[Federal Register Volume 63, Number 165 (Wednesday, August 26, 1998)]
[Notices]
[Pages 45539-45541]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-22879]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-40338; File No. SR-Amex-98-25]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change and Amendment No. 1 Thereto by the American Stock Exchange, Inc.
Relating to the Listing and Trading of Stock Upside Note Securities on
the Lehman Brothers' European Stock Basket
August 19, 1998.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notes is hereby given that
on July 1, 1998, the American Stock Exchange, Inc. (``Amex'' or
``Exchange'') filed with the Securities and Exchange Commission
(``SEC'' or ``Commission'') the proposed rule change as described in
Items I, II, and III below, which Items have been prepared by the Amex.
On August 3, 1998, the Exchange file with the Commission Amendment No.
1 to the proposed rule change.\3\ The Commission is publishing this
notice to solicit comments on the proposed rule change from interested
persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See letter from Claire P. McGrath, Vice President and
Special Counsel, Derivatives Legal Counsel, Amex, to Richard
Strasser, Associate Director, Division of Market Regulation
(``Division''), SEC, dated July 30, 1998 (``Amendment No. 1''). In
Amendment No. 1, the Exchange makes several substantive changes to
the filing.
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I. Self-Regulatory Organization's Statement of the Terms of
Substance of the Proposed Rule Change
The Exchange proposes to list and trade Stock Upside Note
Securities on the Lehman Brothers' European Stock Basket, a new stock
basket developed by Lehman Brothers Holdings Inc. containing stocks of
European companies.
The test of the proposed rule change is available at the Office of
the Secretary, Amex 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 Amex included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
Amex has prepared summaries, set forth in Sections A, B, and C below,
of the most significant aspects of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Amex proposes to trade Stock Upside Note Securities (``SUNS'')
on the Lehman Brothers' European Stock Basket (the ``Basket''), a new
basket of stocks developed by Lehman Brothers Holdings, Inc. (``Lehman
Brothers'') based entirely on the shares of European companies. SUNS on
the Basket are designed to allow investors to combine the protection of
a portion of the principal amount of the SUNS with a potential
additional payment based upon the performance of a portfolio of highly
capitalized European stocks. In particular, the proposed European Stock
Basket will provide at least 90% principal protection with the
opportunity to participate in any upside appreciation of the Basket,
subject to any cap on appreciation that may be include by the issuer.
Criteria Under Section 107A of the Amex Company Guide
Under Section 107A of the Amex Company Guide, the Exchange may
approve for listing and trading securities that can be readily
categorized under the listing criteria for common and preferred stocks,
bonds, debentures or warrants.\4\ SUNS issues on the Basket will
conform to the listing guidelines under Section 107A of the Amex
Company Guide, which provide, among other things, that the issuer shall
satisfy the earnings criteria set forth in Section 101 \5\ of the Amex
Company Guide and have assets in excess of $100 million and
stockholders' equity of at least $10 million. Where the issuer does not
satisfy the earnings criteria set forth in Section 101 of the Amex
Company Guide, the issuer must have assets in excess of $200 million
and stockholders' equity of at least $10 million; or have assets in
excess of $100 million and stockholders' equity of at least $20
million. Further, SUNS will have a minimum public distribution of
1,000,000 units with a minimum of 400 public shareholders, except, if
traded in thousand dollar denominations, then no minimum number of
holders will be required. SUNS will have a principal amount/aggregate
market value of not less than $4 million. In addition, Amex will apply
the continued listing
[[Page 45540]]
guidelines for the proposed SUNS as set forth in Sections 1001 through
1003 of the Amex Company Guide. In particular, Section 1003(b)(iii) \6\
regarding suspensions and delistings with respect to limited
distribution and reduced market value will apply to the SUNS.
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\4\See Exchange Act Release No. 27753 (March 1, 1990), 55 FR
8626 (March 8, 1990).
\5\ Section 101 of the Amex Company Guide requires issuers to
have pre-tax earnings of at least $750,000 in the fiscal year of two
of the last three fiscal years.
