[Federal Register Volume 59, Number 186 (Tuesday, September 27, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-23792]
[[Page Unknown]]
[Federal Register: September 27, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-34692; File No. SR-NYSE-94-15]
Self-Regulatory Organizations; Order Approving a Proposed Rule
Change and Notice of Filing and Order Granting Accelerated Approval of
Amendment No. 1 to the Proposed Rule Change by the New York Stock
Exchange, Inc., Relating to Restructuring Companies Portfolio Market
Index Target-Term Securities (``MITTS'')
September 20, 1994.
I. Introduction
On April 12, 1994, the New York Stock Exchange, Inc. (``NYSE'' or
``Exchange''), pursuant to Section 19(b)(1) of the Securities Exchange
Act of 1934 (``Act'')\1\ and Rule 19b-4 thereunder,\2\ filed with the
Securities and Exchange Commission (``SEC'' or ``Commission'') a
proposed rule change to list and trade Market Index Target-Term
Securities (``MITTS''),\3\ the return on which is based upon a
portfolio of securities of companies that have restructured or are in
the process of restructuring (``Restructuring Companies
Portfolio'').\4\ Notice of the proposal appeared in the Federal
Register on April 28, 1994.\5\ No comment letters were received on the
proposed rule change. On August 9, 1994, the NYSE filed Amendment No. 1
to the proposed rule change.\6\ This order approves the proposal, as
amended.
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\1\15 U.S.C. 78s(b)(1) (1988).
\2\17 CFR 240.19b-4 (1992).
\3\``MITTS'' and ``Market Index Target-Term Securities'' are
service marks of Merrill Lynch & Co., Inc. (``Merrill Lynch'').
\4\The Restructuring Companies Portfolio is a static portfolio
consisting of 17 equity securities listed as common shares in the
United States. The components of the portfolio represent companies
which are generally perceived to have recently experienced declines
in earnings as compared to historical levels and/or other adverse
developments which have required some form of restructuring by such
companies.
\5\See Securities Exchange Act Release No. 33934 (April 20,
1994), 59 FR 22040 (April 28, 1994).
\6\Amendment No. 1 to the proposed rule change provides that the
value of the Restructuring Companies Portfolio will be calculated
continuously and disseminated to the Options Price Reporting
Authority (``OPRA'') no less frequently than once every minute
throughout the trading day. See Letter from James Buck, Senior Vice
President and Secretary, NYSE, to Sharon Lawson, Assistant Director,
Office of Market Supervision, Division of Market Regulation,
Commission, dated August 9, 1994 (``Amendment No. 1'').
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II. Description of the Proposal
Under Section 703.19 of the Exchange's Listed Company Manual
(``Manual''), the NYSE may approve for listing securities which can not
be readily categorized under the listing criteria for common and
preferred stocks, bonds, debentures, and warrants.\7\ The NYSE is now
proposing under Section 703.19 of the Manual to list for trading MITTS
based on the Restructuring Companies Portfolio (``Restructuring
Companies Portfolio MITTS'').\8\
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\7\See Securities Exchange Act Release Nos. 29229 (May 23,
1991), 56 FR 24852 (May 31, 1991); and 28217 (July 18, 1990), 55 FR
30056 (July 24, 1990) (``Hybrid Approval Orders'').
\8\The Commission recently approved the listing and trading on
the Exchange of MITTS based upon (1) A global portfolio of
securities representing telecommunications companies, and (2) a
portfolio of European companies. See Securities Exchange Act Release
Nos. 32840 (September 2, 1993), 58 FR 47485 (September 9, 1993); and
33368 (December 22, 1993), 58 FR 68975 (December 29, 1993) (``MITTS
Approval Orders'').
