[Federal Register Volume 64, Number 104 (Tuesday, June 1, 1999)]
[Notices]
[Pages 29367-29370]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-13810]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-41436; File No. SR-Amex-99-15]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change by the American Stock Exchange LLC Relating to the Listing and
Trading of Notes and Warrants on the 10 Uncommon Values Index of Lehman
Brothers Inc.
May 21, 1999.
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 April 19, 1999, 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 self-regulatory organization. The
Exchange filed Amendment No. 1 \3\ to the proposed rule change on May
17, 1999. 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.
\3\ Letter from Scott Van Hatten, Amex to Richard Strasser,
Division of Market Regulation, Commission, dated May 14, 1999
(``Amendment No. 1''). Amendment No. 1 clarifies that the Notes (as
hereinafter defined) will be principal protected if held to maturity
or if called by the issuer. Amendment No. 1 also provides three
sample calculations of payment amounts that investors holding Notes
may receive.
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I. Self-Regulatory Organization's Statement of the Terms of
Substance of the Proposed Rule Change
The Exchange proposes to approve for trading stock index warrants,
pursuant to Section 106, and indexed term notes, pursuant to Section
107, of the Amex Company Guide based upon the 10 Uncommon
Values Index of Lehman Brothers Inc.
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 VI 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 Exchange proposes to trade stock index warrants, pursuant to
Section 106, and indexed term notes, pursuant to Section 107, of the
Amex Company Guide based upon Lehman Brothers' 10 Uncommon
Values Index, an index consisting of ten actively traded
equity securities (``Index''). The issuer of the Warrants (as
hereinafter defined) and Notes (as hereinafter defined) will be
[[Page 29368]]
Lehman Brothers Holdings Inc. (``LB Holdings'').
The securities to be included in the Index will be those selected
annually by the Investment Policy Committee (``Committee'') of Lehman
Brothers' Equity Research group, a division of Lehman Brothers Inc.,
and announced on or about July 1, as its selection of ten securities
that the Committee believes will outperform the stock market during the
succeeding twelve months. To determine the ten selections each year,
various Lehman brothers' Equity Research analysits appear before the
firm's Investment Policy Committee to present their proposed equity
selections to be included in the Index for the next twelve months. The
Committee analyzes and screens each proposal after which the list of
stocks is reviewed to determine which ones offer the potential for
market outperformance. The Committee then selects what it believes to
be the best ideas for the next year's 10 Uncommon Values. Immediately
thereafter, on or about July 1 of each year, the ten securities to be
included in that year's Index are announced. Each subsequent year's 10
Uncommon Value stocks (``New Components'') will replace the preceding
year's 10 Uncommon Value stock (``Old Components'') in their entirety
in the Index. The New Components will be added to the Index on or about
July 1 (``Announcement Date'') each year, and the Old Components will
be removed from the Index on the last business day immediately
preceding the Announcement Date (``Closing Date'').
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. Lastly, as with other structured products, the Exchange
will closely monitor activity in the Notes and Warrants to identify and
deter any potential improper trading activity in the Notes and
Warrants.
Description of Index Term Notes. Under Section 107 of the Amex
Company Guide, the Exchange may approve for listing and trading
securities that cannot be readily categorized under the listing
criteria for common and preferred stocks, bonds, debentures, or
warrants.\4\ The Amex now proposes to list for trading under Section
107 of the Amex Company Guide, indexed term notes (``Notes'') whose
value in whole or in part will be based on the Index.
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\4\ See Securities Exchange Act Release No. 27753 (March 1,
1990), 55 FR 8626 (March 8, 1990).
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The Notes will be debt securities and will conform to the listing
guidelines under Section 107A of the Amex Company Guide. Although a
specific maturity date will not be established until the time of the
offering, the Notes will provide for maturity of not less than one nor
more than ten years from the date of issue.
The price of each Note may be par or less than par, in which case
the Notes accrue original issue discount. The Notes may or may not
provide for periodic coupon payments (at a fixed rate).
Beginning on a specified date (``Conversion Date''), holders have
the right to tender the Notes in exchange for the cash equivalent
(``Exchange Amount'') of the current component securities in the Index
in proportions equal to their weighting in the Index, according to the
following formula:
Par/Strike x Indexf
Where:
Indexf: Index Closing Price of the Selected Index on the
earlier of Conversion Date or Maturity Date
Indexi Initial Spot
Strike: --to be disclosed % of Indexi (e.g. 125%)
Investors in the Notes may receive varying payment amounts
depending upon whether the notes are held to maturity, called by the
issuer prior to maturity or redeemed by the investor prior to maturity.