\6\ See Amendment No. 1, supra note 3.
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The SUNS are non-convertible debt securities of Lehman Brothers and
will conform to the above listing standards. Although the specific
maturity date will be established until immediately prior to the time
of the offering, the SUNS will provide for maturity within a period of
not less than two years and not more than seven years from the date of
issue. The SUNS will provide for a single payment a maturity, and will
bear no periodic payments of interest. The European Stock Basket SUNS
will be denominated in U.S. dollars and will entitle the owner at
maturity to received an amount based on the percentage change between
the ``Original Portfolio Value'' and the ``Ending Average Portfolio
Value'', provided: (1) The amount payable at maturity will not be less
than 90% of the principal amount of the SUNS; and (2) the issuer may
place a cap on the amount to be paid on the SUNS at maturity. Thus,
holders of the SUNS may not receive the full amount of the appreciation
of the Ending Portfolio Value over the Original Portfolio Value. For
example, Lehman Brothers may place a cap on the amount to be received
at maturity as a stated percentage of the issuance price, e.g., 150% of
the issuance price. Alternatively, a cap could be in the form of
participation rate whereby a holder of the SUNS would participate in a
stated percentage of the total percentage change between the Ending
Portfolio Value and the Original Portfolio Value, e.g., 80% of the
total appreciation of the European Stock Basket during the term of the
SUNS. The Original Portfolio Value is the value of the European Stock
Basket on the date on which the issuer prices the SUNS for the initial
offering to the public. The Ending Average Portfolio Value is the
average of the closing prices of the European Stock Basket securities
for a ten-day period beginning on the twelfth trading day prior to
maturity of the SUNS.\7\ The European Stock Basket SUNS will be cash-
settled and will not give holders any right to receive any Basket
security or any other ownership right or interest in such security even
though the return on the investment is based on the value of the
Basket.
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\7\ Id.
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The SUNS Basket and Components
The European Stock Basket will consist of not less than ten nor
more than thirty stocks of highly capitalized European companies.\8\
Each stock included in the Basket will meet the following criteria: (1)
A market capitalization in excess of $75 million; alternatively, the
lowest weighted securities in the Basket that do not account for more
than 10% of the weight of the Basket, may have a market capitalization
of $50 million or greater; (2) the trading volume of each component in
the Basket will be at least one million shares during each of the six
months preceding the listing of the SUNS; alternatively, the lowest
weighted securities in the Basket that do not account for more than 10%
of the weight of the Basket, may have a volume of at least 500,000
shares during each of the six months preceding the listing of the SUNS;
(3) the market price for each component stock used for the calculation
of the Basket will be obtained from the stock's primary market; and (4)
the market price for each component will be at least $5 for the
majority of business days during the three calendar months preceding
the listing of the SUNS.\9\
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\8\ Id.
\9\ Id.
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Basket Calculation
The Basket will be calculated using the modified equal-dollar
weighting methodology. Thus, prior to the issuance of the SUNS, Lehman
Brothers will establish a weighting for each of the securities in the
Basket.\10\ Specifically, each security included in the Basket will be
assigned a multiplier so that the security represents the established
percentage of the value of the entire Basket on the date of issuance.
The multiplier indicates the number of shares (or fraction of one
share) of a security, given its market price, to be included in the
calculation of the Basket. The weightings established for each security
will assure that: (1) No single stock will represent more than 25% of
the weight of the Basket; (2) the five highest weighted stocks will
represent no more than 50% of the weight of the Basket; (3) foreign
country securities that are not subject to comprehensive surveillance
agreements will not in the aggregate represent more than 40% of the
weight of the index; (4) stocks for which the primary market is in any
one country that is not subject to a comprehensive surveillance
agreement do not represent 20% or more of the weight of the index; and
(5) stocks for which the primary market is in any two countries that
are not subject to the comprehensive surveillance agreements do not
represent 33% or more of the weight of the index.
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\10\ Id.
