[Federal Register Volume 70, Number 60 (Wednesday, March 30, 2005)]
[Notices]
[Pages 16322-16325]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E5-1393]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-51425; File No. SR-NASD-2004-139]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change and Amendment No. 1 Thereto by the National Association of 
Securities Dealers, Inc. Relating to the Listing and Trading of 
Leveraged Index Return Notes Linked to the Dow Jones Industrial Average

March 23, 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 September 15, 2004, the National Association of Securities Dealers, 
Inc.

[[Page 16323]]

(``NASD''), through its subsidiary, The Nasdaq Stock Market, Inc. 
(``Nasdaq''), filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I, II, 
and III below, which Items have been prepared by Nasdaq. On March 21, 
2005, the Exchange 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 March 21, 2005 (``Amendment No. 
1''). In Amendment No. 1, the Exchange provided additional details 
regarding the proposed index linked notes and underlying index.
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I. Self-Regulatory Organization's Statement of the Terms of the 
Substance of the Proposed Rule Change

    Nasdaq proposes to list and trade Leveraged Index Return Notes 
Linked to the Dow Jones Industrial Average (``Notes'') issued by 
Merrill Lynch & Co., Inc. (``Merrill Lynch'').

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

    In its filing with the Commission, Nasdaq included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. Nasdaq has prepared summaries, set forth in Sections A, 
B, and C below, of the most significant aspects of such statements.

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

1. Purpose
    Nasdaq proposes to list and trade the Notes. The Notes provide for 
a return based upon the Dow Jones Industrial Average (``Index'').

The Index

    The Index is a price-weighted index published by Dow Jones & 
Company, Inc. A component stock's weight in the Index is based on its 
price per share, rather than the total market capitalization of the 
issuer of that component stock. The Index is designed to provide an 
indication of the composite price performance of 30 common stocks of 
corporations representing a broad cross-section of U.S. industry. The 
corporations represented in the Index tend to be market leaders in 
their respective industries, and their stocks are typically widely held 
by individuals and institutional investors. The corporations currently 
represented in the Index are incorporated in the U.S. and its 
territories, and their stocks are traded on the New York Stock Exchange 
and The Nasdaq National Market. The component stocks in the Index are 
selected (and any changes are made) by the editors of the Wall Street 
Journal (``WSJ''). Changes to the stocks included in the Index tend to 
be made infrequently. Historically, most substitutions have been the 
result of mergers, but from time to time, changes may be made to 
achieve what the editors of the WSJ deem to be a more accurate 
representation of the broad market of the U.S. industry. The value of 
the Index is the sum of the primary market prices of each of the 30 
common stocks included in the Index, divided by a divisor that is 
designed to provide a meaningful continuity in the value of the Index. 
In order to prevent certain distortions related to extrinsic factors, 
the divisor may be adjusted appropriately. The current divisor of the 
Index is published daily in the WSJ and other publications. Other 
statistics based on the Index may be found in a variety of publicly 
available sources.
    As of August 27, 2004, the market capitalization of the securities 
included in the Index ranged from a high of approximately $346 billion 
to a low of approximately $24 billion. The average daily trading volume 
for Index components (calculated over the previous thirty trading days) 
ranged from a high of approximately 24 million shares to a low of 
approximately 1.7 million shares.
    The value of the Index is widely disseminated at least every 15 
seconds by providers that are independent from Merrill Lynch. In the 
event the calculation or dissemination of the Index is discontinued, 
Nasdaq will delist the Notes.

