[Federal Register Volume 59, Number 203 (Friday, October 21, 1994)]
[Unknown Section]
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From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-26169]
[[Page Unknown]]
[Federal Register: October 21, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-34848; File No. SR-Amex-94-39]
Self-Regulatory Organizations; Order Granting Accelerated
Approval of a Proposed Rule Change and Notice of Filing and Order
Granting Accelerated Approval of Amendment No. 1 to the Proposed Rule
Change by the American Stock Exchange, Inc. Relating to the Listing and
Trading of Banking Industry Portfolio Indexed Term Notes
October 17, 1994.
I. Introduction
On September 22, 1994, the American Stock Exchange, Inc. (``Amex''
or ``Exchange''), pursuant to Section 19(b)(1) of the Securities
Exchange Act of 1934 (``Act'')\1\ and Rule 19b-4 thereunder,\2\ filed
with the Securities and Exchange Commission (``SEC'' or ``Commission'')
a proposed rule change to list and trade Indexed Term Notes
(``Notes''), the return on which is based upon a static portfolio of
banking industry securities (``Banking Industry Portfolio''). Notice of
the proposal appeared in the Federal Register on October 4, 1994.\3\ No
comment letters were received on the proposed rule change. The Exchange
filed Amendment No. 1 to the proposal on October 11, 1994.\4\ This
order approves the proposal, as amended.
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\1\15 U.S.C. 78s(b)(1) (1988).
\2\17 CFR 240.19b-4 (1992).
\3\See Securities Exchange Act Release No. 34723 (September 27,
1994), 59 FR 50631 (October 4, 1994).
\4\In Amendment No. 1 to the proposed rule change, the Exchange
proposes to remove Crestar Financial Corp from the Banking Industry
Portfolio and replace it with Citizens Bancorp (Md.). See Letter
from Claire McGrath, Managing Director and Special Counsel, Amex, to
Michael Walinskas, Branch Chief, Office of Market Supervision
(``OMS''), Division of Market Regulation (``Division''), Commission,
dated October 11, 1994.
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II. Description of the Proposal
Under Section 107 of the Amex Company Guide (``Guide''), the
Exchange may approve for listing and trading securities which cannot be
readily categorized under the listing criteria for common and preferred
stocks, bonds, debentures, or warrants.\5\ The Amex now proposes to
list for trading, under Section 107A of the Guide, Notes whose value is
based in whole or in part on a static index composed of twenty
actively-traded bank stocks.\6\
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\5\See Securities Exchange Act Release No. 27753 (March 1,
1990), 55 FR 8626 (March 8, 1990).
\6\The specific components of the Banking Industry Portfolio
are: Bancorp Hawaii, Inc.; Barnett Banks, Inc.; Baybanks, Inc.;
Citizens Bancorp (Md.); City National Corp.; Corestates Financial;
First American Corp.; First Chicago Corp.; Hibernia Corp.;
Mercantile Bancorp; Michigan National; Midlantic Corp.; North Fork
Bancorp; Provident Bankshares; Summit Bancorp; U.S. Bancorp; UJB
Financial Corp.; Union Planters Corp.; UST Corp.; and Vermont
Financial Services.
