[Federal Register Volume 59, Number 164 (Thursday, August 25, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-20895]
[[Page Unknown]]
[Federal Register: August 25, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-34549; File No. SR-Amex-93-46]
Self-Regulatory Organizations; Order Granting Approval and Notice
of Filing and Order Granting Accelerated Approval of Amendment No. 6 to
a Proposed Rule Change by the American Stock Exchange, Inc., Relating
to Equity Linked Term Notes
August 18, 1994.
On December 29, 1993, the American Stock Exchange, Inc. (``Amex''
or ``Exchange'') filed with the Securities and Exchange Commission
(``Commission''), pursuant to Section 19(b)(1) of the Securities
Exchange Act of 1934 (``Act''),\1\ and Rule 19b-4 thereunder,\2\ a
proposed rule change relating to Equity Linked Term Notes (``ELNs'').
Notice of the proposal and Amendment No. 1\3\ appeared in the Federal
Register on January 26, 1994.\4\ No comment letters were received on
the proposed rule change. The Exchange filed Amendment No. 2 to the
proposed rule change on January 31, 1994, Amendment No. 3 on March 9,
1944, Amendment No. 4 on April 28, 1994, Amendment No. 5 on June 27,
1994, and Amendment No. 6 on July 18, 1994.\5\ This order approved the
Exchange's proposal, as amended.
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\1\15 U.S.C. 78s(b)(1) (1982).
\2\17 CFR 240.19b-4 (1993).
\3\The amended rule language contained in Amendment No. 1 to the
proposal was subsequently withdrawn by the Amex. See Amendment No.
6, infra note 5.
\4\See Securities Exchange Act Release No. 33483 (January 14,
1994), 59 FR 3745 (January 26, 1994).
\5\Amendment No. 6 withdraws and supersedes the rule language
originally proposed for section 107B of the Amex Company Guide
(``Guide''), as subsequently amended by Amendment Nos. 1 through 5.
The changes proposed in Amendment No. 6 are fully described herein.
See Letter from Claire McGrath, Managing Director and Special
Counsel, Derivative Securities, Amex, to Michael Walinskas, Branch
Chief, Office, Division, Commission, dated July 18, 1994
(``Amendment No. 6'').
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The Amex proposes to amend Section 107B of the Guide with respect
to the listing criteria for ELNs.\6\ ELNs are intermediate term (two to
seven years), non-convertible, hybrid securities, the value of which is
linked to the performance of a highly capitalized, actively traded
common stock. ELNs may provide for periodic interest payments to
holders based on fixed or floating rates, or they may be structured as
``zero coupon'' instruments with no payments to holders prior to
maturity.\7\ 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.
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\6\The Commission approved the listing and trading of ELNs on
May 20, 1993. See Securities Exchange Act Release No. 32343 (May 20,
1993), 58 FR 30833 (``Exchange Act Release No. 32343''). The
Commission subsequently approved an amendment to the listing
standards for ELNs to provide for alternative capitalization and
trading volume requirements for the underlying security. See
Securities Exchange Act Release No. 33328 (December 13, 1993), 58 FR
66041 (December 17, 1993).
\7\The Exchange has agreed to notify the Commission if an issuer
of ELNs intends to provide for periodic interest payments to holders
based on a floating interest rate. See Exchange Act Release No.
32343, supra note 6, at note 6. The Commission, at that time, may
require the Amex to submit a rule filing pursuant to Section 19(b)
of the Act prior to permitting the Exchange to list an ELN with such
terms.
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In addition to the general listing criteria contained in Section
107A of the Guide,\8\ ELNs must also conform to the special listing
criteria of Section 107B of the Guide which provide that: (1) Each
issuer must have a tangible net worth of at least $150 million; (2) the
total original issue price of the particular issue of ELNs combined
with all of the issuer's other ELNs listed on a national securities
exchange or traded through the National Association of Securities
Dealers, Inc. Automated Quotation system (``NASDAQ'') may not be
greater than 25% of the issuer's tangible net worth at the time of
issuance; (3) each underlying linked stock must have either (i) a
market capitalization of at least $3 billion and a trading volume in
the 12-month period preceding listing (in all markets in which the
underlying security is traded) of at least 2.5 million shares, or (ii)
a market capitalization of at least $1.5 billion and a trading volume
in the 12-month period preceding listing (in all markets in which the
underlying security is traded) of at least 20 million shares; (4) the
issuer of the underlying linked stock must be a U.S. reporting company
under the Act; (5) the issuance of ELNs relating to an underlying
linked stock may not exceed 5% of the total outstanding shares of such
stock; (6) the linked security must either be listed on a national
securities exchange or traded through NASDAQ; and (7) the linked
security must be subject to last sale reporting.
