[Federal Register Volume 70, Number 162 (Tuesday, August 23, 2005)]
[Notices]
[Pages 49346-49347]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E5-4586]



[[Page 49346]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-52276; File No. SR-NASD-2004-131]


Self-Regulatory Organizations; National Association of Securities 
Dealers, Inc.; Order Granting Approval to Proposed Rule Change and 
Amendments Nos. 1 and 2 Thereto, and Notice of Filing and Order 
Granting Accelerated Approval to Amendment No. 3 Thereto, Relating to 
the Listing and Trading of Leveraged Index Return Notes Linked to the 
Nikkei 225 Index

August 17, 2005.

I. Introduction

    On August 30, 2004, the National Association of Securities Dealers, 
Inc. (``NASD''), through its subsidiary, The Nasdaq Stock Market, Inc. 
(``Nasdaq''), 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 list and trade Leveraged Index Return Notes 
Linked to the Nikkei 225 Index (``Notes'') issued by Merrill Lynch & 
Co., Inc. (``Merrill Lynch''). On March 21, 2005, Nasdaq filed 
Amendment No. 1 to the proposed rule change and on March 31, 2005, 
Nasdaq filed Amendment No. 2 to the proposed rule change. The proposed 
rule change and Amendments Nos. 1 and 2 were published for comment in 
the Federal Register on July 12, 2005.\3\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 51970 (July 5, 
2005), 70 FR 40091 (July 12, 2005).
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    The Commission received no comments on the proposal. This order 
approves the proposed rule change, as amended by Amendments Nos. 1 and 
2. Simultaneously, the Commission provides notice of filing of 
Amendment No. 3 to the proposed rule change and grants accelerated 
approval of Amendment No. 3.
    The Commission has previously approved the listing of securities, 
the performance of which has been linked, in whole or in part, to the 
Nikkei 225 Index (the ``Index''). The Notes, which are a series of non-
convertible debt securities, will not be secured by collateral, will 
not pay interest and are not subject to redemption by Merrill Lynch or 
at the option of any beneficial owner before their maturity term of 4 
\1/2\ years. At maturity, if the value of the Index has increased, a 
beneficial owner of a Note would be entitled to receive the original 
offering price ($10), plus an amount calculated by multiplying the 
original offering price ($10) by an amount equal to 123% 
(``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%, a beneficial owner of a Note would 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%, a beneficial owner would receive less, and possibly 
significantly less, than the original offering price: for each 1% 
decline in the Index below 20%, the redemption amount of the Note would 
be reduced by 1.25% of the original offering price.
    The Index, which is a modified, price-weighted index, is composed 
of 225 securities and is broad-based. As of July 8, 2005, the highest 
weighted stock in the Index had the weight of 2.9705%, and the top five 
stocks had the cumulative weight of approximately 13.2606%. In 
addition, as of July 8, 2005, the Index had an average daily trading 
volume for an average Index component of 3,228,120 shares. As of the 
same date, the market capitalization of the Index components ranged 
from approximately 13.04 trillion yen to 40 billion yen, which 
corresponded approximately to 116 billion U.S. dollars and 353 million 
U.S. dollars.

II. Discussion and Commission Findings

    The Commission believes that Nasdaq has adequately addressed the 
potential problems that could arise from the hybrid nature of the 
Notes. The Commission notes that since the Notes will be deemed equity 
securities for the purposes of NASD Rule 4420(f), the NASD and Nasdaq 
existing equity trading rules would apply to the Notes. The Commission 
also notes that pursuant to Rule 2310(a) 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. Also, 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 
investments objectives, and (4) such other information used or 
considered to be reasonable by such member in making recommendations to 
the customer. Members are also reminded that the Notes are considered 
non-conventional investments for purposes of the NASD Notice to Members 
03-71 (Nov. 2003). In addition, Nasdaq will distribute a circular to 
members that provides guidance regarding compliance responsibilities 
and requirements, including suitability recommendations, and highlights 
the special risks and characteristics of the Notes. Furthermore, the 
Notes will be subject to the equity margin rules and the regular equity 
trading hours of 9:30 a.m. to 4 p.m. will apply to transactions in the 
Notes.
    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. Finally, Nasdaq will commence delisting or removal proceedings 
with respect to the Notes (unless the Commission has approved the 
continued trading of the Notes) if specified standards with respect to 
the Notes are not continuously maintained.
    After careful consideration, the Commission finds that the proposed 
rule change, as amended, is consistent with the requirements of the Act 
and the rules and regulations thereunder, applicable to a national 
securities association. The Commission finds that the proposed rule 
change is consistent with the provisions of Section 15A of the Act,\4\ 
in general, and with Section 15A(b)(6) of the Act,\5\ in particular, in 
that it 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 should provide investors with another 
investment vehicle based on the Index and a means of participating in 
the market for foreign securities. The Commission believes that the 
Notes will permit investors to obtain returns based on the Nikkei while 
at the same time limiting the downside risk of the original investment 
as a result of the 20% threshold. As described more fully above, even 
if the value of the Index decreases more than 20%, in no event will the 
decline in the value of the

[[Page 49347]]

Notes equal (unless the Index value drops to zero) or exceed the 
decline in the value of the Index.
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    \4\ 15 U.S.C. 78o-3.
    \5\ 15 U.S.C. 78o-3(b)(6).
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    The Commission finds good cause for approving Amendment No. 3 
before the 30th day after the date of publication of notice of filing 
thereof in the Federal Register. Nasdaq filed Amendment No. 3 solely 
for purposes of updating figures related to the Index. Because the 
updated figures are non-controversial and do not raise any concerns 
about the nature of the Index or the Notes, the Commission finds good 
cause for accelerating approval of Amendment No. 3 in order to prevent 
unnecessary delay in the approval of this proposed rule change in its 
entirety.

III. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether Amendment No. 3 
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-NASD-2004-131 on the subject line.

Paper Comments

     Send paper comments in triplicate to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-9303.
    All submissions should refer to File Number SR-NASD-2004-131. 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 Room. 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-2004-131 and should be submitted on or before 
September 13, 2005.

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\6\ that the proposed rule change (SR-NASD-2004-131), as amended by 
Amendments Nos. 1 and 2, be, and it hereby is, approved, and that 
Amendment No. 3 to the proposed rule change be, and thereby is, 
approved on an accelerated basis.
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    \6\ 6 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\7\
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    \7\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. E5-4586 Filed 8-22-05; 8:45 am]
BILLING CODE 8010-01-P