[Federal Register Volume 60, Number 125 (Thursday, June 29, 1995)]
[Notices]
[Pages 33884-33887]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-16054]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-35886; File No. SR-Amex-95-20]
Self-Regulatory Organizations; Order Granting Accelerated
Approval of a Proposed Rule Change and Notice of Filing and Order
Granting Accelerated Approval of Amendment Nos. 1 and 2 to the Proposed
Rule Change by the American Stock Exchange, Inc. Relating to the
Listing and Trading of Indexed Term Notes
June 23, 1995.
On May 30, 1995, the American Stock Exchange, Inc. (``Amex'' or
``Exchange'') submitted to the Securities and Exchange Commission
(``Commission''), pursuant to Section 19(b) of the Securities Exchange
Act of 1934 (``Act''),\1\ and Rule 19b-4 thereunder,\2\ a proposed rule
change to list and trade indexed term notes (``Notes''), the return on
which is based in whole or in part on changes in the value of twenty-
four (24) equity securities of companies that have been identified by
the Note underwriter, The Bear Stearns Companies (``Bear Stearns''), as
``consolidation candidates.'' Notice of the proposal appeared in the
Federal Register on June 9, 1995.\3\ No comment letters were received
on the proposal. The Exchange filed Amendment No. 1 to the proposed
rule change on June 12, 1995,\4\ and Amendment No. 2 on June 20,
1995.\5\ This order approves the Amex proposal, as amended.
\1\ 15 U.S.C. 78s(b)(1) (1988).
\2\ 17 CFR 240.19b-4 (1994).
\3\ See Securities Exchange Act Release No. 35802 (June 2,
1995), 60 FR 30614.
\4\ In Amendment No. 1, the Exchange amended the proposal to
provide that at maturity, (1) holders of the Notes will participate
in 90% of the percentage change between the ``original portfolio
value'' and the ``average portfolio value''; and (2) the average
portfolio value will be determined by reference to the average of
the monthly closing Index values over the term of the Notes. See
Letter from William Floyd-Jones, Jr., Assistant General Counsel,
Legal & Regulatory Policy Division, Amex, to Michael Walinskas,
Branch Chief, Office of Market Supervision (``OMS''), Division of
Market Regulation (``Division''), Commission, dated June 8, 1995
(``Amendment No. 1'').
\5\ In Amendment No. 2, as described below, the Exchange
clarifies the Exchange rules that will govern the trading of the
Notes. See Letter from Michael Bickford, Vice President, Capital
Markets Group, Amex, to Michael Walinskas, Branch Chief, OMS,
Division, Commission, dated June 20, 1995 (``Amendment No. 2'').
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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
[[Page 33885]]
stocks, bonds, debentures, or warrants.\6\ 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 changes in the value of twenty-four (24)
equity securities of companies that have been identified by the Note
underwriter as ``consolidation candidates'' (``Index'').\7\
\6\ See Securities Exchange Act Release No. 27753 (March 1,
1990), 55 FR 8626 (March 8, 1990).
\7\ The components of the Index are: Agouron Pharmaceuticals,
Inc; Biogen, Inc.; Campbell Soup Co.; Crestar Financial Corp.;
Electronic Arts, Inc.; Heinz (H.J.) Co.; Healthcare COMPARE Corp.;
Integra Financial Corp.; McCormick & Co., Inc.; Mercantile
Bancorporation; Mesa, Inc.; Midlantic Corp., Inc.; The Money Store,
Inc.; Multicare Companies, Inc.; Oryx Energy Co.; Physician Corp. of
America; Protein Design Labs, Inc.; Quaker Oats Co.; Santa Fe Energy
Resources; Sierra Health Services, Inc.; Triton Energy Corp.; United
Companies Financial Corp.; Upjohn Co.; and Vertex Pharmaceuticals,
Inc.
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The Notes are non-convertible debt securities of Bear Stearns, and
will conform to the listing guidelines under Section 107A of the
Guide.\8\ The Notes will have a term of three years from the date of
issue. The Notes provide for a single payment at maturity, and will
bear no periodic payments of interest. At maturity, the Notes will
entitle the holder to receive an amount based upon ninety percent (90%)
of the percentage change between the ``original portfolio value'' \9\
and the ``average portfolio value'',\10\ provided, however that the
amount payable at maturity will not be less than 90% of the principal
amount of the Notes. Thus, while there is no cap on the appreciation,
investors participate in only 90% of the appreciation, as calculated
above.\11\ The Notes are cash-settled in that they do not give the
holder any right to receive an Index security or any other ownership
right or interest in the securities comprising the Index, although the
return on the investment is based on the aggregate value of the Index.
\8\ 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 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 may
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.
\9\ The ``original portfolio value'' is the closing level of the
Index at the time that the Notes are priced immediately preceding
the issuance of the Notes.
\10\ The ``average portfolio value'' is the average of the
closing values of the Index on the last trading day of each of the
36 months during the term of the Notes. See Amendment No. 1, supra
note 4.
\11\ The Commission notes that because the average portfolio
value is based on an average of closing Index values over the term
of the Notes, the percentage change between the ``original portfolio
value'' and the ``average portfolio value'' may be significantly
different than the percentage change in the value of the Index
between the date that the Notes are issued and the maturity date for
the Notes.