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As with the other MITTS products, the Restructuring Companies
Portfolio MITTS will conform to the listing guidelines under Section
703.19 of the Manual, which provide that: (1) Issues must have a
minimum public distribution of one million securities; (2) a minimum of
400 shareholders; (3) a minimum duration of one year; (4) a market
value of at least $4 million; and (5) otherwise comply with the NYSE's
initial listing criteria.\9\ In addition, the Exchange will monitor the
Restructuring Companies Portfolio MITTS to verify compliance with the
Exchange's continued listing criteria.\10\ MITTS are non-callable
senior hybrid debt securities of Merrill Lynch that provide for a
single payment at maturity, and will bear no periodic payments of
interest. Restructuring Companies Portfolio MITTS will entitle the
owner at maturity to receive an amount based upon the percentage change
between the ``Original Portfolio Value'' and the ``Ending Average
Portfolio Value,'' subject to a minimum repayment amount. The
``Original Portfolio Value'' is the value of the Restructuring
Companies Portfolio on the date on which the issuer prices the
Restructuring Companies Portfolio MITTS issue for the initial offering
to the public. The ``Ending Average Portfolio Value'' is the average of
the values of the Restructuring Companies Portfolio at the end of the
five calendar quarters preceding the expiration of the Restructuring
Companies Portfolio MITTS on December 31, 1999.\11\ The Ending Average
Portfolio Value will be used in calculating the amount owners will
receive upon maturity.\12\
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\9\The hybrid listing standards in Section 703.19 of the Manual
are intended to accommodate listed companies in good standing, their
subsidiaries and affiliates, and non-listed equities which meet the
Exchange's original listing standards. Domestic issuers must also
meet the earnings and net tangible assets criteria set forth in
Sections 102.01 and 102.02 of the Manual. Specifically the minimum
original listing criteria requires that issuers have: (1) 2,000
holders holding 100 shares or more or have 2,200 holders with an
average monthly trading volume of 100,000 shares; (2) a public float
of $1.1 million shares; (3) an aggregate public market value of $18
million or total net tangible assets of $18 million; and (4)
earnings before taxes of $2.5 million in the latest fiscal year and
earnings before taxes of $2 million in each of the preceding two
fiscal years, or earnings before taxes of $6.5 million in the
aggregate for the last three fiscal years with a $4.5 million
minimum in the most recent fiscal year (all three years are required
to be profitable).
\10\The continued listing criteria for capital or common stock
requires that: (1) The number of holders of 100 shares or more is
equal to or greater than 1,200; (2) the number of publicly-held
shares is equal to or greater than 600,000; (3) the aggregate market
value of publicly-held shares is equal to or greater than $5
million; (4) the aggregate market value of shares outstanding
(excluding treasury stock) is equal to or greater than $8 million
and average net income after taxes for the past three years is equal
to or greater than $600,000; and (5) net tangible assets available
to common stock are equal to or greater than $8 million and average
net income after taxes for the past three years is equal to or
greater than $600,000. In addition, the continued listing standards
for bonds require that outstanding publicly-held bonds have an
aggregate market value or principal amount equal to or greater than
$1 million. See Section 802 of the Manual.
\11\Specifically, the Ending Average Portfolio Value will equal
the average of the quarterly values of the Restructuring Companies
Portfolio beginning in the calendar quarter ending December 31,
1998. The quarterly value for each of the first four of the final
five calendar quarters shall be the Restructuring Companies
Portfolio value on the last scheduled Exchange trading day on which
there is no market disruption event. The quarterly value for the
final calendar quarter shall be the Restructuring Companies
Portfolio Value on the seventh scheduled Exchange trading day
preceding maturity of the Restructuring Companies MITTS unless there
is a market disruption event in which case the sixth trading day
preceding maturity shall be used.
\12\The Restructuring Companies Portfolio MITTS will entitle a
holder at maturity to receive for each $10 principal amount of MITTS
an amount equal to the Ending Average Portfolio Value of the
Restructuring Companies Portfolio divided by 10, but in any event no
less than $9 per each $10 principal amount of Restructuring
Companies Portfolio MITTS.
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If the market value of the portfolio has declined, the owner will
receive not less than a specified percentage of the principal amount of
the security. (For instance, if the market value of the portfolio used
to calculate the amount payable at maturity has declined more than 10%,
the owners of the Restructuring Companies Portfolio MITTS will receive
90% of the principal amount of the securities.) The payment at maturity
is based on changes in the value of the portfolio, but does not reflect
the payment of dividends on the securities that comprise the portfolio.
