Self-Regulatory Organizations; Notice of Filing of Proposed Rule Change by the New York Stock Exchange, Inc., Relating to Health Care Portfolio Market Index Target-Term Securities

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-33933; File No. SR-NYSE-94-14]

April 20, 1994.

Self-Regulatory Organizations; Notice of Filing of Proposed Rule

Change by the New York Stock Exchange, Inc., Relating to Health Care

Portfolio Market Index Target-Term Securities

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 April 12, 1994, the New York Stock Exchange, Inc. (``NYSE'' or

``Exchange'') filed with the Securities and Exchange Commission

(``Commission'' or ``SEC'') 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. 78s(b)(1) (1988).

\2\CFR 240.19b-4 (1991).

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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 for trading Market Index Target-Term

Securities (``MITTS''),\3\ the return on which is based upon a

portfolio of securities of U.S. companies in the health care industry

(``Health Care Portfolio''), Initially, the Health Care Portfolio will

contain the securities of 22 health care companies that are traded in

the United States on the NYSE or are National Market System securities

traded through the facilities of the National Association of Securities

Dealers Automated Quotation System (``NASDAQ'').\4\

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\3\``MITTS'' and ``Market Index Target-Term Securities'' are

service marks of Merrill Lynch & Co., Inc. (``Merrill Lynch'').

\4\The companies represented in the Health Care Portfolio are:

Abbott Laboratories; American Home Products Corporation; Baxter

International Inc.; Beverly Enterprises, Inc.; Bristol-Meyers Squibb

Company; FHP International Corporation; Foundation Health

Corporation; Genesis Health Ventures, Inc.; Health Management

Associates, Inc.; Health Care and Retirement Corporation; The

Hillhaven Corporation; Horizon Healthcare Corporation; Johnson &

Johnson; Eli Lilly and Company; Living Centers of America, Inc.;

Pacificare Health Systems, Inc.; Pfizer Inc.; Sierra Health

Services, Inc.; United Healthcare Corporation; U.S. Healthcare,

Inc.; Warner-Lambert Company; and Wellpoint Health Networks Inc.

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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 the

Item IV below. The NYSE 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

Pursuant to the listing criteria set forth in Section 703.19 of the

Exchange's Listed Company Manual (``Manual''), the Exchange proposes to

list and trade MITTS. MITTS are securities that entitle the holder to

receive from the issuer upon maturity an amount based upon the change

in the market value of a stock index or portfolio, provided that a

minimum amount (90% of the principal amount) will be repaid. The

Exchange is submitting the proposed rule change specifically to enable

the Exchange to list for trading MITTS on the Health Care Portfolio

(``Health Care Portfolio MITTS'') issued by Merrill Lynch.

Health Care Portfolio MITTS will allow investors to combine

protection of a substantial portion of the principal amount of the

MITTS with the potential additional payments based on a portfolio of

securities of selected health care companies. The Health Care Portfolio

MITTS will provide that at least 90% of the principal amount thereof

will be repaid at maturity.

The Security

Health Care 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 Health Care Portfolio on the date

on which the issuer prices the Health Care Portfolio MITTS issue for

the initial offering to the public. The ``Ending Average Portfolio

Value'' is the average of the values of the Health Care Portfolio at

the end of the five calendar quarters preceding the expiration of the

Health Care Portfolio MITTS on December 31, 1999.\5\ The Ending Average

Portfolio Value will be used in calculating the amount owners will

receive upon maturity.\6\

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\5\Specifically, the Ending Average Portfolio Value will equal

the average of the quarterly values of the Health Care 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 Health Care 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 Health Care Portfolio Value on the seventh scheduled

Exchange trading day preceding maturity of the Health Care MITTS

unless there is a market disruption event in which case the sixth

trading day preceding maturity shall be used.

\6\The Health Care 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 Health Care

Portfolio divided by 10, but in any event no less than $9 per each

$10 principal amount of Health Care 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 Health Care 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.