Other Information

    Under NASD Rule 4420(f), Nasdaq may approve for listing and trading 
innovative securities that cannot be readily categorized under 
traditional listing guidelines.\4\ Nasdaq proposes to list the Notes 
for trading under NASD Rule 4420(f).
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    \4\ See Exchange Act Release No. 32988 (September 29, 1993); 58 
FR 52124 (October 6, 1993).
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    The Notes, which will be registered under Section 12 of the Act, 
will initially be subject to Nasdaq's listing criteria for other 
securities under Rule 4420(f). Specifically, under NASD Rule 
4420(f)(1):
    The issuer shall have assets in excess of $100 million and 
stockholders' equity of at least $10 million.\5\ In the case of an 
issuer which is unable to satisfy the income criteria set forth in NASD 
Rule 4420(a)(1), Nasdaq generally will require the issuer to have the 
following: (i) Assets in excess of $200 million and stockholders' 
equity of at least $10 million; or (ii) assets in excess of $100 
million and stockholders' equity of at least $20 million;
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    \5\ Merrill Lynch satisfies this listing criterion.
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    There must be a minimum of 400 holders of the security, provided, 
however, that if the instrument is traded in $1,000 denominations, 
there must be a minimum of 100 holders;
    For equity securities designated pursuant to this paragraph, there 
must be a minimum public distribution of 1,000,000 trading units;
    The aggregate market value/principal amount of the security will be 
at least $4 million.
    In addition, Merrill Lynch satisfies the listed marketplace 
requirement set forth in NASD Rule 4420(f)(2).\6\ Lastly, pursuant to 
Rule 4420(f)(3), prior to the commencement of trading of the Notes, 
Nasdaq will distribute a circular to members providing guidance 
regarding compliance responsibilities and requirements, including 
suitability recommendations, and highlighting the special risks and 
characteristics of the Notes. In particular, in accordance with NASD 
Rule 2310(a), Nasdaq will advise members recommending a transaction in 
the Notes to have reasonable grounds for believing that the 
recommendation is suitable for such customer upon the basis of the 
facts, if any, disclosed by such customer as to his other security 
holdings and as to his financial situation and needs. In addition, 
pursuant to Rule 2310(b), prior to the execution of a transaction in 
the Notes that has been recommended to a non-institutional customer, a 
member shall make reasonable efforts to obtain information concerning: 
(1) The customer's financial status; (2) the customer's tax status; (3) 
the customer's investment objectives; and (4) such other information 
used or considered to be reasonable by such member in making 
recommendations to the customer.
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    \6\ NASD Rule 4420(f)(2) requires issuers of securities 
designated pursuant to this paragraph to be listed on The Nasdaq 
National Market or the New York Stock Exchange (``NYSE'') or be an 
affiliate of a company listed on The Nasdaq National Market or the 
NYSE; provided, however, that the provisions of Rule 4450 will be 
applied to sovereign issuers of ``other'' securities on a case-by-
case basis.
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    The Notes will be subject to Nasdaq's continued listing criterion 
for other

[[Page 16324]]