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The Notes are non-convertible debt securities of Lehman Brothers,
Inc. (``Lehman Brothers'') and will conform to the listing guidelines
under Section 107A of the Guide.\7\ Although the specific maturity date
will not be established until immediately prior to the time of the
offering, the Notes will provide for maturity within a period of not
less than one nor more than seven years from the date of issue. The
Notes provide for a single payment at maturity, and will bear no
periodic payments of interest. Banking Industry Portfolio Notes will
entitle the owner at maturity to receive an amount based upon the
percentage change between the ``Original Portfolio Value'' and the
``Ending Average Portfolio Value;'' provided, however, that: (1) the
amount payable at maturity will not be less than 90% of the principal
amount of the Notes; and (2) the issuer may place a cap on the amount
to be paid on the Notes at maturity.\8\ The ``Original Portfolio
Value'' is the value of the Banking Industry Portfolio on the date on
which the issuer prices the Notes for the initial offering to the
public. The ``Ending Average Portfolio Value'' is the average of the
closing prices of the Banking Industry Portfolio securities for a
specified number of days prior to maturity of the Notes.\9\ The Ending
Average Portfolio Value will be used in calculating the amount owners
will receive upon maturity.\10\
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\7\Specifically, the Notes must have: (1) a minimum public
distribution of one million trading units; (2) a minimum of 400
holders; (3) an aggregate market value of at least $4 million; and
(4) a term of at least one year. Additionally, the issuer of the
Notes (i.e., Lehman Brothers) must have assets of at least $100
million, stockholders' equity of at least $10 million, and pre-tax
income of at least $750,000 in the last fiscal year or in two of the
three prior fiscal years. As an alternative to these financial
criteria, the issuer must have either: (1) assets in excess of $200
million and stockholders' equity in excess of $10 million; or (2)
assets in excess of $100 million and stockholders' equity in excess
of $20 million.
\8\For example, Lehman Brothers could place a cap on the amount
to be received at maturity as a stated percentage of the issuance
price, e.g., 150% of the issuance price. Alternatively, a cap could
be in the form of a participation rate whereby a holder of the Notes
would participate in a stated percentage of the total percentage
change between the Ending Portfolio Value and the Original Portfolio
Value, e.g., 80% of the total appreciation of the Banking Industry
Portfolio during the term of the Notes. The Commission notes that
these examples are by way of illustration, not of limitation, as to
how a cap on the amount to be paid to holders of the Notes at
maturity could be constructed by Lehman Brothers.
\9\Specifically, the Ending Average Portfolio Value will equal
the average of the closing prices for the Banking Industry Portfolio
securities for the first 10 of the last 20 trading days prior to
maturity of the Notes. Telephone conversation between Benjamin
Krause, Senior Vice President, Capital Markets Group, Amex, and Brad
Ritter, Senior Counsel, OMS, Division, Commission, on October 11,
1994.
\10\The Banking Industry Portfolio Notes will entitle a holder
at maturity to receive not less than 90% of the original issue price
for the Notes. Additionally, holders of the Notes may not receive
the full amount of the change between the Ending Portfolio Value and
the Original Portfolio Value.
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If market value of the Banking Industry Portfolio has declined, the
owners of the Banking Industry Portfolio Notes will receive at least
90% of the principal amount of the Notes. The payment at maturity is
based on charges in the value of the Banking Industry Portfolio,
subject to any cap on appreciation that may be included by the issuer,
but does not reflect the payment of dividends on the securities that
comprise the portfolio. Banking Industry Portfolio Notes are cash-
settled in that they do not give holder any right to receive a
portfolio security or any other ownership right or interest in the
portfolio securities, although the return on the investment is based on
the aggregate value of the Banking Industry Portfolio securities.
According to the Amex, Banking Industry Portfolio Notes will allow
investors to combine the protection of a portion of the principal
amount of the Notes with a potential additional payment based upon the
performance of a portfolio of 20 highly capitalized banking industry
stocks. In particular, the proposed Banking Industry Portfolio Notes
will provide at least 90% principal protection with the opportunity to
participate in any upside appreciation of the underlying Banking
Industry Portfolio, subject to any cap on appreciation that may be
included by the issuer.