Below are examples of calculations of payments amounts that investors
holding the Notes may receive.\5\
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\5\ See Amendment No. 1, supra n.3.
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To determine payment amounts given each of the three separate
events, a Par value (Issue Price) of $1000, Strike of 125, and Initial
Value of the Index 100 are assumed. The maturity of the notes are
assumed to be 5 years and the issuer may not call the notes prior to
three years after their issuance (i.e., the notes will have a non-call
life of 3 years).
1. The investor holds the Notes until maturity. At maturity, the
investor will receive the greater of:
Par ($1000), and
(Par/Strike x Final Index Value)
2. The investor converts the Notes prior to maturity. Investors may
convert their Notes at any time after the one-month anniversary of the
issue date in exchange for cash. The amount the investor would receive
in the event of early conversion is determined by the following
formula:
(Par/Strike x Current Index Value)
3. The issuer has the right to call the notes at Par at any point
beginning three years after the trade date by publishing such call with
30-days notice to investors. Once the issuer calls the Notes, its
holders may convert it by giving the issuer at least 20-days notice. If
the investors convert, they receive:
(Par/Strike x Current Index Value)
Otherwise, should the holder fail to convert, the Notes will be
called by the issuer and the investor will receive the Par Value
($1,000).
Example 1: Assume an Index value equal to 150 (i.e, greater than
the initial Index value of 100). Payment to investors under the above
three events would be as follows:
1. Greater of [$1000 and ($1,000/125 x 150)] = $1,200
2. ($1,000/125 x 150) = $1,200
3. ($1,000/125 x 150) = $1,200
Example 2: Assuming an Index value of 90 (i.e., less than the
initial index value of 100). Payment to investors under the above three
events would be as follows:
1. Greater of [$1,000 and ($1,000 / 125 x 90)] = $1,000
2. ($1,000 / 125 x 90) = $720
3. Note may or may not be called by the issuer in this case. If the
Note is called, payment would equal Par ($1,000).
Beginning on a specified date the issuer may or may not have the
right to call all of the Notes at a call price equal to the issue price
of the Notes plus accrued original issue discount, if any, to the call
date. If the market value of the basket of component securities on the
last trading before the issuer sends its call notice is equal to or
greater than the call price, the issuer will deliver to holders the
Exchange Amount instead. If the issuer notifies holders it will be
calling the Notes for the Exchange Amount, a holder may still exercise
its exchange right on any day prior to the call date.
If the Notes have not been exchanged or called prior to maturity,
they will be paid in cash at maturity in an amount equal to par plus
accrued interest, if any.
Exchange Rules Applicable to Index Notes. Because the Notes are
linked to a basket 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 Time) will apply to the trading of the Notes.
Pursuant to Exchange 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, the
[[Page 29369]]
Notes will be subject to the equity margin rules of the Exchange.\6\
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\6\ See Exchange Rule 462.
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Description of Index Warrants. Under Section 106 of the Amex
Company Guide, the Exchange may approve for listing and trading index
warrants. The Amex now proposes to list for trading, under Section 106
of the Amex Company Guide, index warrants (``Warrants'') whose value in
whole or in part will be based upon the Index. The Warrants will
conform to the listing guidelines under Section 106 of the Amex Company
Guide.
Although a specific maturity date will not be established until the
time of the offering, the Warrants will have a term of between one and
five years from the date of issuance. The Warrants will be cash-settled
in U.S. Dollars.
Expiration and Settlement of Index Warrants. The Warrants will be
direct obligations of their issuer, LB Holdings, subject to cash-
settlement during their term, and either exercisable throughout their
life (i.e., American style) or exercisable only on their expiration
date (i.e., European style). Upon exercise, or at the warrant
expiration date (if not exercised prior to such date), the holder of a
warrant structured as a ``put'' would receive payment in U.S. dollars
to the extent that the Index has declined below a pre-stated index
level (i.e., the put strike). Conversely, holders of a warrant
structured as a ``call'' would, upon exercise or at expiration, receive
payment in U.S. dollars to the extent that the Index has increased
above the pre-stated index level (i.e., the call strike). If ``out-of-
the-money'' at the time of expiration, then the Warrants would expire
worthless. In addition, the Amex, prior to the commencement of trading,
will distribute a circular to its membership calling attention to
specific risks associated with the Warrants on the Index.