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The multiplier of each security of the Basket will generally remain
unchanged except for adjustments that may be necessary as a result of
stock splits or stock dividends. 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. If the issuer of a
security included in the Basket no longer exists, whether for reason of
a merger, acquisition or similar type of corporate control transaction,
Lehman Brothers will assign to that security a value equal to the
security's final value for the purposes of calculating portfolio
values.
If the issuer of a European Stock Basket 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 Basket so long as a market price for such security is available.
If such a market price is no longer available for a Basket security due
to a liquidation, bankruptcy, insolvency, or any other similar
proceeding, the value of the security will be zero in connection with
calculating the daily Basket value and the Ending Average Portfolio
Value, for so long as no such market price exists for that security.
Lehman Brothers will not attempt to find a replacement stock, or to
compensate in a manner other than what is set forth above, for the
extinction of a security due to a bankruptcy or similar event.
The value of the Basket will be calculated and disseminated every
15 seconds from 9:30 a.m. until 4:00 p.m. each trading day by the
Exchange or by an independent calculation agent appointed by Lehman
Brothers. The Basket value will be calculated based on real-time prices
during the hours the European markets overlap trading hours at the
Exchange. The Basket will be calculated using the last sale value for
each component security from its primary market place. The Exchange
rate for each currency represented in the Basket will be from one of
two sources: (i) The WM/Reuter closing value reported in London at
about 12:00 (New York time) each trading day or, (ii) the best bid and
offer price posted by one or more contributing banks as provided by
Bridge/Telesphere. If the market place for any one of the securities
[[Page 45541]]
constituting the European Stock Basket has not opened for trading on
any given business day, the previous closing value will be used in the
calculation. The Basket value, for any day, will equal the sum of the
products of the most recently available market prices, expressed in
U.S. dollars and the applicable multipliers for the Basket securities.
Lehman Brothers will undertake to implement certain surveillance and
compliance procedures with respect to the dissemination of the Basket
value, requiring that the Basket value be announced only through public
dissemination and restricting the access of the Lehman Brothers trading
desk to the Basket value determined by the calculation agent until
after public dissemination of the value.\11\
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\11\ Id.
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Exchange Rules Applicable to SUNS
The Exchange's equity trading rules will apply to the trading of
SUNS linked to the European Stock Basket. Those rules include Rule 411,
which requires members to use due diligence to learn the essential
facts relative to every customer to every order or account accepted;
and Rule 462 which requires that application of equity margin rules to
the trading of indexed term notes. The Exchange will, prior to trading
the proposed SUNS, distribute an Information Circular to the
membership: (1) Highlighting the essential features of the SUNS product
including, but not limited to, the less than 100% principal protection
feature and the fact that the issuer has placed a cap on the amount to
be paid on the SUNS at maturity; \12\ and (2) providing guidance with
regard to member firm compliance responsibilities (including
suitability recommendations) when handling transactions of the SUNS and
highlighting their special risks and characteristics. The circular will
state that before a member, member organization, or employee of such
member organization undertakes to recommend a transaction in the
security, such member or member organization should make a
determination that the security is suitable for such customer and 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 is
financially able to bear the risks of the recommended transaction.
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\12\ Id.
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2. Statutory Basis
The Basis under the Act for the proposed rule change is the
requirement under Section 6(b)(5)\13\ that an exchange have rules that
are designed to prevent fraudulent and manipulative acts and practices,
to promote just and equitable principles of trade, to remove
impediments to and perfect the mechanism of a free and open market and
a national market system, and, in general, to protect investors and the
public interest.
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\13\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition that is not necessary or appropriate
in furtherance of the purposes of the Act.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants or Others
The Exchange has neither solicited nor received written comments on
the proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing
for Commission Action
Within 35 days of the publication of this notice in the Federal
Register or within such longer period: (i) As the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding, or (ii) as to
which the self-regulatory organization 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 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 Room. Copies of such filing will also be
available for inspection and copying at the principal office of the
Amex.
All submissions should refer to File No. SR-Amex-98-25 and should
be submitted by September 16, 1998.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\14\
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\14\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-22879 Filed 8-25-98; 8:45 am]
BILLING CODE 8010-01-M