The Banking Industry Portfolio consists of securities of 20
companies that collectively, at the time of issuance,\11\ will satisfy
the generic listing requirements approved by the Commission for the
listing and trading of options on newly established narrow-based
indexes.\12\ Specifically, the component securities of the Banking
Industry Portfolio satisfy the following criteria: (1) a minimum market
capitalization of $75 million, except that up to 10% of the component
securities may have a market capitalization of not less than $50
million; (2) trading volume in each of the six months prior to the
offering of the Notes of not less than one million shares, except that
up to 10% of the component securities may have a trading volume in each
of the six months prior to the offering of the Notes of not less than
500,000 shares; (3) at least 90% of the component securities will meet
the then current criteria for standardized options trading set forth in
Exchange Rule 915; (4) all components of the Banking Industry Portfolio
will be listed on the Amex or the New York Stock Exchange, or will be
National Market securities traded through Nasdaq; (5) all components of
the Banking Industry Portfolio will be subject to last sale reporting
pursuant to Rule 11Aa3-1 of the Act; and (6) no more than 20% of the
weight of the Banking Industry Portfolio shall be represented by
foreign securities or ADRs for which the Exchange does not have in
place a comprehensive surveillance sharing agreement with the
appropriate regulatory organization(s) in such country(ies).\13\
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\11\The Commission notes that because the Banking Industry
Portfolio is a static portfolio, the Amex will not make adjustments
subsequent to issuance of the Notes for purposes of maintaining
compliance with these standards.
\12\See Securities Exchange Act Release No. 34157 (June 3,
1994), 59 FR 30062 (June 10, 1994).
\13\The exchange has represented that Lehman Brothers may
conclude prior to issuance of the Notes, based on changes in its
market research and investment strategy, that the composition of the
Banking Industry Portfolio should be altered. In such an event,
Lehman Brothers would be allowed, with the concurrence of the staff
of the Commission, to replace component securities accounting for up
to 10% of the number of components of the Banking Industry Portfolio
(i.e., two components) provided that with the replacement
components, the Banking Industry Portfolio still satisfies the
requirements for the listing and trading of options on newly
established narrow-based indexes. Id. If Lehman Brothers determines
to make any changes to the Banking Industry Portfolio that do not
satisfy these conditions, the Exchange would be required to obtain
approval from the Commission pursuant to Section 19(b) of the Act
before listing Notes based on the altered Banking Industry
Portfolio.
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At the outset, each of the securities in the Banking Industry
Portfolio will have equal representation. Specifically, each security
included in the Banking Industry Portfolio will be assigned a
multiplier on the date of issuance so that the security represents an
equal percentage of the value of the entire portfolio on the date of
issuance. The multiplier indicates the number of shares (or fraction of
one share) of a security, given its market price on an exchange or
through Nasdaq, to be included in the calculation of the portfolio.
Accordingly, each of the 20 companies included in the Banking Industry
Portfolio will represent approximately 5.0% of the total portfolio at
the time of issuance.
The multiplier for each security in the Banking Industry Portfolio
will generally remain unchanged except for limited adjustments that may
be necessary as a result of stock splits or stock dividends.\14\ There
will be no adjustments to the multipliers to reflect cash dividends
paid with respect to a portfolio security. In addition, no adjustments
of any multiplier of a portfolio security will be made unless such
adjustment would require a change of at least 1% in the multiplier then
in effect.
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\14\Lehman Brothers will adjust the multiplier of any portfolio
security if the security is subject to a stock split or reverse
split to equal the product of the number of shares issued with
respect to one share of the portfolio security and the prior
multiplier. In the case of a stock dividend, the multiplier will be
adjusted so that the new multiplier will equal the former multiplier
plus the product of the number of shares of such portfolio security
issued with respect to one share of the portfolio security and the
prior multiplier.
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If the issuer of a security included in the Banking Industry
Portfolio no longer exists, whether for reason of a merger, acquisition
or similar type of corporate control transaction, then Lehman Brothers
will assign to that security a value equal to the security's final
value for the purposes of calculating portfolio values. For example, if
a company included in the portfolio is acquired by another company,
Lehman Brothers shall thereafter assign a value to the shares of the
acquired company's securities equal to the value per share at the time
that the acquisition takes place.
