[Federal Register Volume 63, Number 143 (Monday, July 27, 1998)]
[Notices]
[Pages 40145-40147]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-19987]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-40228; File No. SR-Amex-98-24]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change by the American Stock Exchange, Inc. Relating to the Listing and
Trading of Merrill Lynch EuroFund Market Index Target Term Securities
July 17, 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 June 30, 1998, the American Stock Exchange, Inc. (``Exchange'' or
``Amex'') 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 and trade under Section 107A of the
Exchange's Company Guide, Merrill Lynch EuroFund Market Index Target
Term Securities SM (``MITTS Securities''). The
value of the MITTS Securities will be based in whole or in part on
changes in the value of the Merrill Lynch EuroFund Index (``EuroFund
Index'').
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 Section 107A of the Exchange's Company 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.\3\ The Exchange seeks to list the MITTS
Securities for trading under Section 107A of the Exchange's Company
Guide. The MITTS Securities are structured as mutual fund linked notes,
the value of which will be linked, in whole or in part, to the adjusted
total return value of Class B Shares of the Merrill Lynch EuroFund
(``EuroFund''),\4\ a mutual fund registered under the Investment
Company Act of 1940. The EuroFund is a ``diversified company'' as
defined in Section 5(b) of the Investment Company Act of 1940 \5\ and
the securities held by the EuroFund are issued by companies based in
five or more countries.
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\3\ Securities Exchange Act Release No. 27753 (Mar. 1, 1990), 55
FR 8626 (Mar. 8, 1990).
\4\ According to the prospectus prepared by the underwriter, the
Eurofund is a diversified, open-end management company that seeks to
provide shareholders with capital appreciation primarily through
investment in equities of corporations domiciled in European
countries. While there are no prescribed limits on geographic
distribution within the European community, it currently is
anticipated that a majority of the EuroFund's assets will be
invested in equity securities of issuers domiciled in Western
European countries. Current income from dividends and interest will
not be an important consideration in selecting portfolio securities.
The Eurofund expects that under normal market conditions at least
80% of its net assets will be invested in European corporate
securities, primarily common stocks, and debt and preferred
securities convertible into common stocks.
\5\ 15 U.S.C. 80a-5(b).
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The Exchange represents that MITTS Securities will be senior,
unsecured debt securities that will conform to the listing guidelines
under Section 107A of the Exchange's Company Guide. Although a specific
maturity date will not be established until the time of the offering,
the MITTS Securities will provide for a maturity of between two and
seven years from the date of issuance. MITTS Securities may provide for
periodic payments and/or payments at maturity based in whole or in part
on changes in the value of the EuroFund Index, an index based on the
adjusted total return of the Class B Shares of the EuroFund.\6\ At
maturity, holders of the
[[Page 40146]]
MITTS Securities will receive not less than 100% of the initial issue
price in either the value of Class D Shares of the EuroFund or cash.
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\6\ The EuroFund Index will measure the adjusted total return
value of Class B Shares of the EuroFund. The total return value
reflects the change in net asset value of Class B Shares of the
EuroFund, plus cash dividends and distributions paid on those
shares. The Amex will calculate the EuroFund Index value each day by
reducing the EuroFund Index value by a percentage equal to the pro
rata portion of an annual reduction factor. The annual reduction
factor is expected to be between 2.25% and 2.75% and will be
determined on the date that the MITTS Securities are priced for
initial sale to the public. Holders of Class B Shares receive the
value of their shares plus cash dividends and distributions paid on
those shares less fees. Holders of the MITTS Securities receive at
maturity the principal amount of their investment plus a
Supplemental Redemption Amount based on the adjusted total return of
Class B Shares of the Eurofund (as described above) which may be
lower than what a holder of Class B EuroFund Shares might receive.
The Amex represents that an explanation of this deduction will be
included in any marketing materials, fact sheets, or any other
materials circulated to investors regarding the trading of MITTS
Securities.
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a. Description of the MITTS Securities and the Underlying Merrill
Lynch EuroFund. Similar to equity linked term notes that are listed for
trading pursuant to Section 107B of the Exchange's Company Guide, the
MITTS Securities will have a limited term of between two and seven
years. In addition: (i) both the issue (MITTS Securities) and the
issuer (Merrill Lynch & Co., Inc.) meet the general criteria set forth
in Section 107A of the Exchange's Company Guide; (ii) the issuer has a
minimum tangible net worth in excess of $250,000,000 and otherwise
substantially exceeds the earnings requirements set forth in Section
101(A) of the Exchange's Company Guide; (iii) the EuroFund has total
net assets of approximately $2.16 billion; and (iv) the EuroFund's net
asset value (``NAV'') is reported each day through the facilities of
the National Association of Securities Dealers Automated Quotation
System (``Nasdaq''). The continued listing guidelines governing the
MITTS Securities are set forth in Sections 1001 through 1003 of the
Exchange's Company Guide. In particular, Section 1003(b) regarding
suspensions and delistings with respect to limited distribution and
reduced market value will apply to MITTS Securities.