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\8\Under Section 107A of the Guide, an issue of ELNs must have:
(1) A minimum public distribution of one million trading units and a
minimum of 400 unit holders; (2) an aggregate market value of at
least $20 million; (3) where cash settled, the settlement must be in
U.S. dollars; and (4) where redeemable, a redemption price of at
least three dollars. In addition, Section 107A provides that issuers
of hybrid securities 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. Issues not meeting these financial criteria must
have assets in excess of $200 million and stockholders' equity in
excess of $10 million, or alternatively, assets in excess of $100
million and stockholders' equity of at least $20 million.
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The Exchange is now proposing to amend Section 107B in order to
provide for the listing and trading of ELNs linked to a security,
including a sponsored ADR,\9\ that is traded in the U.S. markets and is
issued by a non-U.S. company\10\ that is subject to reporting
requirements under the Act. Except for the requirement that the issuer
of the underlying linked security must be a U.S. company, the listing
requirements for ELNs linked to a security issued by a non-U.S. company
will be the same as those set forth above with the following
enhancements:\11\ (1) Section 107B of the Guide is being amended to
clarify that the trading volume requirement refers to U.S. trading
volume;\12\ (2) the term of such ELNs shall be limited to between two
and three years; (3) either (i) the Exchange must have in place a
comprehensive market information sharing agreement\13\ with the primary
exchange on which the underlying security is primarily traded (in the
case of ADRs, with the primary exchange where the security underlying
the ADR is traded), or (ii) at least 50% of the market for the
underlying security and all related securities\14\ for the six months
prior to issuance must occur in the U.S. market;\15\ (4) if linked to
an ADR, the ADR must be sponsored; (5) there must be a minimum of 2,000
holders of the linked security; (6) the ELNs issuance may not exceed
(i) 2% of the total shares of the underlying security outstanding
provided at least 30% of the worldwide trading volume for the security
for the six-months prior to listing occurred in the U.S. market, (ii)
3% of the total shares of the underlying security outstanding provided
at least 50% of the worldwide trading volume for the security for the
six-months prior to listing occurred In the U.S. market, or (iii) 5% of
the total shares of the underlying security outstanding provided at
least 70% of the worldwide trading volume for the security for the six-
months prior to listing occurred in the U.S. market; and (7) no ELN may
be listed if the U.S. market for the underlying security accounted for
less than 30% of the worldwide trading volume for the security and
related securities during the prior six months.
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\9\Amendment No. 6, supra note 5. As opposed to an unsponsored
ADR, a sponsored ADR is established jointly by the issuer of the
underlying security and a depositary. With a sponsored ADR, the
depositary is generally required to distribute notices of
shareholder meetings and voting instructions to ADR holders, thereby
ensuring the ADR holders will be able to exercise voting rights
through the depositary with respect to the underlying securities.
\10\The exchange defines a non-U.S. company as any company
formed or incorporated outside of the United States. Telephone
conversation between Claire McGrath, Managing Director and Special
Counsel, Derivative Securities, Amex, and Brad Ritter, Attorney,
Office of Derivatives and Equity Regulation, Division of Market
Regulation, Commission, on July 19, 1994. See also, 17 CFR 240.3b-
4(b) (1985) (definition of foreign issuer under the Act).
\11\See Amendment No. 6, supra note 5.
\12\See infra notes 16-18 and accompanying text. This will also
apply to ELNs linked to securities issued by U.S. companies.