Restructuring Companies Portfolio MITTS are cash-settled in that they
do not give the holder any right to receive a portfolio security or any
other ownership right or interest in the portfolio securities, although
the return on the investment is based on the aggregate portfolio value
of the Restructuring Companies Portfolio securities.
According to the NYSE, Restructuring Companies Portfolio MITTS will
allow investors to combine the protection of a portion of the principal
amount of the MITTS with a potential additional payment based upon the
performance of a portfolio of securities representing 17 highly
capitalized companies that either have restructured or are in the
process of restructuring. Restructuring Companies Portfolio MITTS will
mature on December 31, 1999.
The Restructuring Companies Portfolio consists of securities of 17
companies that have significantly different levels of market
capitalization, ranging from a high of approximately $30. 2 billion
(IBM) to a low of approximately $328 million (Arkis, Inc.).\13\ Sixteen
of the securities in the Restructuring Companies Portfolio are traded
on the NYSE and one is a National Market security traded through
Nasdaq. The average daily trading volume for the components of the
Restructuring Companies Portfolio for the period from November 5, 1992,
through March 7, 1994, ranged from a high of approximately 3.7 million
shares (Eastman Kodak), to a low of approximately 93,008 shares (The
Columbia Gas System, Inc.).
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\13\These values are as of March 7, 1994.
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At the outset, each of the securities in the Restructuring
Companies Portfolio will have equal representation. Specifically, each
security included in the portfolio will be assigned a multiplier on the
date of issuance so that the security represents an equal percentage of
the value of the entire portfolio on the date of issuance. The
multiplier indicates the number of shares (or fraction of one share) of
a security, given its market price on an exchange or through NASDAQ, to
be included in the calculation of the portfolio. Accordingly, each of
the 17 companies included in the Restructuring Companies Portfolio will
represent approximately 5.88 percent of the total portfolio at the time
of issuance.
The multiplier for each security in the Restructuring Companies
Portfolio will generally remain unchanged except for limited
adjustments that may be necessary as a result of stock splits or stock
dividends.\14\ There will be no adjustments to the multipliers to
reflect cash dividends paid with respect to a portfolio security. In
addition, no adjustments of any multiplier of a portfolio security will
be made unless such adjustment would require a change of at least 1% in
the multiplier then in effect.
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\14\Merrill Lynch will adjust the multiplier of any portfolio
security if the security is subject to a stock split or reverse
split to equal the product of the number of shares issued with
respect to one share of the portfolio security and the prior
multiplier. In the case of a stock dividend, the multiplier will be
adjusted so that the new multiplier will equal the former multiplier
plus the product of the number of shares of such portfolio security
issued with respect to one share of the portfolio security and the
prior multiplier.
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If the issuer of a security included in the Restructuring Companies
Portfolio no longer exists, whether for reason of a merger, acquisition
or similar type of corporate control transaction, then Merrill Lynch
will assign to that security a value equal to the security's final
value for the purposes of calculating portfolio values. For example, if
a company included in the portfolio is acquired by another company,
Merrill Lynch shall thereafter assign a value to the shares of the
acquired company's securities equal to the value per share at which
time the acquisition takes place.
If the issuer of a portfolio security is in the process of
liquidation or subject to a bankruptcy proceeding, insolvency, or other
similar adjudication, such security will continue to be included in the
Restructuring Companies Portfolio so long as a market price on an
exchange or through NASDAQ for such security is available. If such a
market price is no longer available for a portfolio security,
including, but not limited to, liquidation, bankruptcy, insolvency, or
any other similar proceeding, then the value of the portfolio security
will be assigned a value of zero in connection with calculating the
daily portfolio value and the closing portfolio value of the
Restructuring Companies Portfolio, for so long as no such market price
exists for that security.\15\
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\15\Merrill Lynch will not attempt to find a replacement stock
or to compensate for the extinction of a security due to bankruptcy
or a similar event.
