[Federal Register Volume 60, Number 54 (Tuesday, March 21, 1995)]
[Notices]
[Pages 14993-14995]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-6842]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-35479; File No. SR-Phlx-95-09]
Self-Regulatory Organizations; Notice of Filing and Immediate
Effectiveness of Proposed Rule Change by the Philadelphia Stock
Exchange, Inc. Relating to Listing Criteria for Equity Linked Notes
(``ELNs'')
March 13, 1995.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''), 15 U.S.C. 78s(b)(1), notice is hereby given that on March 8,
1995, the Philadelphia Stock Exchange, Inc. (``Phlx'' or ``Exchange'')
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.
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Phlx proposes to amend Exchange Rule 803 to adopt listing
standards for equity linked notes (``ELNs''). The text of the proposed
rule change is available at the Office of the Secretary, the Phlx, 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 Phlx included statements
concerning the purpose of and basis for 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
Section (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
The purpose of the proposed rule change is to add subsection (h) to
Exchange Rule 803 to permit the Exchange to list and trade ELNs. ELNs
are intermediate-term, hybrid securities, whose value is based in whole
or in part, to the performance of a highly capitalized, actively traded
U.S. common stock, non-convertible preferred stock, or foreign security
that is traded in the U.S. in the form of sponsored American Depositary
Receipts (``ADRs''), ordinary shares, or otherwise.\1\ ELNs may pay
periodic interest or may be issued as zero-coupon instruments with no
payments to holders prior to maturity. ELNs may be subject to a ``cap''
on the maximum principal amount to be repaid to holders upon maturity,
and they may feature a ``floor'' on the minimum principal amount paid
to holders upon maturity. A specific issue of ELNs, for example, may
provide holders with a fixed semi-annual interest payment, while
capping the maximum amount to be repaid upon maturity at 135% of the
issuance price, with no minimum floor guarantee on the principal to be
repaid at maturity. Another issue of ELNs might offer lower semi-annual
payments based upon a floating interest rate\2\ with a minimum floor
for the repayment of principal of 75% of the issuance price. ELNs will
be treated as equity instruments for, among other purposes, margin
requirements. According to the Phlx, the flexibility available to an
issuer of ELNs permits the creation of securities which offer issuers
and investors the opportunity to more precisely focus on a specific
investment strategy.
\1\The Phlx will notify the Commission if an issue of ELNs is
structured so that it is convertible prior to maturity and will
submit a rule filing pursuant to Section 19(b) of the Act prior to
listing ELNs with such terms if the Commission so requires.
\2\The Phlx will notify the Commission if an issue of ELNs
provides for periodic interest payments to holders based on a
floating rate and will submit a rule filing pursuant to Section
19(b) of the Act prior to listing ELNs with such terms if the
Commission so requires.
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There are four components to the proposed listing standards for
ELNs: (1) ELN issuer standards; (2) ELN offering standards; (3)
underlying linked security standards; and (4) limitations on the size
of ELN offerings.
1. Issuer Listing Standards
The issuer must be listed on or be an affiliate of a company listed
on a national securities exchange or the Nasdaq National Market. Each
issuer must also have a minimum tangible net worth of $150 million.
Finally, the market value of an ELN offering, when combined with the
market value of all other ELN offerings previously completed by the
issuer and traded on a national securities exchange or through Nasdaq
may not be grater than 25% of the issuer's tangible net worth at the
time of issuance.
2. Offering Standards
In order to ensure adequate liquidity in the markets for ELNs, each
issuance of an ELN must have: (1) A minimum public distribution of one
million ELNs; (2) a minimum of 400 holders of the ELNs, unless the ELNs
are traded in $1,000 denominations, in which case thee is no minimum
number of holders required; (3) a minimum market value of $4 million;
and (4) a term to maturity of two to seven years (although ELNs linked
to a non-U.S. security (including a sponsored ADR) can not have a term
longer than three years).
3. Underlying Linked Security Standards
In order to help ensure that ELNs will not have a disruptive effect
on the market for the underlying securities, the linked securities must
have sufficiently large market capitalizations and high trading
volumes. Specifically, an underlying security must have: (1) A minimum
market capitalization of $3 billion and trading volume in the United
States of at least 2.5 million shares in the 12-month period preceding
the listing of the ELN; (2) a minimum market capitalization of $1.5
billion and trading volume in the United States of at least 20 million
shares in the 12-month period preceding the listing of the ELN; or (3)
a minimum market capitalization of $500 million and trading volume in
the United States of at least 80 million shares in the 12-month period
preceding the listing of the ELN. In addition, if an issuer proposes to
issue ELNs on a security that does not meet the market capitalization
and trading volume standards set forth above, the Phlx, with the
concurrence of the staff of the Commission, may evaluate the trading
volume, public float, and market capitalization of that security, as
well as other relevant factors, and determine on a case-by-case basis
that it is appropriate to list ELNs overlying that security. The Phlx
will submit a rule filing pursuant to Section 19(b) of the Act if so
required by the Commission if significant regulatory concerns are
raised by a proposed ELN offering that does not meet the above market
capitalization and trading volume standards.\3\
\3\In this connection, the Commission notes that any proposal to
list an ELN linked to a security with a market capitalization of
less than $500 million would raise significant regulatory concerns
for which a Section 19(b) rule filing would be required.
