[Federal Register Volume 70, Number 78 (Monday, April 25, 2005)]
[Notices]
[Pages 21257-21262]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E5-1949]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-51563; File No. SR-Amex-2005-001]


Self-Regulatory Organizations; Order Approving Proposed Rule 
Change and Amendment No. 1 by the American Stock Exchange LLC and 
Notice of Filing and Order Granting Accelerated Approval to Amendment 
No. 2 Relating to the Adoption of Generic Listing Standards for Index-
Linked Securities

April 15, 2005.

I. Introduction

    On January 6, 2005, the American Stock Exchange LLC (``Amex'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act''),\1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change 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\3\ in connection with index-linked securities (``Index 
Securities''). On February 25, 2005, Amex amended its proposal.\4\ The 
proposed rule change, as modified by Amendment No. 1, was published for 
notice and comment in the Federal Register on March 4, 2005.\5\ The 
Commission received no comment letters regarding the proposed rule 
change. On April 15, 2005, Amex amended the proposed rule change.\6\ 
This order approves the proposed rule change, as modified by Amendment 
No. 1. Simultaneously, the Commission provides notice of filing of 
Amendment No. 2 and grants accelerated approval of Amendment No. 2.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 17 CFR 240.19b-4(e).
    \4\ 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.
    \5\ See Securities Exchange Act Release No. 51258 (February 25, 
2005), 70 FR 10700 (``Notice'').
    \6\ See Amendment No. 2, dated April 15, 2005 (``Amendment No. 
2''). In Amendment No. 2, the Exchange proposed minor clarifications 
to the rule text. The text of Amendment No. 2 is available on Amex's 
Web site (http://www.amex.com), at the Amex's Office of the 
Secretary, and at the Commission's Public Reference Room.
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II. Description of Proposal

    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.\7\ The Amex proposes to add 
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.\8\
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    \7\ See Securities Exchange Act Release No. 27753 (March 1, 
1990), 55 FR 8624 (March 8, 1990) (order approving File No. SR-Amex-
89-29).
    \8\ 17 CFR 240.19b-4(e).
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A. Generic Listing Standards

    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,\9\ if the Commission has approved, pursuant to Section 
19(b) of the Act,\10\ the self-regulatory organization's trading rules,

[[Page 21258]]

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.\11\ 
Hence, Amex is proposing in this rule filing to adopt generic listing 
standard under new Section 107D of the Company Guide for this product 
class, pursuant to which it will be able to list and trade (including 
pursuant to unlisted trading privileges) Index Securities without 
individual Commission approval of each product pursuant to Section 
19(b)(2) of the Act.\12\ Instead, Amex represents that any securities 
it lists and/or trades pursuant to Section 107D of the Amex Company 
Guide will satisfy the standards set forth therein. The Exchange states 
that, within five (5) business days after commencement of trading of an 
Index Security in reliance on Section 107D, Amex will file a Form 19b-
4(e).\13\
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    \9\ 17 CFR 240.19b-4(c)(1).
    \10\ 15 U.S.C. 78s(b).
    \11\ See Securities Exchange Act Release No. 40761 (December 8, 
1998), 63 FR 70952 (December 22, 1998) (the ``19b-4(e) Order'').
    \12\ 15 U.S.C. 78s(b)(2).
    \13\ 17 CFR 19b-4(e)(2)(ii); 17 CFR 249.820.
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    The Exchange submits that several Index Securities based on both 
broad-based and market segment indexes are currently trading on the 
Exchange.\14\ 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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    \14\ 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 infra notes 16.
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B. Index Securities

    Index Securities are designed for investors who desire to 
participate in a specific market segment or combination of market 
segments through index products by providing investors with exposure to 
an identifiable underlying market index.\15\ 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. Index Securities may or may 
not make interest payments based on dividends or other cash 
distributions paid on the securities comprising the Underlying Index or 
Indexes 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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    \15\ As explained in the Notice, 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.
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    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.\16\ More generally, Index Securities may or may not be 
structured\17\ with accelerated returns, upside or downside, based on 
the performance of the Underlying Index. Amex specifically represents 
that 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 or may not provide ``principal protection,'' i.e., a 
minimum guaranteed amount to be repaid.\18\ 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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    \16\ 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).
    \17\ 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.
    \18\ Some Index Securities may provide for ``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. 
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 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 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. 
Pursuant to Section 107D, 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 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.

C. Proposed Listing Criteria

    As explained more fully in the Notice, Amex has proposed asset/
equity requirements and tangible net worth for each Index Security 
issuer, as well as minimum distribution, principal/market value, and 
term thresholds for each issuance of Index Securities.