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The value of the Restructuring Companies Portfolio will be
calculated by an independent third party and will be disseminated
through OPRA at least once each minute throughout the trading day.\16\
The portfolio value will equal the sum of the products of the most
recently available market prices and the applicable multipliers for the
portfolio securities.
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\16\See Amendment No. 1, supra note 6.
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Like other issues of MITTS listed on the NYSE, Restructuring
Companies Portfolio MITTS may not be redeemed prior to maturity and are
not callable by the issuer. Holders of Restructuring Companies
Portfolio MITTS will be able to cash-out of their investment by selling
the security on the NYSE. The Exchange anticipates that the trading
value of the security in this secondary trading market will depend in
large part on the value of the securities comprising the Restructuring
Companies Portfolio and also on such other factors as the level of
interest rates, the volatility of the value of the Restructuring
Companies Portfolio, the time remaining to maturity, dividend rates,
and the creditworthiness of the issuer, Merrill Lynch.\17\
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\17\Merrill Lynch will deposit registered securities
representing Restructuring Companies Portfolio MITTS with its
depository, the Depository Trust Company (``DTC''), so as to permit
book-entry settlement of transactions by participants in DTC.
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Because Restructuring Companies Portfolio MITTS are linked to a
portfolio of equity securities, the NYSE's existing equity floor
trading rules will apply to the trading of Restructuring Companies
Portfolio MITTS. First, pursuant to NYSE Rule 405, 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
Restructuring Companies Portfolio MITTS.\18\ Second, consistent with
NYSE Rule 405, the Exchange will further require that a member or
member firm specifically approve a customer's account for trading
Restructuring Companies Portfolio MITTS prior to, or promptly after,
the completion of the transaction. Third, Restructuring Companies
Portfolio MITTS will be subject to the equity margin rules of the
Exchange. Fourth, in accordance with the NYSE's Hybrid Approval Orders,
the Exchange will, prior to trading Restructuring Companies Portfolio
MITTS, distribute a circular to the membership providing guidance with
regard to member firm compliance responsibilities (including
suitability recommendations) when handling transactions in
Restructuring Companies Portfolio MITTS and highlighting the special
risks and characteristics of the Restructuring Companies Portfolio
MITTS.\19\
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\18\NYSE Rule 405 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.
\19\See Hybrid Approval Orders, supra note 7.
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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). Specifically, the
Commission believes that providing for exchange-trading of
Restructuring Companies Portfolio MITTS will offer a new and innovative
means of participating in the market for securities of companies that
have either recently restructured or are in the process of
restructuring. In particular, the Commission believes that
Restructuring Companies Portfolio MITTS will permit investors to gain
equity exposure in such companies, while at the same time, limiting the
downside risk of the original investment. For the reasons discussed in
the MITTS Approval Orders, the Commission finds that the listing and
trading of Restructuring Companies Portfolio MITTS is consistent with
the Act.\20\
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\20\See Mitts Approval Orders, supra note 8.
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As with other MITTS products, Restructuring Companies Portfolio
MITTS are not leveraged instruments, however, their price will still be
derived and based upon the underlying linked security. Accordingly, the
level of risk involved in the purchase or sale of a Restructuring
Companies Portfolio MITTS is similar to the risk involved in the
purchase or sale of traditional common stock. Nonetheless, because the
final rate of return of a MITTS is derivatively priced, based on the
price performance of a portfolio of securities, the Commission has
several specific concerns regarding the trading of this type of
product.
The Commission notes that the Exchange's rules and procedures that
address the special concerns attendant to the trading of hybrid
securities will be applicable to Restructuring Companies Portfolio
MITTS. In particular, by imposing the hybrid listing standards,
suitability, disclosure, and compliance requirements noted above, the
Commission believes the Exchange has addressed adequately the potential
problems that could arise from the hybrid nature of Restructuring
Companies Portfolio MITTS. Moreover, the Exchange will distribute a
circular to its membership calling attention to the specific risks
associated with Restructuring Companies Portfolio MITTS.