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According to the Amex, the 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 an Index of
24 equity secuities of ``consolidation candidates''. In particular, the
proposed Notes will provide 90% principal protection with the
opportunity to participate in 90% of any appreciation of the underlying
Index, as calculated above.
The Index consists of 24 securities that satisfy the following
criteria: (1) A minimum market capitalization per component of $75
million, except that up to 10% of the number of component securities in
the Index may have individual market capitalizations of not less than
$50 million; (2) trading volume per Index component 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 number of Index component
securities may have a trading volume in each of the six months prior to
the offering of not less than 500,000; (3) at least 90% of the number
of components in the Index will satisfy the then current criteria for
standardized options trading set forth in Exchange Rule 915; (4) all
components of the Index will be listed on the Amex or the New York
Stock Exchange, or will be National Market securities traded through
Nasdaq; and (5) all components of the Index will be subject to last
sale reporting pursuant to Rule 11Aa3-1 of the Act.
At the outset, each of the securities in the Index will have equal
representation. Specifically, each security included in the Index will
be assigned a multiplier on the date of issuance of the Notes so that
each component represents an equal percentage of the value of the Index
on the date of issuance. The multiplier indicates the number of shares
of a security, rounded to the nearest whole share, given its market
price on an exchange or through Nasdaq, to be included in the
calculation of the Index. Accordingly, each of the 24 companies
included in the Index will represent approximately 4.17 percent of the
weight of the Index at the time of issuance of the Notes. 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 issuance of the Notes.
The number of shares of each component stock in the Index will
remain fixed 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 securities. The number of
shares of each component security 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. Shares of a component security
may be replaced (or supplemented) with other securities under certain
circumstances, such as the conversion of a component stock into another
class of security, or the spin-off of a subsidiary. If the security
remains in the Index, the number of shares of that security will be
adjusted, if necessary, to the nearest whole share, to maintain the
component's relative weight in the Index at the level immediately prior
to the corporate action.\12\ In all cases, the divisor will be
adjusted, if necessary, to ensure continuity of the value of the Index.
In the event that a security in the Index is canceled due to a
corporate consolidation and the holders of such security receive cash,
the cash value of such securities will be included in the Index and
will accrue interest at LIBOR to term, compounded daily.
\12\ Telephone conference between Michael Bickford, Vice
President, Capital Markets Group, Amex, and Brad Ritter, Senior
Counsel, OMS, Division, Commission, on June 20, 1995 (``June 20
Conversation''). The issuer will not attempt to find a replacement
stock or compensate for the extinction of a security due to
bankruptcy or a similar event.
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The value of the Index will be calculated continuously by the Amex
and will be disseminated every 15 seconds over the Consolidated Tape
Association's Network B. The Index value will equal the sum of the
products of the most recently available market prices and the
applicable multipliers for the securities in the Index.
The Notes may not be redeemed prior to maturity and are not
callable by the issuer. Holders of Index Notes will be able to cash-out
of their investment only by selling the Notes on the Amex. The Exchange
anticipates that the trading value of the Notes in this secondary
trading market will depend in large part on the value of the securities
compromising the Index and also on such other factors as the level of
interest rates, the volatility of the value of the
[[Page 33886]]
Index, the time remaining to maturity, dividend rates, and the
creditworthiness of the issuer, Bear Stearns.\13\
\13\ See Amendment No. 2, supra note 5.
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Because Index Notes are linked to an index of equity securities,
the Amex's existing equity floor trading rules will apply to the
trading of Index Notes.\14\ 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 Index Notes.\15\ 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 Index Notes prior to, or
promptly after, the completion of the transaction.\16\ Third, Index
Notes will be subject to the equity margin rules of the Exchange.\17\
Fourth, the Exchange will, prior to trading Index Notes, distribute a
circular to the membership providing guidance with regard to member
firm compliance responsibilities (including suitability
recommendations) when handling transactions in Index Notes and
highlighting the special risks and characteristics of the Index
Notes.\18\
\14\ Id.
\15\ Id. 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.
\16\ See Amendment No. 2, supra note 5.
\17\ Id.
\18\ Id. The Commission notes that the circular should also
highlight the formula for calculating the payment to holders at
maturity as well as the participation rate in the appreciation of
the Index, as described above.
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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.\19\
Specifically, the Commission believes that providing for exchange-
trading of the Notes will offer a new and innovative means of
participating in the market for securities identified by the issuer of
the Notes as consolidation candidates.\20\ In particular, the
Commission believes that the Notes will permit investors to gain equity
exposure in such companies, while at the same time, limiting the
downside risk of their original investment. For the reasons discussed
in the Indexed Term Note Approval Orders, the Commission finds that the
listing and trading of the Notes is consistent with the Act.\21\
\19\ 15 U.S.C. 78f(b)(2) (1988).