[[Page 21259]]

Criteria for Underlying Indexes
    Each index or combination of indexes underlying an Index Security 
(the ``Underlying Index'' or ``Underlying Indexes'') must satisfy the 
specific criteria set forth in proposed Section 107D(g) of the Company 
Guide 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 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. In all cases, an Underlying Index is required to 
have a minimum of ten (10) component securities (``Underlying 
Security'').
    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 16, 18. 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, modified market capitalization, price, equal-dollar or 
modified equal-dollar weighting methodology.\20\ 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.\21\ 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\ Details regarding each of these methodologies are described 
in the Notice. See Notice, notes 20-24.
    \21\ 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:
     Each Underlying Security must have 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;
     Each Underlying Security must have a 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 or modified 
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 (e.g., underlying 
securities that account for 90% of the weight of the index) 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 association 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, modified capitalization-weighted 
and price weighted indexes as of the first day of January and July in 
each year;

[[Page 21260]]

     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 or modified 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:
     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.\22\
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    \22\ 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 4:00 p.m. will apply to transactions in Index 
Securities.
Information Circular
    In addition, upon evaluating the nature and complexity of each 
Index Security, the Exchange represents that it will prepare and 
distribute, if appropriate, an Information Circular to members 
describing the product. Accordingly, the particular structure and 
corresponding risk of any Index Security traded on the Exchange will be 
highlighted and disclosed.\23\ 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.
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    \23\ The Exchange notes that members conducting a public 
securities business are subject to the rules and regulations of the 
National Association of Securities Dealers, Inc. (``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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Surveillance
    The Exchange will closely monitor activity in Index Securities to 
identify and deter any potential improper trading activity in Index 
Securities. Additionally, the Exchange represents that it will develop 
surveillance procedures adequate to properly monitor the trading of the 
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.

III. Commission Findings

    After careful consideration, the Commission finds that the proposed 
rule change, as amended, is consistent with Section 6(b) of the Act 
\24\ and the rules and regulations thereunder applicable to a national 
securities exchange.\25\ In particular, the Commission believes that 
the proposal furthers the objectives of Section 6(b)(5) of the Act \26\ 
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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    \24\ 15 U.S.C. 78f(b).
    \25\ In approving this proposal, the Commission has considered 
its impact on efficiency, competition, and capital formation. 15 
U.S.C. 78c(f).
    \26\ 15 U.S.C. 78f(b)(5).
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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.\27\ In approving these securities for 
Exchange trading, the Commission thoroughly considered the structures, 
their

[[Page 21261]]

usefulness to investors and to the markets, and Amex rules that govern 
their trading. The Commission believes that generic listing standards 
for these securities should fulfill the intended objective of Rule 19b-
4(e) by allowing those Index Securities that satisfy the generic 
listing standards to commence trading without public comment and 
Commission approval.\28\ This has the potential to reduce the time 
frame for bringing Index Securities to market and thereby reduce the 
burdens on issuers and other market participants. Further, the 
Exchange's ability to rely on Rule 19b-4(e) for Index Securities 
potentially reduces the time frame for listing and trading these 
securities, and thus enhances investors' opportunities. The Commission 
notes that it maintains regulatory oversight over any products listed 
pursuant to generic listing standards through regular inspection 
oversight.
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    \27\ See supra notes 16, 18 and 19.
    \28\ 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) (Narrow-Based 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). The Commission notes that 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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A. Trading of Index Securities