The Commission realizes that Restructuring Companies Portfolio
MITTS are dependent upon the individual credit of the issuer, Merrill
Lynch. To some extent this credit risk is minimized by the Exchange's
continued listing standards which require issuers to maintain an
aggregate market value of $5 million for its publicly-held shares.\21\
In addition, the Exchange's hybrid listing standards further require
that Restructuring Companies Portfolio MITTS have at least $4 million
in market value. In any event, financial information regarding Merrill
Lynch, in addition to the information on the issuers of the underlying
securities comprising the Restructuring Companies Portfolio, will be
publicly available.\22\
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\21\See supra note 10.
\22\The companies that comprise the Restructuring Companies
Portfolio are reporting companies under the Act.
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The Commission also has a systemic concern, however, that a broker-
dealer, such as Merrill Lynch, or a subsidiary providing a hedge for
the issuer will incur position exposure. As discussed in the MITTS
Approval Orders, the Commission believes this concern is minimal given
the size of Restructuring Companies Portfolio MITTS issuance in
relation to the net worth of Merrill Lynch.\23\
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\23\See MITTS Approval Orders, supra note 8.
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The Commission also believes that the listing and trading of
Restructuring Companies Portfolio MITTS should not unduly impact the
market for the underlying securities comprising the Restructuring
Companies Portfolio. First, as discussed above, the underlying
securities comprising the portfolio are well-capitalized, highly liquid
stocks. Second, because all of the components of the Restructuring
Companies Portfolio will initially be equally weighted, no single stock
or group of stocks dominates the Restructuring Companies Portfolio.
Finally, the issuers of the underlying securities comprising the
Restructuring Companies Portfolio, are subject to reporting
requirements under the Act, and all of the portfolio securities are
either listed or traded on, or traded through the facilities of, U.S.
securities markets.\24\ Additionally, the NYSE's surveillance
procedures will serve to deter as well as detect any potential
manipulation.
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\24\The Commission notes that 16 of the component securities are
traded on the NYSE and one is a National Market security traded
through Nasdaq.
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Finally, the Commission notes that the value of the Restructuring
Companies Portfolio will be disseminated at least once every minute
throughout the trading day. The Commission believes that this result is
appropriate because, unlike previously approved MITTS products which
contain foreign components, the Restructuring Companies Portfolio is
comprised solely of securities traded in the U.S. for which real-time
price information is available. The Commission believes that providing
access to the value of the Restructuring Companies Portfolio at least
once every minute throughout the trading day is extremely important and
will provide benefits to investors in the product.\25\
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\25\In this regard, the Commission believes that it is useful
and beneficial for all investors and market participants to have
access to the value of the Restructuring Companies Portfolio as
frequently as possible and encourages the NYSE and Merrill Lynch to
further explore the possibilities in this area, i.e., calculating
and disseminating the value of the portfolio at least once every 15
seconds as is done with other derivative products.
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The Commission finds good cause for approving Amendment No. 1 to
the proposed rule change prior to the thirtieth day after the date of
publication of notice thereof in the Federal Register. As discussed
above, the Commission believes that investors and market participants
will benefit from having the value of the Restructuring Companies
Portfolio calculated and disseminated as frequently as possible
throughout the trading day. The Commission believes that Amendment No.
1 provides this benefit without unduly burdening either the Exchange or
the issuer of the Restructuring Companies Portfolio MITTS.
Additionally, the Commission notes that Amendment No. 1 provides for
significantly greater access by investors and market participants to
current values of the Restructuring Companies Portfolio than did the
original proposal which was noticed for the full 21-day comment period
without any comments being received by the Commission. Accordingly, the
Commission believes it is consistent with Section 6(b)(5) of the Act to
approve Amendment No. 1 to the proposed rule change on an accelerated
basis.
Interested persons are invited to submit written data, views and
arguments concerning Amendment No. 1 to the proposed rule change.
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 NYSE. All submissions should refer to File No.
SR-NYSE-94-15 and should be submitted by October 18, 1994.
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\26\ that the proposed rule change (File No. SR-NYSE-94-15), as
amended, is approved.
\26\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.\27\
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\27\17 CFR 200.30-3(a)(12) (1993).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-23792 Filed 9-26-94; 8:45 am]
BILLING CODE 8010-01-M