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The issuer of the linked security must be a reporting company under
the Act and the underlying linked security must be traded on a national
securities exchange or through Nasdaq and be [[Page 14994]] subject to
last sale reporting pursuant to Rule 11Aa3-1 under the Act.
Additionally, ELNs can be linked to certain non-U.S. companies\4\
subject to reporting requirements under the Act whose securities are
traded in the U.S. either as ordinary shares or sponsored ADRs,
provided there are at least 2,000 holders of the underlying linked
security. For ELNs linked to non-U.S. securities (including sponsored
ADRs) either: (1) The Exchange must also have in place a comprehensive
surveillance agreement with the primary exchange in the home country
where the security underlying the ELN is primarily traded (or in the
case of sponsored ADRs, on the primary exchange where the security
underlying the ADR is traded); or (2) the combined trading volume of
the underlying security and other related securities occurring in the
U.S. market represents (on a share equivalent basis) at least 50% of
the combined worldwide trading volume in the underlying security, other
related securities, and other classes of common stock related to the
underlying security over the six month period preceding the date of
listing of the ELN. The U.S. market includes trading only on the U.S.
self-regulatory organizations included in the Intermarket Surveillance
Group\5\ and linked through the Intermarket Trading System.\6\
\4\A non-U.S. company is any company formed or incorporated
outside of the United States.
\5\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.
See Intermarket Surveillance Group Agreement, July 14, 1983. The
most recent amendment to the ISG Agreement, which incorporates the
original agreement and all amendments made thereafter, was signed by
ISG members on January 29, 1990. See Second Amendment to the
Intermarket Surveillance Group Agreement, January 29, 1990. The
members of the ISG, (and accordingly, of the U.S. market) are: the
American Stock Exchange, Inc. (``Amex''); the Boston Stock Exchange,
Inc.; the Chicago Board Options Exchange, Inc. (``CBOE''); the
Chicago Stock Exchange, Inc.; the Cincinnati Stock Exchange, Inc.;
the National Association of Securities Dealers, Inc. (``NASD''), the
New York Stock Exchange, Inc. (``NYSE''); the Pacific Stock
Exchange, Inc.; and the Philadelphia Stock Exchange, Inc. Because of
potential opportunities for trading abuses involving stock index
futures, stock options and the underlying stock and the need for
greater sharing of surveillance information for these potential
intermarket trading abuses, the major stock index futures exchanges
(e.g., the Chicago Mercantile Exchange and the Chicago Board of
Trade) joined the ISG as affiliate members in 1990.
\6\ITS is a communications system designed to facilitate trading
among competing markets by providing each market with order routing
capabilities based on current quotation information. The system
links the participant markets and provides facilities and procedures
for: (1) the display of composite quotation information at each
participant market, so that brokers are able to determine readily
the best bid and offer available from any participant for multiply
trading securities; (2) efficient routing of orders and sending
administrative messages (on the functioning of the system) to all
participating markets; (3) participation, under certain conditions,
by members of all participating markets in opening transactions in
those markets; and (4) routing orders from a participating market to
a participating market with a better price.
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4. Limitations of Size of Particular ELN Offerings
Without the concurrence of the staff of the Commission, the
issuance of ELNs relating to any underlying U.S. security may not
exceed five percent of the total outstanding shares of such underlying
security. Further, without the concurrence of the staff of the
Commission, the issuance of ELNs relating to any non-U.S. security
(including sponsored ADRs) that is traded in the U.S. and is issued by
a non-U.S. company subject to U.S. reporting requirements may not
exceed: (1) 2% of the total shares outstanding worldwide provided at
least 30% of the worldwide trading volume in the underlying security
occurs in the U.S. market during the six month period preceding the
date of listing of the ELN; (2) 3% of the total shares outstanding
worldwide provided at least 50% of the worldwide trading volume in the
underlying security occurs in the U.S. market during the six month
period preceding the date of listing of the ELN; or (3) 5% of the total
shares outstanding worldwide provided at least 70% of the worldwide
trading volume in the underlying security occurs in the U.S. market
during the six month period preceding the date of listing of the ELN.
An ELN may not be linked to a non-U.S. security (including a sponsored
ADR) where such security and all related securities had less than 30%
of the worldwide trading volume occur in the U.S. during the six month
period preceding the date of listing of the ELN. The Exchange may
determine, on a case-by-case basis and with the concurrence of the
staff of the Commission, to approve for listing ELNs that relate to
more than these allowable percentages.\7\
\7\As with the market capitalization and trading volume
requirements, the Commission notes that based on the proposed facts,
the Phlx may be required to submit a rule filing to the Commission
pursuant to Section 19(b) of the Act to address regulatory issues
raised by any Phlx proposal to list ELNs related to more than the
allowable percentages of outstanding shares of the underlying
security.