\13\See Amendment No. 6, supra note 5; and Letter form Benjamin
Krause, Senior Vice President, Capital Markets Group, Amex, to
Sharon Lawson, Assistant director, Office, Division, Commission,
dated March 8, 1994 (``March 8 Letter''). A comprehensive market
information sharing agreement would provide for the exchange of
market trading activity, clearing activity, and the identity of the
ultimate purchaser or seller of the securities traded. See, e.g.,
Securities Exchange Act Release No. 33555 (January 31, 1994), 59 FR
5619 (February 7, 1994) (order approving File No. SR-Amex-93-28)
(``ADR Approval Order'').
\14\Such related securities include all classes of common stock
issued by the foreign issuer and ADRs that overlie any of these
classes of common stock. See March 8 Letter, supra note 13.
\15\The trading volume for any linked security trading on an
exchange that is not part of the U.S. market will be included in the
determination of world-wide trading volume, but not in the
determination of U.S. market trading volume. The Exchange represents
that it shall use its best efforts to discover all markets (foreign
and U.S.) on which the underlying security and all related
securities trade. Id.
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The proposal defines the U.S. market\16\ as the U.S. self-
regulatory organizations that are members of the Intermarket
Surveillance Group (``ISG'')\17\ and whose markets are linked together
by the Intermarket Trading System (``ITS'').\18\
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\16\Id.
\17\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
Amex; the Boston Stock Exchange, Inc.; the Chicago Board Options
Exchange, Inc.; the Chicago Stock Exchange, Inc.; the Cincinnati
Stock Exchange, Inc.; the National Association of Securities
Dealers, Inc.; the New York Stock Exchange, Inc.; 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.
\18\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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The Exchange believes that the proposed rule change will benefit
investors by expanding the number of securities that may be linked to
ELNs, thereby providing investors with enhanced investment flexibility.
The Exchange further believes that it is appropriate to now include
within the existing regulatory framework for ELNs, securities that are
traded in the U.S. and that are issued by non-U.S. companies subject to
reporting requirements under the Act because of the significant level
of U.S. investor interest in both U.S. and non-U.S. highly capitalized
and actively traded reporting companies. Because an ELN and the
underlying security traded in the U.S. to which it will be linked will
continue to be subject to the criteria presently contained in Sections
107A and 107B of the Guide, as enhanced herein, and the Exchange will
have in place either a comprehensive market information sharing
agreement with the primary exchange where the underlying security
trades (in the case of an ADR, with the primary exchange in the country
where the security underlying the ADR primarily trades) or the linked
security will meet the proposed trading volume criteria where no such
agreement exists, the Exchange believes that it will have the ability
to inquire into potential trading problems or irregularities with
respect to any particular ELN and the underlying security to which it
is linked.
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)\19\ in that it is
designed to prevent fraudulent and manipulative acts and practices, to
promote just and equitable principles of trade, and to protect
investors and the public interest. Specifically, in the Commission's
order originally approving the listing and trading of ELNs, the
Commission stated it would be willing to reexamine the issue of
allowing ELNs linked to ADRs if such a decision were justified by the
subsequent trading experience of ELNs and if sufficient safeguards were
put into place to ensure the pricing integrity of both the ELN and the
underlying ADR.\20\ The Commission is satisfied that these
preconditions have been satisfied. As of July 1, 1994, the Amex had 11
series of ELNs listed for trading. The Exchange represents that no
problems have arisen and no complaints have been received by the
Exchange with respect to the trading of these series of ELNs.\21\
Accordingly, the trading history of ELNs overlying common stock issued
by U.S. companies has not raised any regulatory concerns that would
cause the Commission to be concerned about expanding the listing of
ELNs to include ELNs linked to securities (including sponsored ADRs)
that are traded in the U.S. on a national securities exchange or
through NASDAQ and that are issued by non-U.S. companies subject to
reporting requirements under the Act.
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\19\15 U.S.C. 78f(b)(5) (1988).
\20\See Exchange Act Release No. 32343, supra note 6, at note
13.
\21\Telephone conversation between Claire McGrath, Managing
Director and Special Counsel, Derivative Securities, Amex, and Brad
Ritter, Attorney, Office of Derivatives and Equity Regulation,
Division of Market Regulation, Commission, on July 19, 1994.
