Self-Regulatory Organizations; Filing of Proposed Rule Change and Amendment No. 1 to the Proposed Rule Change by the American Stock Exchange, Inc. Relating to Equity Linked Term Notes Linked to American Depositary Receipts

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-33483; File No. SR-Amex-93-46]

Self-Regulatory Organizations; Filing of Proposed Rule Change and

Amendment No. 1 to the Proposed Rule Change by the American Stock

Exchange, Inc. Relating to Equity Linked Term Notes Linked to American

Depositary Receipts

January 14, 1994.

Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934

(``Act''), 15 U.S.C. 78s(b)(1), notice is hereby given that on December

29, 1993, the American Stock Exchange, Inc., (``Amex'' or ``Exchange'')

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 Amex. On January 13, 1994, the Amex

filed Amendment No. 1 to the proposed rule change.\1\ The Commission is

publishing this notice to solicit comments on the proposed rule change

from interested persons.

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\1\Amendment No. 1 to the proposed rule change (1) discusses the

basis and necessity of listing and trading equity linked notes

(``ELNs'') linked to American Depositary Receipts (``ADRs''), and

(2) defines the U.S. ADR market. Additionally, Amendment No. 1

clarifies the procedures by which the Exchange will determine

whether an ELN may be listed on a particular ADR. Specifically, the

Exchange proposes to adopt the procedures proposed by the Exchange

in connection with the listing of options on ADRs (see Securities

Exchange Act Release No. 33130 (October 25, 1993), 58 FR 58357

(November 1, 1993)). See Letter from Claire McGrath, Managing

Director and Special Counsel, Derivative Securities, Amex, to

Richard Zack, Branch Chief, Office of Derivatives Regulation,

Division of Market Regulation, Commission, dated January 12, 1994

(``Amendment No. 1'').

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I. Self-Regulatory Organization's Statement of the Terms of Substance

of the Proposed Rule Change

The Exchange proposes to amend Section 107B (``Equity Linked Term

Notes'') of the Amex Company Guide (``Guide'') to provide for the

listing and trading of hybrid dept securities whose value is linked to

the performance of an ADR which is listed on a national securities

exchange or traded through the facilities of a national securities

system and subject to last sale reporting. The text of the proposed

rule change is available at the Office of the Secretary, the 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 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 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 the

Statutory Basis, for, the Proposed Rule Change

On May 20, 1993, the Commission approved the Exchange's proposed

amendments to Section 107 of the Guide to provide for the listing and

trading of ELNs.\2\ Subsequently, on December 13, 1993, the Commission

approved a proposed rule change to provide alternative capitalization

and trading volume standards applicable to the securities underlying

ELNs.\3\

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\2\See Securities Exchange Act Release No. 32343 (May 20, 1993),

58 FR 30833 (May 27, 1993).

\3\See Securities Exchange Act Release No. 33328 (December 13,

1993), 58 FR 66041 (December 17, 1993).

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ELNs are intermediate term (two to seven years), non-convertible,

hybrid debt securities, the value of which is linked to the performance

of a highly capitalized, actively traded U.S. 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.\4\ 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. A specific issue of

ELNs, for example, may provide holders with a fixed semi-annual

interest payment, a cap of 135% of the issuance price on the maximum

amount to be paid upon maturity, and no minimum floor on the principal

to be repaid at maturity. Another issue of ELNs might offer lower

annual payments based upon a floating rate and a minimum floor

principal repayment of 75% of the issuance price. As may be seen, the

flexibility available to an issuer of ELNs permits the creation of

securities which offers investors the opportunity to more precisely

focus on a specific investment strategy. Since July 1993, the Exchange

has listed and currently trades seven ELNs issues.

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\4\The Exchange has agreed to notify the Commission if an issuer

of ELNs provides for periodic interest payments to holders based on

a floating rate. Id.