As with other MITTS, Health Care Portfolio MITTS may not be

redeemed prior to maturity and are not callable by the issuer. Owners

may sell the security on the Exchange. The Exchange anticipates that

the trading value of the security in the secondary market will depend

in large part on the value of the Health Care Portfolio and also on

other factors, including the level of interest rates, the volatility of

the value of the Health Care Portfolio, the time remaining to maturity,

dividend rates, and the creditworthiness of the issuer.

The Exchange will only list for trading Health Care Portfolio MITTS

issues that have at least one million outstanding securities, at least

400 owners, a minimum life of one year and at least a $4 million market

value, and that otherwise comply with the Exchange's initial listing

criteria. In addition, the Exchange will monitor each issue to verify

that it complies with the Exchange's continued listing criteria.\7\

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\7\See section 703.19 of the Manual.

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Merrill Lynch will deposit registered securities representing

Health Care Portfolio MITTS with its depository, the Depository Trust

Company (``DTC''), so as to permit book-entry settlement of

transactions by participants in DTC.

The Portfolio

The Health Care Portfolio consists of the common stock of 22 highly

capitalized health care companies. The common stock of the 22 companies

initially will be equally weighted within the portfolio on the pricing

date. The public float (i.e., the market price multiplied by the number

of shares outstanding) of the 22 companies differ significantly (from a

high of $28 billion (Bristol Meyers Squibb Co.) to a low of $285

million (Horizon Healthcare Corp.)), as do the market prices of their

common stock (from a high of $84.625 (United Healthcare Corporation) to

a low of $15.375 (Beverly Enterprises, Inc.)).\8\

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\8\Prices specified in this paragraph, and prices and exchange

rates used to calculate public float specified in this paragraph,

are as of March 7, 1994.

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The common stock of 19 of the 22 component companies is listed on

the Exchange. The common stock of the other three component companies

is traded through NASDAQ. At the outset, the common stock of each of

the companies represented in the Health Care Portfolio will have equal

representation. That is, the common stock of each company included in

the portfolio shall be assigned a multiplier on the pricing date such

that all component companies represent an equal percentage of the value

of the entire portfolio on such date. The multiplier indicates the

number of shares of common stock (or fraction of one share) included in

the calculation of the portfolio. Thus, each of the 22 companies

represented shall represent 4.545% of the total portfolio on the

pricing date.

The multipliers assigned to the component companies will be

adjusted for certain events such as stock splits, reverse stock splits,

or stock dividends, and the value of the component securities will also

be adjusted for certain events including a liquidation, bankruptcy,

insolvency, merger, or consolidation involving the issuer of the

underlying shares. For example, if the issuer of the shares underlying

a component company has been subject to a merger or a consolidation and

is not the surviving entity, then a value for such common stock will be

determined at the time such issuer is merged or consolidated and will

equal the last available market price for such common stock and that

value will be constant for the remaining term of the Health Care

Portfolio MITTS.\9\

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\9\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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Based upon the reported prices of the common stock, a Merrill Lynch

affiliate or an independent third party will calculate the value of the

Health Care Portfolio on at least a daily basis and make those values

available to investors.

The Issuer

The Exchange has determined that the issuer of the Health Care

Portfolio MITTS, Merrill Lynch, meets the listing criteria set forth in

Section 703.19 of the Manual. The Exchange states that Merrill Lynch is

an Exchange-listed company in good standing and has sufficient assets

to justify the issuance of MITTS offerings of the size contemplated by

the proposed rule change.

The Exchange believes that the proposed rule change is consistent

with Section 6 of the Act, in general, and with section 6(b)(5), in

particular, in that it is 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.

B. Self-Regulatory Organization's Statement on Burden on Competition

The NYSE does not believe that the proposed rule change will impose

any inappropriate burden on competition.

C. Self-Regulatory Organization's Statement on Comments on the Proposed

Rule Change Received from Members, Participants or Others

No written comments were solicited or received with respect 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 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 such 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. 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 at the

Commission's Public Reference Section, 450 Fifth Street NW.,

Washington, DC 20549. 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-94-14 and should be

submitted by May 19, 1994.

For the Commission, by the Division of Market Regulation,

pursuant to delegated authority.\10\

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\10\17 CFR 200.30-3(a)(12) (1993).

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Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 94-10086 Filed 4-26-94; 8:45 am]

BILLING CODE 8010-01-M