securities pursuant to Rule 4450(c). Under this criterion, the 
aggregate market value or principal amount of publicly held units must 
be at least $1 million. The Notes also must have at least two 
registered and active market makers as required by Rule 4310(c)(1). 
Nasdaq will also consider prohibiting the continued listing of the 
Notes if Merrill Lynch is not able to meet its obligations on the 
Notes.
    The Notes are a series of senior non-convertible debt securities 
that will be issued by Merrill Lynch and will not be secured by 
collateral. The Notes will be issued in denominations of whole units 
(``Unit''), with each Unit representing a single Note. The original 
public offering price will be $10 per Unit. The Notes will not pay 
interest and are not subject to redemption by Merrill Lynch or at the 
option of any beneficial owner before maturity. The Notes' term to 
maturity is 5 years.
    At maturity, if the value of the Index has increased, a beneficial 
owner of a Note will be entitled to receive the original offering price 
($10), plus an amount calculated by multiplying the original offering 
price ($10) by an amount expected to be between 105 percent and 115 
percent (``Participation Rate'') of the percentage increase in the 
Index. If, at maturity, the value of the Index has not changed or has 
decreased by up to 20 percent, then a beneficial owner of a Note will 
be entitled to receive the full original offering price.
    However, unlike ordinary debt securities, the Notes do not 
guarantee any return of principal at maturity. Therefore, if the value 
of the Index has declined at maturity by more than 20 percent, a 
beneficial owner will receive less, and possibly significantly less, 
than the original offering price: for each 1 percent decline in the 
Index below 20 percent, the redemption amount of the Note will be 
reduced by 1.25 percent of the original offering price.
    The change in the value of the Index will normally (subject to 
certain modifications explained in the prospectus supplement) be 
determined by comparing (a) the average of the values of the Index at 
the close of the market on five business days shortly before the 
maturity of the Notes to (b) the closing value of the Index on the date 
the Notes are priced for initial sale to the public. The value of the 
Participation Rate will be determined by Merrill Lynch on the date the 
Notes are priced for initial sale based on the market conditions at 
that time. Both the value of the Index on the date the Notes are priced 
and the Participation Rate will be disclosed in Merrill Lynch's final 
prospectus supplement, which Merrill Lynch will deliver in connection 
with the initial sale of the Notes.
    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 of securities 
comprising the Index. The Notes are designed for investors who want to 
participate or gain exposure to the Index, and who are willing to 
forego market interest payments on the Notes during the term of the 
Notes.
    Since the Notes will be deemed equity securities for the purpose of 
Rule 4420(f), the NASD and Nasdaq's existing equity trading rules will 
apply to the Notes. First, as stated, pursuant to NASD Rule 2310 and 
IM-2310-2, members must have reasonable grounds for believing that a 
recommendation to a customer regarding the purchase, sale or exchange 
of any security is suitable for such customer upon the basis of the 
facts, if any, disclosed by such customer as to his other security 
holdings and as to his financial situation and needs.\7\ Members are 
also reminded that the Notes are considered non-conventional 
investments for purposes of NASD's Notice to Members 03-71.\8\ In 
addition, as previously described, Nasdaq will distribute a circular to 
members providing guidance regarding compliance responsibilities and 
requirements, including suitability recommendations, and highlighting 
the special risks and characteristics of the Notes. Furthermore, the 
Notes will be subject to the equity margin rules. Lastly, the regular 
equity trading hours of 9:30 a.m. to 4 p.m. will apply to transactions 
in the Notes.
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    \7\ NASD Rule 2310(b) requires members to make reasonable 
efforts to obtain information concerning a customer's financial 
status, a customer's tax status, the customer's investment 
objectives, and such other information used or considered to be 
reasonable by such member or registered representative in making 
recommendations to the customer.
    \8\ See NASD, NTM 03-71 (November 2003), note 1.
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    Pursuant to Securities Exchange Act Rule 10A-3 and Section 3 of the 
Sarbanes-Oxley Act of 2002, Public Law 107-204, 116 Stat. 745 (2002), 
Nasdaq will prohibit the initial or continued listing of any security 
of an issuer that is not in compliance with the requirements set forth 
therein.
    Nasdaq represents that the NASD's surveillance procedures are 
adequate to properly monitor the trading of the Notes. Specifically, 
the NASD will rely on its current surveillance procedures governing 
equity securities, and will include additional monitoring on key 
pricing dates.
    In connection with initial distributions of its Nasdaq-listed 
notes, Merrill Lynch is required to deliver the appropriate prospectus.
2. Statutory Basis
    Nasdaq believes that the proposed rule change is consistent with 
the provisions of Section 15A of the Act,\9\ in general, and with 
Section 15A(b)(6) of the Act,\10\ in particular, in that the proposal 
is designed to prevent fraudulent and manipulative acts and practices, 
to promote just and equitable principles of trade, to remove 
impediments to and perfect the mechanism of a free and open market and, 
in general, to protect investors and the public interest. Specifically, 
the proposed rule change will provide investors with another investment 
vehicle based on the Index.
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    \9\ 15 U.S.C. 78o-3.
    \10\ 15 U.S.C. 78o-3(b)(6).
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B. Self-Regulatory Organization's Statement on Burden on Competition

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

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

    Written comments were neither solicited nor received.

III. 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 self-regulatory organization 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 16325]]

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an e-mail to [email protected]. Please include 
File Number SR-NASD-2004-139 on the subject line.

Paper Comments

     Send paper comments in triplicate to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, 450 Fifth Street, NW., 
Washington, DC 20549-0609.
    All submissions should refer to File Number SR-NASD-2004-139. 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 
NASD. All comments received will be posted without change; the 
Commission does not edit personal identifying information from 
submissions. You should submit only information that you wish to make 
available publicly. All submissions should refer to File Number SR-
NASD-2004-139 and should be submitted on or before April 20, 2005.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\11\
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    \11\ 17 CFR 200.30-3(a)(12).
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J. Lynn Taylor,
Assistant Secretary.
[FR Doc. E5-1393 Filed 3-29-05; 8:45 am]
BILLING CODE 8010-01-P