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The Commission also believes that sufficient safeguards will be in
place to ensure the pricing integrity of both the ELN and the
underlying security. First, each of the requirements currently in place
for the listing of ELNs (i.e., market capitalization, trading volume,
maximum size of issuance, and U.S. last sale reporting), as enhanced
herein, will apply where the linked security is a security that is
traded in the U.S. and is issued by a non-U.S. company. In addition,
the only such securities that can be linked to ELNs are those for which
either a comprehensive market information sharing agreement is in place
with the primary market for the security underlying the ELN (in the
case of an ADR, with the primary exchange in the country where the
security underlying the ADR primarily trades) or where at least 50% of
the worldwide trading volume in the underlying security and other
related securities for the six months prior to issuance occurs in the
U.S. market.\22\ These standards are more stringent than those the
Commission recently found to be adequate with respect to the listing
and trading of options on ADRs where no comprehensive surveillance
sharing agreement exists between the Exchange and the primary market in
the country where the security underlying the ADR is primarily
traded.\23\ As the Commission stated in the ADR Approval Order, the
existence of a comprehensive surveillance sharing agreement serves as a
deterrent to manipulation and thus protects the integrity of the
marketplace.\24\ Additionally, the Commission stated that where the
U.S. market is the primary market for the trading of an ADR, the U.S.
market is the relevant pricing market for that ADR.\25\ In those cases,
the Commission stated that a comprehensive surveillance sharing
agreement exists because the self-regulatory organizations which make
up the U.S. market are members of ISG, through which the Exchange can
investigate any potential manipulations.\26\ As a result, by applying
these same standards to ELNs linked to securities that are traded in
the U.S. market and are issued by non-U.S. companies subject to U.S.
reporting requirements, the Commission believes the Exchange will be
able to detect and deter potential manipulations involving ELNs and the
linked securities.
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\22\In no event may an ELN be linked to a security issued by a
non-U.S. company where less than 30% of the worldwide trading volume
in the security and all related securities occurs in the U.S.
market. See Amendment No. 6, supra note 5.
\23\The standards being approved here are more stringent in two
respects. First, whereas options may be listed on both sponsored and
unsponsored ADRs satisfying the approved requirements, ELNs may only
be linked to sponsored ADRs. Secondly, in determining whether the
U.S. market accounts for at least 50% of the market for the linked
security and all related securities the Exchange must use the
trading volume for the prior six months with respect to ELNs, but
for only the prior three months for options on ADRs. See ADR
Approval Order, supra note 13.
\24\Id.
\25\Id.
\26\Id.
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Moreover, the Commission believes that the proposed method
described above for determining whether the six-month trading
volume\27\ of the underlying security and all related securities in the
U.S. market is at least 50% of the worldwide trading volume of such
securities is adequate to ensure that the U.S. market is and continues
to be the price discovery market for the security underlying an ELN.
The Commission notes that these procedures are substantively the same
as those the Commission approved in the ADR Approval Order.\28\
Furthermore, limiting the term of ELNs linked to securities issued by
non-U.S. companies to no more than three years will increase the
likelihood that the U.S. market will remain the primary price discovery
market for the underlying linked security during the term of the ELNs.
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\27\See Amendment No. 6, supra note 7; and March 8 Letter, supra
note 13.
\28\See ADR Approval Order, supra note 13. The ELN requirements,
however, do not have a U.S. volume maintenance standard similar to
that required for options on ADRs. Because a particular series of
ELNs is issued at one time for a set term it would be difficult to
apply such a standard. The Commission, however, believes that the
other requirements discussed above will help ensure that the U.S. is
the relevant market for the ELNs.
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Finally, the Exchange will require for ELNs linked to securities
issued by non-U.S. companies that there be at least 2,000 holders of
the underlying security and that the size of such ELN issuances will be
limited to (i) 2% of the total shares of the underlying security
outstanding provided at least 30% of the worldwide trading volume for
the security for the six-months prior to listing occurred in the U.S.
market, (ii) 3% of the total shares of the underlying security
outstanding provided at least 50% of the worldwide trading volume for
the security for the six-months prior to listing occurred in the U.S.
market, or (iii) 5% of the total shares of the underlying security
outstanding provided at least 70% of the worldwide trading volume for
the security for the six-months prior to listing occurred in the U.S.
market. The Commission believes that these restrictions will minimize
the possibility that trading in an ELNs issuance will adversely impact
the market for the security to which it is linked.\29\
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\29\Additionally, the Exchange has agreed to consult with the
Commission prior to issuing an ELN overlying an Amex-traded
security. See Letter from Claire McGrath, Managing Director and
Special Counsel, Derivative Securities, Amex, to Michael Walinskas,
Branch Chief, Office, Division, Commission, dated August 18, 1994.