Exchange Rules Applicable to Index Warrants. The listing and
trading of Warrants on the Index will comply in all respects with
Exchange Rules 1100 through 1110 for the trading of stock index and
currency warrants. These rules cover issues such as exercise and
position and reporting requirements. Surveillance procedures currently
used to monitor trading in each of the Exchange's other index warrants
will also be used to monitor trading in the Warrants. The Index will be
deemed to be a Stock Index Industry Group under Amex Exchange
900C(b)(1). The Exchange expects that the review required by Exchange
Rule 1107(b)(ii) will result in a position limit of 9,000,000 Warrants.
Eligibility Standards for Index Components. Components of the Index
approved pursuant to this filing will meet the following criteria: (1)
a minimum market value of at least $75 million, except that the lowest
weighted component security in the Index may have a market value of $50
million; (2) trading volume in each of the last six months of not less
than 1,000,000 shares, except that the lowest weighted component
security in the Index may have a trading volume of 500,000 shares or
more in each of the last six months; (3) 90% of the Index's numerical
Index value and at least 80% of the total number of component
securities will meet the then current criteria for standardized option
trading set forth in Exchange Rule 915; (4) all component stocks will
either be listed on the Amex, the New York Stock Exchange, or traded
through the facilities of the Nasdaq Stock Market and reported National
Market System securities; and (5) if any foreign securities or American
Depositary Receipts represented in the Index cause a particular foreign
country's weight in the Index to initially exceed 20% of the Index's
numerical Index value, the Exchange will have in place a surveillance
sharing agreement with the appropriate regulatory organization in that
country.
Index Calculation. The Index will be calculated using an ``equal-
dollar weighting'' methodology designed to ensure that each of the
component securities is represented in an approximately ``equal''
dollar amount in the Index. To create the Index, a portfolio of equity
securities will be established by the issuer representing an investment
of $10,000 in each component security (rounded to the nearest whole
share). The value of the Index will equal the current market value of
the sum of the assigned number of shares of each of the component
securities divided by the current index divisor. The Index divisor will
initially be set to provide a benchmark value of 100.00 at the close of
trading on the day preceding the establishment of the Index.
The Exchange will calculate the Index and, similar to other stock
index values published by the Exchange, the value of the Index will be
calculated continuously and disseminated every 15 seconds over the
Consolidated Tape Association's Network B.
The number of shares of each component stock in the Index will
remain fixed between Announcement Dates except in the event of certain
types of corporate actions such as the payment of a dividend other than
an ordinary cash dividend, a stock distribution, stock split, reverse
stock split, rights offering, distribution, reorganization,
recapitalization, or similar event with respect to the component
stocks. The number of shares of each component stock may also be
adjusted, if necessary in the event of a merger, consolidation,
dissolution or liquidation of an issuer or in certain other events such
as the distribution of property by an issuer to shareholders, the
expropriation or nationalization of a foreign issuer or the imposition
of certain foreign taxes on shareholders of a foreign issuer. Shares of
a component stock may be replaced (or supplemented) with other
securities under certain circumstances, such as the conversion of a
component stock into another class of security, the termination of a
depositary receipt program or the spin-off of a subsidiary. If the
stock remains in the Index, the number of shares of that security in
the portfolio may be adjusted, to the nearest whole share, to maintain
the component's relative weight in the Index at the level immediately
prior to the corporate action. In all cases, the divisor will be
adjusted, if necessary, to ensure Index continuity.
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. lastly, as with other structured products, the Exchange
will closely monitor activity in the Notes and Warrants to identify and
deter any potential improper trading activity in the Notes and
Warrants.
2. Statutory Basis
The proposed rule change is consistent with Section 6(b) of the Act
\7\ in general, and furthers the objectives of Section 6(b)(5) \8\ in
particular, in that it is designated 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 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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\7\ 15 U.S.C. 78f(b).
\8\ 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.
[[Page 29370]]
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
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 such proposed rule change, or
(B) institute proceeding 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-
0609. 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 will also be
available for inspection and copying at the principal office of the
Amex. All submissions should refer to File No. SR-Amex-99-15 and should
be submitted by June 22, 1999.
For the Commission by the Division of Market Regulation,
pursuant to delegated authority.\9\
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\9\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-13810 Filed 5-28-99; 8:45 am]
BILLING CODE 8010-01-M
