[Federal Register Volume 63, Number 193 (Tuesday, October 6, 1998)]
[Notices]
[Pages 53737-53739]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-26661]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-40481; File No. SR-CBOE-98-38]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change by the Chicago Board Options Exchange, Incorporated Relating to
the Listing and Trading of Principal-Protected Notes
September 25, 1998.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on September 14, 1998, the Chicago Board Options Exchange, Incorporated
(``Exchange'' or ``CBOE'') filed with the Securities and Exchange
Commission (``Commission'') the proposed rule change as described in
Items I, II, and III below, which Items have been prepared by the
Exchange. 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 the trade four separate Principal-
Protected Notes. The value of each Principal-Protected Note will be
linked to an index comprised of a single specified domestic mutual fund
portfolio (``Index'' or collectively ``Indexes'').
The text of the proposed rule change is available at the Office of
the Secretary, the Exchange, and at the Commission.
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 Exchange 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 Exchange has prepared summaries, set forth in
Sections A, B, and C below, of the most significant aspects of such
statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
Under Exchange Rule 31.5(F), the Exchange may approve for listing
and trading securities which cannot be readily categorized under the
Exchange's listing criteria for preferred stock, bonds and debentures,
or warrants. The Exchange seeks to list four Principal-Protected Notes,
each of which shall be separately linked to a specified domestic mutual
fund portfolio Index.\3\ The four mutual fund portfolios underlying the
Indexes are registered under the Investment Company Act of 1940.
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\3\ The Exchange notes that the Commission recently approved a
similarly structured product for listing and trading on the American
Stock Exchange--Market Index Target Term Securities linked to the
Merrill Lynch EuroFund Index. See Securities Exchange Act Release
No. 40367 (Aug. 26, 1998), 63 FR 47052 (Sept. 3, 1998).
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The Principal-Protected notes will be senior, unsecured debt
securities that will conform to the listing guidelines under Exchange
Rule 31.5(F) in all respects.\4\ Although a specific maturity date will
not be established until the
[[Page 53738]]
time of the offering, the Principal-Protected Notes will provide for a
maturity of between two and seven years from the date of issuance. Each
Principal-Protected Note may provide for payments at maturity based in
whole or in part on changes in the value of the corresponding Index.
Each Index will measure the total return of the corresponding mutual
fund portfolio. The total return value shall reflect the Changes in the
Net Value (``NAV'') of the corresponding mutual fund portfolio, plus
any cash dividends and/or distributions paid on those shares.\5\
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\4\ Exchange Rule 31.5(F) states that the Exchange will consider
listing any security not otherwise covered by the Exchange's listing
requirements, provided the security satisfied the following
criteria:
(a) 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 paragraph (A) (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 the following: (i) assets in excess
of $200 million and stockholders' equity of at least $10 million; or
(ii) assets in excess of $100 million and stockholders' equity of at
least $20 million.
(b) Distribution--Minimum public distribution of $1,000,000
trading units including a minimum of 400 holders or, if traded in
thousand dollar denominations, no minimum number of holders.
(c) Principal Amount/Aggregate Market Value--Not less than $4
million.
\5\ As discussed infra in Section II(A)(1)(c), ``Settlement of
Principal Protected Notes,'' the total return value may be reduced
by an adjustment factor.
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The Exchange will calculate the value of each Index once each
business day. Holders of the Principal-Protected Notes will not receive
any interest payments. However, holders of the Principal-Protected
Notes will received at maturity the full principal amount of their
Notes, plus a ``Supplemental Redemption Amount,'' if any, based on a
formula to be set forth in the Prospectus. The Exchange notes that the
formula may produce a total return at maturity which is lower than what
a holder of the corresponding mutual fund portfolio might receive
during the same period. At maturity, holders of the Principal-Protected
Notes will not receive less than 100% of the initial issue price.
a. Description of Principal-Protected Notes and the Underlying
Mutual Funds. Similar to other Exchange traded index-linked notes, both
the issues (Principal-Protected Notes) and the issuer meet the general
criteria set forth in Exchange Rule 31.5(F). Furthermore, the Exchange
has represented that the issuer has a minimum tangible net worth in
excess of $100,000,000 and otherwise substantially exceeds the earnings
requirements set forth in Exchange Rule 31.5(A).\6\ Each mutual fund
portfolio underlying an Index includes several hundred stocks from
among a wide variety of industry groups. As of the latest reporting
period, the underlying mutual fund portfolios ranged in value from $900
million to $2.1 billion in total net assets. The NAV of each mutual
fund portfolio is reported each business day through the facilities of
the National Association of Securities Dealers Automated Quotation
System (``Nasdaq'') and also is reported in the Mutual Fund Tables of
the Wall Street Journal and other newspapers. The Principal-Protected
Notes will be subject to the suspension and delisting policies of the
Exchange set forth in Exchange Rule 31.94.\7\
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\6\ Exchange Rule 31.5(A), ``Equity Securities,'' requires that
an issuer have 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.