b. Calculation and Dissemination of Net Asset and Index Values. The
EuroFund Index shall measure the adjusted total return of Class B
Shares of the EuroFund. Such amount shall be equal to the change in
price of EuroFund Class B Shares, plus cash dividends and distributions
paid on EuroFund Class B Shares, less a percentage equal to
approximately 2.25%-2.75%, each year, of the value of the EuroFund
Index. The percentage reduction of the EuroFund Index will be applied
to the total return of EuroFund Class B Shares on a pro rata basis each
calendar day. This adjusted total return value will be disseminated
once a day over the Consolidated Tape Association's Network B.\7\
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\7\ The Exchange represents that the EuroFund's value is updated
only at the close of trading each day because that is the only time
when the EuroFund's NAV is determined and disseminated. The Exchange
believes this should not pose an obstacle to the trading of the
MITTS Securities, anymore than it prevents investors from entering
intra-day orders to purchase or redeem shares of the EuroFund's
itself at a closing NAV that is unknown as the time the orders are
entered.
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In addition to the dissemination of the adjusted total return
value, the EuroFund's NAV will be disseminated through the facilities
of Nasdaq. If the EuroFund does not comply with Rule 22c-1 under the
Investment Company Ac tof 1940,\8\ which requires daily computation of
a fund's current NAV, the Exchange will use the last available price in
its calculation.
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\8\ 17 CFR 270.22c-1.
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c. Settlement of MITTS Securities. Although the value of MITTS
Securities will be calculated using EuroFund Class B Shares, MITTS
Securities will settle in Class D Shares of the EuroFund. Under the
proposal, MITTS Securities will settle by delivery of the number of
Class D Shares of the EuroFund equal in value to the principal amount
($10 per MITTS Security) plus the Supplemental Redemption Amount,\9\ if
any, based on the NAV for Class D Shares determined on a specified data
prior to the stated maturity of the MITTS Securities.\10\ If the issuer
is unable to deliver the Class D Shares because the EuroFund is not
issuing Class D Shares to new investors in the EuroFund as of the date
immediately prior to the stated maturity date, it will pay the
equivalent amount in cash.
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\9\ The Supplemental Redemption Amount, which may not be less
than zero, will equal the principal amount ($10) multiplied by the
percentage difference between the ending value of the EuroFund Index
and the starting value [$10 ((ending EuroFund Index value--starting
EuroFund Index value)/starting EuroFund Index value)]. The ending
and starting EuroFund Index values used to calculate the
Supplemental Redemption Amount shall reflect the application of the
annual reduction fee.
\10\ The specified date shall be two business days prior to the
stated maturity of the MITTS Securities. Telephone conversation
between Sharon Lawson, Senior Special Counsel, Division of Market
Regulation, Commission; Cliare McGrath, Vice President and Special
Counsel, Exchange; and Thomas Lee, Vice President of Customized
Investments, Merrill Lynch (July 16, 1998).
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d. Exchange Rule Applicable to MITTS. Because MITTS Securities are
linked to a portfolio of equity securities, the Exchange's equity floor
trading rules and regular equity trading hours (9:30 a.m. to 4:00 p.m.
Eastern Standard Time) will govern the trading of MITTS Securities. In
addition, MITTS Securities will be subject to the equity margin rules
of the Exchange.
In accordance with Exchange Rule 411, the Exchange shall impose a
duty of due diligence on its members and member firms to determine the
essential facts relating to customers prior to their purchasing and
trading MITTS Securities. Furthermore, consistent with the offering of
other structured products, the Exchange will distribute a circular to
its membership prior to the commencement of trading in MITTS Securities
to provide guidance regarding member frim 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 MITT Security, such member or member organization
should make a determination that the MITTS Security 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 the 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 structured products, the Exchange will closely
monitor activity in MITTS Securities to identify and deter any
potential improper trading activity in the MITTS Securities.
2. Statutory Basis
The Exchange believes the proposed rule change in consistent with
Section 6(b) of the Act,\11\ in general, and furthers the objectives of
Section 6(b)(5),\12\ 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 engaged in facilitating transactions in securities, and remove
impediments to and perfect the mechanism of a free and open market and
a national market system.
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\11\ 15 U.S.C. 78f(b).
\12\ 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 inappropriate burden on competition.
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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
respects 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 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 submission
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
statement 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 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 filing will also be available
for inspection and copying at the principal office of the Exchange. All
submissions should refer to File No. SR-Amex-98-24 and should be
submitted by August 17, 1998.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\13\
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\13\ 17 CFR 200.20-3(c)(12).
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Jonathan G. Katz,
Secretary.
[FR Doc. 98-19987 Filed 7-24-98; 8:45 am]
BILLING CODE 8010-01-M