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In summary, the Commission believes that the proposal is consistent
with the Act because: (1) There is nothing in the trading history of
ELNs which raises any regulatory concerns with respect to expanding the
ELNs listing standards to include ELNs linked to securities (including
sponsored ADRs) that are traded in the U.S. on a national securities
exchange or through NASDAQ and that are issued by non-U.S. companies
subject to U.S. reporting requirements; (2) the proposed rule change
adequately safeguards the pricing integrity of both the ELN and the
underlying security and ensures that there is sufficient surveillance
to detect as well as deter manipulation; and (3) the existing
regulatory structure and issuer requirements for ELNs, as enhanced
herein, will be applied and will ensure that ELNs will continue to be
linked to highly capitalized companies.
The Commission finds good cause for approving Amendment No. 6 to
the proposed rule change prior to the thirtieth day after the date of
publication of notice of filing thereof in the Federal Register in
order to allow the Exchange to list without delay ELNs linked to
securities (including sponsored ADRs) that are traded in the U.S.
securities markets and that are issued by non-U.S. companies subject to
U.S. reporting requirements and that satisfy the proposed listing
guidelines. Amendment No. 6 provides that ELNs may be linked to
equity\30\ securities issued by non-U.S. companies and traded in the
U.S. as ADRs, ordinary shares, or otherwise, and significantly enhances
the existing listing criteria in Sections 107A and 107B of the Guide
for ELNs linked to securities issued by U.S. companies.
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\30\Telephone conversation between Claire McGrath, Managing
Director and Special Counsel, Derivative Securities, Amex, and Brad
Ritter, Attorney, Office, Division, Commission, on dated July 19,
1994.
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The Commission believes that broadening the universe of securities
that can be linked to ELNs beyond ADRs, as originally proposed, to also
include securities traded in the U.S. as ordinary shares or otherwise
that are issued by non-U.S. companies subject to U.S. reporting
requirements, does not raise any regulatory issues that the Exchange
has not adequately addressed with respect to ELNs linked to ADRs.
Furthermore, the Commission believes that the enhanced listing criteria
proposed in Amendment No. 6 which will apply to ELNs linked to any
security issued by a non-U.S. company, combined with the numerical
listing standards currently contained in Sections 107A and 107B of the
Guide, ensure that the Amex has the ability to detect and deter
manipulation with respect to both the ELN and the underlying security.
Finally, the Commission believes that Amendment No. 6 conforms the
proposed rule change to the procedures approved by the Commission for
the listing of options on ADRs.\31\ As stated in the ADR Approval
Order, the Commission continues to believe that these standards will
ensure that the U.S. market is the relevant pricing market for the ELN
and the underlying security where there is no comprehensive market
information sharing agreement with the primary market for such security
(for ADRs, the primary exchange in the country where the security
underlying the ADR primarily trades).\32\ Accordingly, the Commission
believes that good cause exists for approving Amendment No. 6 to the
proposed rule change on an accelerated basis.
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\31\See ADR Approval Order, supra note 13.
\32\Id.
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Interested persons are invited to submit written data, views and
arguments concerning Amendment No. 6. 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 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,
N.W., Washington, D.C. Copies of such filing will also be available for
inspection and copying at the principal office of the Amex. All
submissions should refer to the File Number SR-Amex-93-46 and should be
submitted by September 15, 1994.
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\33\ that the proposed rule change (SR-Ammex-93-46), as amended, is
hereby approved.
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\33\15 U.S.C. 78s(b)(2) (1988).
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\34\
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\34\17 CFR 200.30-3(a)(12) (1993).
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Margaret H. McFarland
Deputy Secretary.
[FR Doc. 94-20895 Filed 8-24-94; 8:45 am]
BILLING CODE 8010-01-M
