[Federal Register Volume 64, Number 18 (Thursday, January 28, 1999)]
[Notices]
[Pages 4480-4482]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-2003]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-40956; File No. SR-Amex-98-48]
Self-Regulatory Organizations; Notice of Filing of Immediate
Effectiveness of Proposed Rule Change by the American Stock Exchange
LLC Relating to the Listing and Trading of Term Notes Linked to Select
Sector SPDRSM
January 20, 1999.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that on
December 21, 1998, 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 Amex. The Commission is publishing this
notice to solicit comments on the proposed rule change from interested
persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of
Substance of the Proposed Rule Change
The Exchange seeks to list and trade term notes linked to Select
Sector SPDRSM,\3\ traded on the Amex (the ``Notes''). Each
Note issuance will be linked to a separate Select Sector
SPDRSM approved for trading on the Amex. The text of the
proposed rule change is available at the Office of the Secretary, Amex
and at the Commission
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\3\ The Select Sector SPDRsSM, to which the Notes
will be linked, comprise liquid and highly capitalized stocks
included in the S&P 500 Index. The nine Select Sector
SPDRsSM currently approved for trading on the Exchange
are the Basic Industries, Consumer Services, Consumer Staples,
Cyclical/Transportation, Energy, Financial, Industrial, Technology
and Utilities Select Sector SPDRsSM. Each is offered by
the Select Sector SPDRsSM Trust (``Fund''), an open-end
management investment company registered under the Investment
Company Act of 1940 and has been approved for trading on the Amex
pursuant to Amex Rules 1000A through 1003A (Index Fund Shares
Rules). Securities Exchange Act Release No. 40749 (December 4,
1998), 63 FR 68483 (December 11, 1998). In addition, Select Sector
SPDRsSM may underlie options pursuant Securities Exchange
Act Release No. 40157 (July 1, 1998), 63 FR 37426 (July 10, 1998).
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II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Amex included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Amex 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 purpose of the proposed rule change is to permit the Amex to
list term notes, each of which shall be separately linked to one of
nine Select Sector SPDRSM approved for trading on the Amex.
Under Section 107A of the Amex Company Guide, the Exchange may approve
for listing and trading securities which cannot be readily
[[Page 4481]]
categorized under the listing criteria for common and preferred stocks,
bonds, debentures, or warrants.\4\ Similar to other Exchange traded
Index-linked Notes, the Amex represents that both the issues and the
issuer will meet the general criteria set forth in Section 107A of the
Amex Company Guide. Furthermore, the issuer will have a minimum
tangible net worth in excess of $100,000,000 and otherwise
substantially exceed the earnings requirements set forth in Section 101
of the Amex Company Guide.\5\
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\4\ Securities Exchange Act Release No. 27753 (March 1, 1990),
55 FR 8626 (March 8, 1990). Section 107A of the Amex Company Guide,
states that the Exchange will consider listing any security not
otherwise covered by the Exchange's listing requirements, provided
the security satisfies the following criteria: 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 which is
unable to satisfy the earnings criteria set forth in Section 101
(i.e., pre-tax income of $750,000 in its last fiscal year, or in two
of its last three fiscal years and net income of at least $400,000),
the Exchange generally will require the issuer to have either assets
in excess of $200 million and stockholders' equity of at least $10
million or assets in excess of $100 million and stockholders' equity
of at least $20 million; Distribution--minimum public distribution
of 1,000,000 trading units with a minimum of 400 public
shareholders, except, if traded in thousand dollar denominations,
then no minimum number of holders; and Principal Amount/Aggregate
Market Value--not less than $4 million.
\5\ Section 101 of the Amex Company Guide, requires, among other
things, that an issuer have stockholders' equity of at least $4
million and pre-tax income of $750,000 in its last fiscal year, or
in two of its last three fiscal years.
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The Notes will be issued by Merrill Lynch & Co., Inc. (``Merrill'')
and underwritten by Merrill Lynch Pierce Fenner & Smith Incorporated.
The Notes will be senior, unsecured debt securities. Although a
specific maturity date will not be established until the time of the
offering, the Notes will provide for a maturity of between two and
seven years from the date of issuance. Each note will provide for
payment at maturity based in whole or in part on changes in the net
asset value of the corresponding Select Sector SPDRSM. The
Amex represents that Merrill will issue the Notes in various amounts,
between $10 and $25 per unit, with aggregate offerings in an amount
equal to between $15 and $100 million. The Amex represents that Merrill
is currently undertaking to prepare a preliminary prospectus for the
Notes which will be available for distribution to investors.
The Exchange believes the Notes are appropriately linked to Select
Sector SPDRsSM because Select Sector SPDRsSM are
open-ended investment companies. For this reason, the Exchange believes
that any concerns with respect to potential manipulation or market
impact upon settlement of the Notes at maturity are minimized. Similar
to the exercise of an option overlying a Select Sector
SPDRSM, which would require physical delivery of the
underlying Select Sector SPDRSM, and as was discussed in the
order approving the trading of options on Select Sector
SPDRsSM \6\ concerns with respect to potential manipulation
or market impact upon settlement are minimized because Select Sector
SPDRsSM even though some or all of the necessary securities
needed to be deposited are not available, the Exchange believes that
the underlying Select Sector SPDRsSM will be available in
the secondary market upon settlement. Further, although there is no
absolute assurance that market participants will create Select Sector
SPDRsSM, it is likely that arbitrage opportunities will
create an incentive to do so.
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\6\ Supra note 3.