If the issuer of a Banking Industry Portfolio security is in the
process of liquidation or subject to a bankruptcy proceeding,
insolvency, or other similar adjudication, such security will continue
to be included in the Banking Industry Portfolio so long as a market
price on an exchange or through Nasdaq for such security is available.
If such a market price is no longer available for a portfolio security,
including, but not limited to, liquidation, bankruptcy, insolvency, or
any other similar proceeding, then the value of the portfolio security
will be assigned a value of zero in connection with calculating the
daily portfolio value and the closing portfolio value of the Banking
Industry Portfolio, for so long as no such market price exists for that
security.\15\
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\15\Lehman Brothers will not attempt to find a replacement stock
or to compensate for the extinction of a security due to bankruptcy
or a similar event.
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The value of the Banking Industry Portfolio will be calculated
continuously by the Amex and will be disseminated every 15 seconds over
the Consolidated Tape Association's Network B. The portfolio value will
equal the sum of the products of the most recently available market
prices and the applicable multipliers for the portfolio securities.
The Notes may not be redeemed prior to maturity and are not
callable by the issuer. Holders of Banking Industry Portfolio Notes
will be able to cash-out of their investment by selling the security on
the Amex. The Exchange anticipates that the trading value of the
security in this secondary trading market will depend in large part on
the value of the securities comprising the Banking Industry Portfolio
and also on such other factors as the level of interest rates, the
volatility of the value of the Banking Industry Portfolio, the time
remaining to maturity, dividend rates, and the creditworthiness of the
issuer, Lehman Brothers.
Because Banking Industry Portfolio Notes are linked to a portfolio
of equity securities, the Amex's existing equity floor trading rules
will apply to the trading of Banking Industry Portfolio Notes. First,
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 Banking Industry Portfolio
Notes.\16\ Second, consistent with Amex Rule 411, the Exchange will
further require that a member or member firm specifically approve a
customer's account for trading Banking Industry Portfolio Notes prior
to, or promptly after, the completion of the transaction. Third,
Banking Industry Portfolio Notes will be subject to the equity margin
rules of the Exchange. Fourth, the Exchange will, prior to trading
Banking Industry Portfolio Notes, distribute a circular to the
membership providing guidance with regard to member firm compliance
responsibilities (including suitability recommendations) when handling
transactions in Banking Industry Portfolio Notes and highlighting the
special risks and characteristics of the Banking Industry Portfolio
Notes.\17\
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\16\Amex Rule 411 requires that every member, member firm or
member corporation use due diligence to learn the essential facts
relative to every customer and to every order or account accepted.
\17\The circular shall also highlight any cap on appreciation,
if any, that the issuer includes in the Notes.
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III. Commission Findings and Conclusions
The Commission finds that the proposed rule change is consistent
with the requirements of the Act and the rules and regulations
thereunder applicable to a national securities exchange, and, in
particular, the requirements of Section 6(b)(5) of the Act.\18\
Specifically, the Commission believes that providing for exchange-
trading of Banking Industry Portfolio Notes will offer a new and
innovative means of participating in the market for banking industry
securities.\19\ In particular, the Commission believes that Banking
Industry Portfolio Notes will permit investors to gain equity exposure
in such companies, while at the same time, limiting the downside risk
of the original investment. For the reasons discussed in the
Commission's order approving the listing of Basic Industry Portfolio
Notes,\20\ the Commission finds that the listing and trading of Banking
Industry Portfolio Notes is consistent with the Act.
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\18\15 U.S.C. 78f(b)(5) (1988).
\19\The Commission Notes that the Banking Industry Portfolio
Notes are very similar in structure to Basic Industry Portfolio
Notes recently approved for listing on the Amex. See Securities
Exchange Act Release No. 34820 (October 11, 1994) (``Exchange Act
Release No. 34820'').
\20\Id.