    Taken together, the Commission finds that the Amex proposal 
contains adequate rules and procedures to govern the trading of Index 
Securities listed pursuant to Rule 19b-4(e) on the Exchange or traded 
pursuant to unlisted trading privileges. All Index Security products 
listed under the standards will be subject to the full panoply of Amex 
rules and procedures that now govern the trading of Index Securities 
and the trading of equity securities on the Amex, including among 
others, rules and procedures governing trading halts, disclosures to 
members, responsibilities of the specialist, account opening and 
customer suitability requirements, the election of a stop or limit 
order, and margin.
    Amex has proposed asset/equity requirements and tangible net worth 
for each Index Security issuer, as well as minimum distribution, 
principal/market value, and term thresholds for each issuance of Index 
Securities. As set forth more fully above, Amex's proposed listing 
criteria include minimum market capitalization, monthly trading volume, 
and relative weighting requirements for the Index Securities. These 
requirements are designed to ensure that the trading markets for index 
components underlying Index Securities are adequately capitalized and 
sufficiently liquid, and that no one stock dominates the index. The 
Commission believes that these requirements should significantly 
minimize the potential for manipulation. The Commission also finds that 
the requirement that each component security underlying an Index 
Security be listed on a national securities exchange or traded through 
the facilities of a national securities system and subject to last sale 
reporting will contribute significantly to the transparency of the 
market for Index Securities. Alternatively, if the index component 
securities are foreign securities that are not reporting companies, the 
generic listing standards permit listing of an Index Security if the 
Commission previously approved the underlying index for trading in 
connection with another derivative product and certain surveillance 
sharing arrangements exist with foreign markets. The Commission 
believes that if it has previously determined that such index and its 
components were sufficiently transparent, then the Exchange may rely on 
this finding, provided it has comparable surveillance sharing 
arrangements with the foreign market that the Commission relied on in 
approving the previous product.
    The Commission believes that by requiring pricing information for 
both the relevant underlying index or indexes and the Index Security to 
be readily available and disseminated, the proposed listing standards 
should help ensure a fair and orderly market for Index Securities 
approved pursuant to Section 107D.
    The Commission also believes that the requirement that at least 90 
percent of the component securities, by weight, and 80 percent of the 
total number of component securities, be eligible individually for 
options trading will prevent an Index Security from being a vehicle for 
trading options on a security not otherwise options eligible.
    The Exchange has also developed delisting criteria that will permit 
Amex to suspend trading of an Index Security in case of circumstances 
that make further dealings in the product inadvisable. The Commission 
believes that the delisting criteria will help ensure a minimum level 
of liquidity exists for each Index Security to allow for the 
maintenance of fair and orderly markets. Also, the Exchange will 
commence delisting proceedings in the event that the value of the 
underlying index or index is no longer calculated and widely 
disseminated on at least a 15-second basis.

B. Surveillance

    The Exchange must surveil trading in any products listed under the 
generic listing standards. In that regard, the Commission believes that 
a surveillance sharing agreement between an Exchange proposing to list 
a stock index derivative product and the exchange(s) trading the stocks 
underlying the derivative product is an important measure for 
surveillance of the derivative and underlying securities markets. When 
a new derivative securities product based upon domestic securities is 
listed and traded on an exchange pursuant to Rule 19b-4(e) under the 
Act, the exchange should determine that the markets upon which all of 
the U.S. component securities trade are members of the Intermarket 
Surveillance Group (``ISG''), which provides information relevant to 
the surveillance of the trading of securities on other market 
centers.\29\ For new derivative securities products based on securities 
from a foreign market, the exchange should have a comprehensive 
Intermarket Surveillance Agreement with the market for the securities 
underlying the new securities product.\30\ Accordingly, the Commission 
finds that Amex's commitment to implement comprehensive surveillance 
sharing agreements, as necessary,\31\ and the requirement that no more 
than 20 percent of the weight of the index may be comprised of foreign 
country securities or ADRs that are not subject to a comprehensive 
surveillance sharing agreement \32\ will make possible adequate 
surveillance of trading of Index Securities listed pursuant to the 
proposed generic listing standards.
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    \29\ See Securities Exchange Act Release No. 40761 (December 8, 
1998), 63 FR 70952 (December 22, 1998) (File No. S7-13-98). ISG was 
formed on July 14, 1983, to, among other things, coordinate more 
effectively surveillance and investigative information sharing 
arrangements in the stock and options markets. The Commission notes 
that all of the registered national securities exchanges, including 
the ISE, as well as the NASD, are members of the ISG.
    \30\ See id.
    \31\ Proposed Amex Company Guide Section 107D(j).
    \32\ Proposed Amex Company Guide Section 107D(g)(vii).
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    With regard to actual oversight, Amex represents that its 
surveillance procedures are sufficient to detect fraudulent trading 
among members in the trading of Index Securities pursuant to proposed 
Section 107D of the Amex Company Guide.

[[Page 21262]]

C. Acceleration

    The Commission finds good cause for approving proposed Amendment 
No. 2 before the 30th day after the date of publication of notice of 
filing thereof in the Federal Register. In Amendment No. 2, Amex made 
minor modifications to the rule text and corresponding description, 
which clarified the scope of the proposal. The Commission believes that 
Amendment No. 2 will facilitate application of the Exchange's generic 
listing standards and enable more expeditious review and listing of 
Index Securities by Amex, reducing administrative burdens and 
benefiting the investing public. Thus, the Commission finds good cause 
to accelerate approval of the proposed rule change, as amended.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning Amendment No. 2, including whether Amendment No. 2 
is consistent with the Act. Comments may be submitted by any of the 
following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an e-mail to [email protected]. Please include 
File Number SR-Amex-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 May 16, 2005.

V. Conclusion

    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\33\ that the proposed rule change (SR-Amex-2005-001), as modified 
by Amendment No. 1, is hereby approved, and that Amendment No. 2 to the 
proposed rule change is hereby approved on an accelerated basis.
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    \33\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\34\
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    \34\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. E5-1949 Filed 4-22-05; 8:45 am]
BILLING CODE 8010-01-P