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ELNs conform to the general listing criteria under Section 107A of

the Guide, which provide that issues have: (1) A minimum public

distribution of one million trading units and a minimum of 400 holders;

(2) an aggregate market value of at least $20 million; (3) cash

settlement in U.S. dollars and a redemption price of at least three

dollars where the instrument contains such provisions; and (4) 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.\5\ ELNs also conform to the

special listing criteria of Section 107B of the Guide which provide

that: (1) Each issuer 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 not be greater than

25% of the issuer's tangible net worth at the time of issuance; (3)

each underlying linked stock must have 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; (4) the issuer of the underlying linked

stock must be a U.S. reporting company under the Act; and (5) the

issuance of ELNs relating to an underlying linked stock may not exceed

5% of the total outstanding shares of such stock.

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\5\Issuers not meeting these financial criteria must have assets

in excess of $200 million and stockholders' equity of 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 now proposes to amend Section 107B of the Guide to

permit the listing and trading of ELNs linked to actively traded ADRs,

provided that (1) the Exchange has in place an effective surveillance

sharing agreement with the primary Exchange in the home country where

the security underlying the ADR trades, or (2) the combined trading

volume of the ADR and other related ADRs (as defined below) occurring

in the U.S. ADR market represents (on a share equivalent basis) at

least 50% of the combined worldwide trading volume in the ADR, the

security underlying the ADR, other classes of common stock related to

the underlying security, and ADRs overlying such other stock (``other

related ADRs'') over the three month period preceding the date of

listing.\6\ The Exchange will use its best efforts to discover all

markets (foreign and U.S.) on which the security underlying the ADR,

and all related securities, trades.\7\ These proposed changes are in

addition to the criteria which are currently in place for the listing

of ELNs.

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\6\The Exchange notes that under this calculation, the trading

volume for any U.S. ADRs trading on or through a U.S. securities

market that is not part of the U.S. ADR market will be included in

the determination of world-wide trading volume, but not in the

determination of the U.S. ADR market trading volume. See Amendment

No. 1, supra note 1.

\7\Id.

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Amendment No. 1 to the proposed rule change also defines the U.S.

ADR market as the U.S. self-regulatory organizations (``SROs'') that

are members of the Intermarket Surveillance Group (``ISG'')\8\ and

whose markets are linked together by the Intermarket Trading System

(``ITS'').\9\ Accordingly, the U.S. ADR market is currently comprised

of those SROs that are members of ISG.\10\

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\8\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

members of the ISG 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.

\9\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

traded 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.

\10\See Amendment No. 1, supra note 1.

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The Exchange believes that the proposed amendment will benefit

investors by expanding the number of securities that may be linked to

ELNs, thereby providing investors with enhanced investment flexibility.

The Exchange believes that it is appropriate to now include ADRs within

the existing regulatory framework for ELNs 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. Since both the

ELNs and the ADRs will be subject to the criteria outlined in sections

107A and 107B of the Guide, and the Exchange will either have in place

an effective surveillance sharing agreement with the primary exchange

in the home country where the security underlying the ADR trades or the

ADR will meet the trading volume criteria set forth in section 107B,

the Exchange believes that it will have the ability to inquire into

potential trading problems or irregularities with respect to the ELNs

and the ADRs to which they are linked.

The Exchange believes that the proposed rule change is consistent

with section 6(b) of the Act, in general, and furthers the objectives

of 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 foster cooperation and coordination

with persons engaged in facilitating transactions in securities, and to

remove impediments to an perfect the mechanism of a free and open

market and a national market system.

(B) Self-Regulatory Organization's Statement on Burden on Competition

The Amex 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

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 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 Amex. All

submissions should refer to File No. SR-Amex-93-46 and should be

submitted by February 16, 1994.

For the Commission, by the Division of Market Regulation,

pursuant to delegated authority.\11\

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\11\17 CFR 200.30-3(a)(12) (1993).

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Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 94-1582 Filed 1-25-94; 8:45 am]

BILLING CODE 8010-01-M