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Finally, because ELNs are linked to price movements in another
security, the Exchange proposes three additional safeguards that are
designed to satisfy the investor protection concerns raised by the
trading of ELNs. First, for each ELN issue, the Exchange will
distribute a circular to its membership\8\ providing guidance
concerning member firm compliance responsibilities (including
suitability recommendations and account approval) when handling
transactions in ELNs. Second, members will have a duty of due diligence
pursuant to Exchange Rule 746 to learn the essential facts relating to
every customer trading ELNs prior to their first ELN transaction.
Third, pursuant to Exchange Rule 747, a member must approve a
customer's account for trading ELNs prior to the completion of the
customer's first ELN transaction.
\8\The Commission notes that the circular must be in a form
approved by the Commission.
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The Phlx represents that the proposed rule change is consistent
with Section 6(b) of the Act in general and furthers the objectives of
Section 6(b)(5)\9\ in particular in that it is designed to prevent
fraudulent and manipulative acts and practices, to promote just and
equitable principles of trade, to foster cooperation and coordination
with persons engaged in regulating, clearing, settling, processing
information with respect to, and facilitating transactions in
securities, to remove impediments to and perfect the mechanism of a
free and open market and a national market system and in general to
protect investors and the public interest. Specifically, the Phlx
believes the proposal strikes an appropriate balance between the Phlx's
need to adapt and respond to innovations in the securities markets and
the Phlx's concomitant need to ensure the protection of investors and
the maintenance of fair and orderly markets. The Phlx believes the
proposed numerical, quantitative listing standards should ensure that
only substantial companies capable of meeting their contingent
obligations created by ELNs are able to list such products on the
Exchange. Similarly, by providing for the distribution of circulars to
the membership concerning member firm compliance responsibilities and
requirements, the Phlx believes the proposal addresses any potential
sales practice concerns that may arise in connection with ELNs. The
Phlx also believes that the trading of ELNs will provide investors with
important investment and hedging benefits that will serve to satisfy
better their investment and portfolio management needs.
\9\15 U.S.C. 78f(b)(5) (1988).
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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. [[Page 14995]]
(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
Because the foregoing proposed rule change: (1) Does not
significantly affect the protection of investors or the public
interest; (2) does not impose any significant burden on competition;
and (3) does not become operative for 30 days from February 22, 1995,
it has become effective pursuant to Section 19(b) (3) (A) of the Act
and Rule 19b-4 (e) (6) thereunder. The proposed ELN listing standards
are virtually identical to the listing standards for equity linked
notes previously approved by the Commission for NYSE,\10\ the Amex,\11\
the CBOE,\12\ and the NASD.\13\ Accordingly, because the Commission has
already approved similar rules for other exchanges, the Phlx believes
that summary effectiveness of the proposed rule change will not
significantly affect the protection of investors or the public interest
and will not impose any significant burden on competition.\14\ 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 furtherance
of the purposes of the Act.
\10\See Securities Exchange Act Release Nos. 33468 (January 13,
1994), 59 FR 3387 (January 21, 1994) (order originally approving the
listing of ELNs on the NYSE); 33841 (March 31, 1994), 59 FR 16671
(April 7, 1994) (order approving revised market capitalization and
trading volume requirements for the listing of ELNs on the NYSE);
34545 (August 18, 1994), 59 FR 43877 (August 25, 1994) (order
approving the listing of ELNs on the NYSE linked to securities
issued by non-U.S. companies).
\11\See Secruities Exchange Act Release Nos. 32343 (May 20,
1993), 58 FR 30833 (May 27, 1993) (order originally approving the
listing of ELNs on the Amex); 33328 (December 13, 1993), 58 FR 66041
(December 17, 1993) (order approving revised market capitalization
and trading volume requirements for the listing of ELNs on the
Amex); 34549 (August 18, 1994), 59 FR 43873 (August 25, 1994) (order
approving the listing of ELNs on the Amex linked to securities
issued by non-U.S. companies).
\12\See Securities Exchange Act Release No. 34759 (September 30,
1994), 59 FR 50939 (October 6, 1994).
\13\See Securities Exchange Act Release No. 34758 (September 30,
1994), 59 FR 50943 (October 6, 1994).
\14\The Commission notes that prior to listing any ELNs, the
Exchange will be required to obtain approval from the staff of the
Commission concerning the Exchange's surveillance procedures
applicable to the trading ELNs.
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IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing. Persons making written submissions
should file six copies thereof with the Secretary, Securities and
Exchange Commission, 450 Fifth Street NW., 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 at the
Commission's Public Reference Section, 450 Fifth Street NW.,
Washington, D.C. 20549. Copies of such filing will also be available
for inspection and copying at the principal office of the Phlx. All
submissions should refer to File No. SR-Phlx-95-09 and should be
submitted by April 11, 1995.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\15\
\15\17 CFR 200.30-3 (a)(12) (1994).
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Johathan G. Katz,
Secretary.
[FR Doc. 95-6842 Filed 3-20-95; 8:45 am]
BILLING CODE 8010-01-M