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As with the Basic Industry Portfolio Notes, Banking Industry
Portfolio Notes are not leveraged instruments. Their price, however,
will still be derived and based upon the underlying linked securities.
Accordingly, the level of risk involved in the purchase or sale of
Banking Industry Portfolio Notes is similar to the risk involved in the
purchase or sale of traditional common stock. Nonetheless, the
Commission has several specific concerns with this type of product
because the final rate or return of the Notes is derivatively priced,
based on the performance of the underlying securities. The concerns
include: (1) investor protection concerns, (2) dependence on the credit
of the issuer of the security, (3) systemic concerns regarding position
exposure of issuers with partially hedged positions or dynamically
hedged positions, and (4) the impact on the market for the underlying
linked securities.\21\ The Commission believes the Amex has adequately
addressed each of these issues such that the Commission's regulatory
concerns are adequately minimized.\22\ In particular, by imposing the
listing standards, suitability, disclosure, and compliance requirements
noted above, the Amex has adequately addressed the potential public
customer concerns that could arise from the hybrid nature of the
Notes.\23\ Further, the Commission believes that the listing standards
and issuance restrictions should help to reduce the likelihood of any
adverse market impact on the securities comprising the Banking Industry
Portfolio.
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\21\Id.
\22\Id.
\23\The Exchange will also distribute a circular to its
membership, in a form approved by the Commission, calling attention
to the specific risks associated with Banking Industry Portfolio
Notes.
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The Commission realizes that Banking Industry Portfolio Notes are
dependent upon the individual credit of the issuer, Lehman Brothers. To
some extent this credit risk is minimized by the Exchange's continued
listing standards which require issuers to maintain an aggregate market
value of $1 million for its publicly-held shares.\24\ In addition, the
Exchange's hybrid listing standards further require that Banking
Industry Portfolio Notes have at least $4 million in market value.\25\
In any event, financial information regarding Lehman Brothers, in
addition to the information on the issuers of the underlying securities
comprising the Banking Industry Portfolio, will be publicly
available.\26\
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\24\See Amex Company Guide Sec. 1003(b).
\25\See Amex Company Guide Sec. 107A.
\26\The companies that comprise the Banking Industry Portfolio
are reporting companies under the Act.
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The Commission finds good cause for approving the proposed rule
change and Amendment No. 1 to the proposal prior to the thirtieth day
after the date of publication of notice of filing thereof in the
Federal Register. Specifically, the Commission believes that the
proposal, as amended, does not raise any regulatory issues that were
not addressed by the Amex in its proposal to list and trade Basic
Industry Portfolio Notes.\27\ Additionally, the Exchange's proposal to
list and trade Basic Industry Portfolio Notes was noticed for the full
comment period without any comments being received by the Commission.
Accordingly, the Commission believes that it is consistent with Section
6(b)(5) of the Act to approve the proposed rule change and Amendment
No. 1 thereto on an accelerated basis.
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\27\See Exchange Act Release No. 34820, supra note 19.
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Interested persons are invited to submit written data, views and
arguments concerning Amendment No. 1 to the proposed rule change.
Persons making written submissions should file six copies thereof with
the Secretary, Securities and Exchange Commission, 450 Fifth Street,
NW., Washington, DC 20549. Copies of the submissions, 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 at the Commission's Public
Reference Section, 450 Fifth Street, NW., Washington, DC 20549. Copies
of such filings will also be available for inspection and copying at
the principal office of the Amex. All submissions should refer to File
No. SR-Amex-94-39 and should be submitted by November 14, 1994.
It is Therefore Ordered, pursuant to Section 19(b)(2) of the
Act,\28\ that the proposed rule change (File No. SR-Amex-94-39), as
amended, is approved.
\28\15 U.S.C. 78s(b)(2) (1988).
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For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\29\
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\29\17 CFR 200.30-3(a)(12) (1993).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-26169 Filed 10-20-94; 8:45 am]
BILLING CODE 8010-01-M