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Surveillance procedures similar to those in place and used to
surveil the trading in Merrill Lynch Euro Fund MITTS \7\ (``Euro Fund
MITTS'') will be used to surveil trading in the term notes linked to
the various Select Sector SPDRsSM. Accordingly, the Exchange
will monitor trading in the Notes and in the Select Sector
SPDRsSM. And similar to the Euro Fund MITTS, if the Exchange
detects unusual activity in the Select Sector SPDRSM Notes,
it will examine, if necessary, activity in the stocks held by the
Select Sector SPDRSM as well as the redemption activity in
the Select Sector SPDRSM itself. The net asset values of the
Select Sector SPDRsSM will be calculated continuously by
Amex and disseminated every 15 seconds on Network B of the Consolidated
Tape Association (``CTA''). As discussed in the order approving the
trading of Select Sector SPDRsSM, Merrill currently has in
place procedures to prevent the misuse of material, non-public
information regarding changes to component stocks in the Select Sector
SPDRsSM.\8\
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\7\ Securities Exchange Act Release No. 40367 (August 26, 1998),
63 FR 47052 (September 3, 1998).
\8\ Supra note 3.
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Holders of the Notes will not receive any interest payments.
However, holders of the Notes will receive at maturity settlement
payment equal to the principal amount of the notes plus a
``Supplemental Redemption Amount'', based on the percentage increase in
the Select Sector SPDRSM from the starting value to the
adjusted ending value. The starting value will equal the net asset
value of the Select Sector SPDRSM on or prior to the pricing
date, the adjusted ending value will equal the average value of the
Select Sector SPDRSM on five consecutive trading days
shortly prior to maturity, as reduced by an adjustment factor and as
adjusted for certain anti-dilution events. The annual adjustment
factor, generally in an amount between 0.5% and 3%, will be applied to
the net asset value of the Select Sector SPDRSM on a pro
rata basis each day for purposes of determining the adjusted ending
value. The actual adjustment factor will be determined on the pricing
date. Upon maturity, at Merrill's option, the Notes will settle into
either shares of the Select Sector SPDRSM or cash. The
exchange notes that the formula may produce a total return at maturity
which is lower than the return a holder of the corresponding Select
Sector SPDRsSM might receive during the same period. At
maturity, holders of the Notes will not receive less than 100% of the
initial issue price.
Because the Notes are linked to a portfolio of equity securities,
the Amex's existing equity floor trading rules and standard equity
trading hours (9:30 a.m. to 4:00 p.m. Eastern Standard Time) will apply
to the trading of the Notes. Pursuant to Amex Rule 411, the Exchange
will impose a duty of due diligence on its members and member firms to
learn the essential facts relating to every customer prior to trading
the Notes. Further, pursuant to Amex Rule 462, the Notes will be
subject to the equity margin rules of the Exchange. In addition,
consistent with other structured products, the Exchange will distribute
a circular to its membership, prior to the commencement of trading,
providing guidance with regard to member firm compliance
responsibilities, including appropriate suitability criteria and/or
guidelines. The circular will state that before a member, member
organization, or employee of such member organization undertakes to
recommend a transaction in the security, such member or member
organization should make a determination that the security is suitable
for such customer and the person making the recommendation should have
a reasonable basis for believing at the time of making the
recommendation, that the customer has such knowledge and experience in
financial matters that they may be capable of evaluating the risks and
the special characteristics of the recommend transaction, including
those highlighted, and is financially able to bear the risks of the
recommended transaction. Lastly, as with other
[[Page 4482]]
structured products, the Exchange will closely monitor activity in the
Notes to identify and deter any potential improper trading activity in
the Notes.
2. Basis
The proposed rule change is consistent with Section 6(b)\9\ of the
Act in general and furthers the objectives of Section 6(b)(5)\10\ in
particular in that it is designed to prevent fraudulent and
manipulative acts and practices, to promote just and equitable
principles of change, 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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\9\ 15 U.S.C. 78f.
\10\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received from Members, Participants or Others
No written comments were solicited or received with respect to the
proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing
for Commission Action
The foregoing rule change has become effective pursuant to Section
19(b)(3)(A)\11\ and Rule 19b-4(e)(6)\12\ of the Act. The proposed rule
change does not significantly affect the protection of investors or the
public interest, does not impose any significant burden on competition;
and does not become operative prior to 30 days after the date the
proposed rule change was filed with the Commission.
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\11\ 15 U.S.C. 78s(b)(3)(A).
\12\ 17 CFR 240.19b-4(e)(6).
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Rule 19b-4(e)(6) also provides that the SRO provide the Commission
with written notice of its intent to file the proposed rule change,
along with a brief description and text of the proposed rule change, at
least five business days prior to the date of filing the proposed rule
change, or such shorter time as designated by the Commission. The Amex
requested that the Commission waive the notification period in order to
expedite the listing and trading of term notes linked to Select Sector
SPDRsSM. The Commission finds good cause to waive the
notification period because it previously reviewed and approved the
composition and maintenance of the nine Select Sector
SPDRsSM underlying the term notes.\13\
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\13\ Supra note 3.
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At any time within 60 days of the filing of the proposed rule
change, the Commission may summarily abrogate such rule change if it
appears to the Commission that such action is necessary or appropriate
in the public interest, for the protection of investors, or otherwise
in the furtherance of the purposes of the Act.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Persons making written submissions
should file six copies thereof with the Secretary, Securities and
Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549.
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, N.W.,
Washington, D.C. 20549. Copies of such filing will also be available
for inspection and copying at the principal office of the Amex. All
submissions should refer to file number SR-Amex-98-48 and should be
submitted by February 18, 1999.
For the Commission by the Division of Market Regulation,
pursuant to delegated authority.\14\
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\14\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-2003 Filed 1-27-99; 8:45 am]
BILLING CODE 8010-01-M