\7\ Under Exchange Rule 31.94(C)(b)(iii), the Exchange may
consider delisting debt securities if the aggregate market value or
the principal amount of debt securities publicly held is less than
$400,000 or, the issuer is not able to meet its obligations on the
listed debt securities.
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b. Calculation and Dissemination of Net Asset Values and Index
Values. Each Index will measure the total return of its underlying
mutual fund portfolio. Such amount shall be equal to the change in the
mutual fund's NAV, plus any cash dividends and/or distributions paid on
the mutual fund portfolio shares. The value for each Index will be
disseminated once a day over the Consolidated Tape Association's
Network B or through the Option Price Reporting Authority (``OPRA'').
If any mutual fund portfolio does not comply with Rule 22c-1 of the
Investment Company Act of 1940,\8\ which requires daily computation of
a fund's current NAV, the Exchange will use the last available NAV in
its calculation of the Index.
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\8\ 17 CFR 270.22c-1.
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c. Settlement of Principal-Protected Notes. The Principal-Protected
Notes will be settled at maturity by either a cash payment or by
delivering shares in the corresponding mutual fund portfolio, at the
determination of the Issuer. The value of the Principal-Protected Notes
at maturity will be equal to the principal amount of such Notes plus a
Supplemental Redemption Amount. The Supplemental Redemption Amount,
which may not be less than zero, will equal the principal amount of
such Principal-Protected Note multiplied by the percentage difference
between the Adjusted Ending Index Value and the Starting Index Value.
The Adjusted Ending Index Value means the ending value of the Index \9\
reduced by an adjustment factor, if any, to be set forth in the
prospectus.
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\9\ The ending value of the Index shall represent the average of
the values of the Index during a period prior to the stated maturity
as specified in the prospectus.
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d. Other Exchange Rules. Trading in Principal-Protected Notes will
be governed by Chapter XXX of the Exchange's Rules.\10\ The Principal-
Protected Notes will trade during the normal trading hours for Chapter
XXX securities, 8:30 A.M. to 3:00 P.M. Central Standard Time. The
Principal-Protected Notes also will be subject to the equity margin
rules of the Exchange.\11\ Consistent with the Exchange's practice with
respect to the offering of structured products, the Exchange will
distribute an informational circular to its membership prior to the
commencement of trading in the Principal-Protected Notes to provide
guidance regarding member firm compliance responsibilities, including
appropriate suitability criteria and/or guidelines. The circular shall
require that before a member, member organization, or employee of such
member organization, undertakes to recommend a transaction in a
Principal-Protected Note, such member or member organization should
make a determination that the Principal-Protected Note is suitable for
such customer. As part of that determination, 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 special characteristics of the recommended transaction,
including those highlighted, and that the customer is financially able
to bear the risks of the recommended transaction. Lastly, as with other
similarly structured products, the Exchange will closely monitor
trading activity in Principal-Protected Notes to identify and deter any
potential improper trading activity in such securities.
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\10\ See Exchange Rules, Chapter XXX, ``Trading in Stocks,
Warrants and Other Securities.''
\11\ See Exchange Rules, Chapter XII, ``Margins.''
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2. Statutory Basis
The Exchange believes the proposed rule change is consistent with
Section 6 of the Act,\12\ in general, and furthers the objectives of
Section 6(b)(5),\13\ in particular, in that it is designed to prevent
fraudulent and manipulative acts and practices; promote just and
equitable principles of trade; foster cooperation and coordination with
persons facilitating transactions in securities; remove impediments to
and perfect the mechanism of a free and open market and a national
market system; and protect investors and the public interest. The
Exchange further believes the listing and trading of the Principal-
Protected Notes will provide investors an opportunity to invest in a
mutual fund portfolio without being subject to the risk of principal
loss.
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\12\ 15 U.S.C. 78f.
\13\ 15 U.S.C. 78f(b)(5).
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[[Page 53739]]
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe the proposed rule change will impose
any inappropriate burden on competition.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants or Others
The Exchange did not solicit or receive written comments with
respect to the proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing
for Commission Action
Within 35 days of the date of publication of this notice in the
Federal Register or within such longer period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding, or (ii) as to
which the Exchange consents, the Commission will:
(A) by order approve the proposed rule change, or
(B) institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing, including whether the proposed rule
change 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 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 persons, 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 filings will also be available
for inspection and copying at the principal office of the Exchange. All
submissions should refer to File No. SR-CBOE-98-38 and should be
submitted by October 27, 1998.
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. 98-26661 Filed 10-5-98; 8:45 am]
BILLING CODE 8010-01-M