\20\ The Commission notes that the Index Notes are very similar
in structure to other indexed term notes recently approved by the
Commission for listing on the Amex. See Securities Exchange Act
Release Nos. 34820 (October 11, 1994), 59 FR 52571 (October 18,
1994) (approval for listing of indexed term notes linked to a
portfolio of ``basic'' industry securities), 34723 (September 27,
1994), 59 FR 50631 (October 4, 1994) (approval for listing of
indexed term notes linked to a portfolio of banking industry
securities), and 33495 (January 19, 1994), 59 FR 3883 (January 27,
1994) (approval for listing of Telecommunications Basket Stock
Upside Note Securities) (collectively, Indexed Term Note Approval
Orders'').
\21\ Id.
As with the other indexed term notes approved for listing by the
Exchange, the 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 Index 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 products 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.\22\ The Commission believes the Amex has adequately
addressed each of these issues such that the Commission's regulatory
concerns are adequately minimized.\23\ 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.\24\ Moreover, the Commission believes that the Exchange's
existing surveillance procedures are adequate to detect and deter any
attempts at manipulation of the Notes and the securities in the Index.
\22\ Id.
\23\ Id.
\24\ The Exchange will also distribute a circular to its
membership calling attention to the specific risks associated with
the Notes. See supra note 18.
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Further, the Commission believes that the listing standards and
issuance restrictions discussed above, particularly, the objective
standards for market capitalization, trading volume, and options
eligibility, will ensure that at the time that the Notes are issued,
the Index will be composed of highly capitalized, liquid securities. As
a result, the Commission believes that any concerns regarding the
potential for manipulation of the Index or adverse market impact on the
securities comprising the Index are adequately minimized.
The Commission realizes that Index Notes are dependent upon the
individual credit of the issuer, Bear Stearns. To some extent this
credit risk is minimized by the Exchange's listing standards in Section
107A of the Guide which provide that only issuers satisfying
substantial asset and equity requirements may issue securities such as
Index Notes.\25\ In addition, the Exchange's hybrid listing standards
further require that Index Notes have at least $4 million in market
value.\26\ In any event, financial information regarding Bear Stearns,
in addition to the information on the issuers of the securities
comprising the Index, will be publicly available.\27\
\25\ See supra note 8.
\26\ See Amex Company Guide Sec. 107A.
\27\ The companies that comprise the Index are reporting
companies under the Act.
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The Commission finds good cause for approving the proposed rule
change and Amendment Nos. 1 and 2 to the proposal prior to the
thirtieth day after the date of publication of notice of filing thereof
in the Federal Register. Specifically, the proposal, as amended, is
substantively similar to other indexed term notes that the Commission
has approved for listing by the Amex.\28\ To the Commission's
knowledge, these other issues of notes have traded on the Amex without
any material problems occurring.\29\ The only substantive differences
between these Notes and those previously approved are the composition
of the index of securities on which the values of the Notes will be
based, the method for calculating the value to be received by holders
upon maturity of the Notes, and the amount of participation by
investors in the appreciation of the Index during the term of the
Notes. With regard to the composition of the Index, as discussed above,
the Commission believes that the objective eligibility standards for
including a particular security in the Index minimize the potential for
manipulation of the Notes and any possible adverse market impact on the
securities contained in the Index.
\28\ See Indexed Term Note Approval Orders, supra note 20.
\29\ See June 20 Conversation, supra note 12.
The Commission also believes that the proposed method for
calculating the amount to be paid to holders at maturity does not raise
any significant regulatory concerns. The formula used here involves the
averaging of 36 monthly
[[Page 33887]]
closing Index values over a three year period. Accordingly, the
Commission believes that this calculation method reduces the potential
for manipulation. Moreover, as noted above, the Amex has adequate
surveillance procedures in place to detect and deter attempts at
manipulation involving either the Notes or the securities contained in
the Index. Similarly, the Commission also believes that limiting
investors' participation in the appreciation of the Index does not
raise any regulatory concerns. The Commission has previously approved
equity linked products where investors only receive a percentage of the
appreciation of the linked securities.\30\ As a result, the Commission
believes that these aspects of the Notes are consistent with the Act so
long as they are adequately disclosed to investors by the issuer and
described in the circular to be issued by the Exchange upon issuance of
the Notes. Finally, the Commission has not received any comment to date
on the proposal and has not received any comment on similarly
structured notes previously approved.\31\
\30\ See Securities Exchange Act Release No. 32950 (September
23, 1993), 58 FR 50985 (September 29, 1993) (approval for the
listing of debt exchangeable for common stock (``DECS'') by the New
York Stock Exchange).
\31\ See Indexed Term Note Approval Orders, supra note 20.
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Based on the above, the Commission believes that the proposed rule
change is consistent with Section 6(b)(5) of the Act and finds good
cause for approving the proposal and Amendment Nos. 1 and 2 to the
proposal on an accelerated basis.
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, DC 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, NW.,
Washington, DC. 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-95-20 and should be
submitted by July 20, 1995.
It therefore is ordered, pursuant to Section 19(b)(2) of the
Act,\32\ that the proposed rule change (SR-Amex-95-20), as amended, is
approved.
\32\ 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.\33\
\33\ 17 CFR 200.30-3(a)(12) (1994).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-16054 Filed 6-28-95; 8:45 am]
BILLING CODE 8010-01-M
