Act Release Nos. 48151 (July 
10, 2003), 68 FR 42438 (July 17, 2003) (approving the listing and 
trading of notes linked to the Amex Biotech Index); 47983 (June 4, 
2003), 68 FR 35032 (June 11, 2003) (approving the listing and 
trading of a CSFB Note linked to S&P 500); 47911 (May 22, 2003), 68 
FR 32558 (May 30, 2003) (approving the listing and trading of notes 
linked to the S&P 500); 46021 (June 3, 2002), 67 FR 39753 (June 10, 
2002) (approving the listing and trading of notes linked to the 
Select European 50 Index); 45639 (March 25, 2002), 67 FR 15258 
(March 29, 2002) (approving the listing and trading of notes linked 
to the Oil Natural Gas Index); 45305 (January 17, 2002), 67 FR 3753 
(January 25, 2002) (approving the listing and trading of notes 
linked to the Biotech-Pharmaceutical Index); 44437 (June 18, 2001), 
66 FR 33585 (June 22, 2001) (approving the listing and trading of 
notes linked to the Industrial 15 Index); and 44342 (May 23, 2001), 
66 FR 29613 (May 31, 2001) (approving the listing and trading of 
notes linked to the Select Ten Index). See also supra notes 13, 14 
and 18.
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2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with section 6(b) of the Act \28\ in general and furthers the objective 
of section 6(b)(5) \29\ in particular in that it is designed to prevent 
fraudulent and manipulative acts and practices, to promote just and 
equitable principal 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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    \28\ 15 U.S.C. 78f(b).
    \29\ 15 U.S.C. 78f(b)(5)
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B. Self-Regulatory Organization's Statement on Burden on Competition

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

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

    The Exchange did not solicit or receive any written comments with 
respect to the proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the Exchange consents, the Commission will:
    A. By order approve such proposed rule change, or
    B. Institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. 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:

[[Page 10706]]

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-2005-001 on the subject line.

Paper Comments

     Send paper comments in triplicate to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, 450 Fifth Street, NW., 
Washington, DC 20549-0609.
    All submissions should refer to File Number SR-Amex-2005-001. 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 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 File Number SR-
Amex-2005-001 and should be submitted on or before March 25, 2005.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\30\
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    \30\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. E5-875 Filed 3-3-05; 8:45 am]
BILLING CODE 8010-01-P