Self-Regulatory Organizations; Order Approving Proposed Rule Change and Filing and Order Granting Accelerated Approval of Amendment Nos. 1 and 2 to the Proposed Rule Change by the Chicago Board Options Exchange, Inc. Relating to the Listing Criteria for Certain Hybrid Securities.

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-34759; File No. SR-CBOE-94-04]

Self-Regulatory Organizations; Order Approving Proposed Rule

Change and Filing and Order Granting Accelerated Approval of Amendment

Nos. 1 and 2 to the Proposed Rule Change by the Chicago Board Options

Exchange, Inc. Relating to the Listing Criteria for Certain Hybrid

Securities.

September 30, 1994.

I. Introduction

On February 25, 1994, the Chicago Board Options Exchange, Inc.

(``CBOE'' 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 establish

specific listing criteria for certain hybrid securities. Notice of the

proposal appeared in the Federal Register on April 7, 1994.\3\ No

comment letters were received on the proposed rule change. The CBOE

filed Amendment No. 1 to the proposed rule change on September 28,

1994,\4\ and Amendment No. 2 on September 29, 1994.\5\ This order

approves the CBOE proposal, as amended.

---------------------------------------------------------------------------

\1\15 U.S.C. 78s(b)(1) (1988).

\2\17 CFR 240.19b-4 (1992).

\3\See Securities Exchange Act Release No. 33843 (March 31,

1994), 59 FR 16666 (April 7, 1994).

\4\In Amendment No. 1, the CBOE amends, in several respects, the

proposed listing criteria for contingent value rights, equity-linked

notes, and paired securities, as described herein, to conform the

proposed rule language to the listing criteria for such products

previously approved by the Commission for the New York Stock

Exchange, Inc. (``NYSE'') and/or the American Stock Exchange, Inc.

(``Amex''). See Letter from Michael Meyer, Schiff Hardin & Waite, to

Brad Ritter, Senior Counsel, Office of Market Supervision, Division

of Market Regulation, Commission, dated September 27, 1994

(``Amendment No. 1'').

\5\In Amendment No. 2, the CBOE proposes to require that the

Exchange distribute a circular to the membership providing guidance

regarding member firm compliance responsibilities (including

suitability recommendations and account approval) when handling

transactions in contingent value rights. See Letter from Michael

Meyer, Schiff Hardin & Waite, to Brad Ritter, Senior Counsel, Office

of Market Supervision, Division of Market Regulation, Commission,

dated September 29, 1994 (``Amendment No. 2'').

---------------------------------------------------------------------------

II. Description of the Proposal

Pursuant to CBOE Rule 31.5.F, the Exchange may approve for listing

securities which can not be readily categorized under the listing

criteria for common and preferred stocks, bonds, debentures, warrants,

or unit investment trusts. The CBOE is now proposing to: (1) Amend Rule

31.5.F to decrease the minimum aggregate market value of such

securities to $4 million;\6\ (2) add Rule 31.5.H to provide listing

standards for contingent value rights (``CVRs''); (3) add Rule 31.5.I

to provide listing standards for equity-linked term notes (``ELNs'');

and (4) add Rule 31.5.J to provide listing standards for paired

securities.

---------------------------------------------------------------------------

\6\See Amendment No. 1, supra note 4.

---------------------------------------------------------------------------

A. Contingent Value Rights

CVRs are unsecured obligations providing for a possible cash

payment at maturity based on the value of an equity security issued by

an affiliate of the issuer of the CVRs (``related security''). The

holder of a CVR would be entitled to a cash payment at maturity if the

market price of the related security is lower than a predetermined

target price. If the market price of the related security equals or

exceeds the target price, the holder of the CVR would not be entitled

to receive such a cash payment.

Under proposed Rule 31.5.H, a CVR would be eligible for listing by

the CBOE if: (1) The issuer satisfies the net worth and earnings

requirements set forth in Exchange Rule 31.5.A;\7\ (2) the issuer has

assets in excess of $100 million; (3) there is a minimum public

distribution of one million CVRs; (4) there are at least 400 public

holders of the CVRs; (5) the aggregate market value of the CVRs is at

least $4 million; and (6) the CVRs have an original term to maturity of

at least one year.\8\

---------------------------------------------------------------------------

\7\ specifically, an issuer must have: (1) Total assets

(including the value of patents, copyrights, and trademarks but

excluding the value of goodwill) less total liabilities of at least

$4 million; and (2) pre-tax income of at least $750,000 in its last

fiscal year, or in two of its last three fiscal years and net income

of at least $400,000.

\8\ See Amendment No. 1, supra note 4.

---------------------------------------------------------------------------

Because CVRs are linked to another security, the Exchange has

proposed safeguards that are designed to meet the investor protection

concerns raised by the trading of CVRs.\9\ First, pursuant to CBOE Rule

30.50(c), 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 CVRs. Second, consistent with CBOE Rule

30.50(c), the Exchange will further require that a member or member

firm specifically approve a customer's account for trading CVRs prior

to, or promptly after, the completion of the transaction. Third, prior

to the commencement of trading of CVRs, the Exchange will distribute a

circular to the membership providing guidance regarding member firm

compliance responsibilities (including suitability recommendations and

account approval) when handling transactions in CVRs.

---------------------------------------------------------------------------

\9\Id.

---------------------------------------------------------------------------

B. Equity-Linked Term Notes

The Exchange is also proposing to add Rule 31.5.I to its rules to

establish specific listing criteria for ELNs.\10\ ELNs are

intermediate-term, hybrid instruments whose value will be linked to the

performance of a highly-capitalized, actively traded common stock, non-

convertible preferred stock, or sponsored American Depositary Receipt

(``ADR'').\11\

---------------------------------------------------------------------------

\10\ The CBOE notes that the Commission has previously approved

the listing of ELNs by the NYSE and the Amex. The CBOE states that

with two exceptions, as discussed herein, the CBOE's proposed

standards are virtually identical to the NYSE's and Amex's listing

standards for ELNs. See Securities Exchange Act Release Nos. 32343

(May 20, 1993). 58 FR 30833 (May 27, 1933) (order originally

approving the listing of ELNs by the Amex); 33328 (December 13,

1993), 58 FR 66041 (December 17, 1993) (order approving revised

market capitalization and trading volume requirements for the

listing of ELNs by the Amex); 33468 (January 13, 1994), 59 FR 3387

(January 21, 1994) (order originally approving the listing of ELNs

by the NYSE); 33841 (March 31, 1994), 59 FR 16671 (April 7, 1994)

(order approving revised market capitalization and trading volume

requirements for the listing of ELNs by the NYSE); 34545 (August 18,

1994), 59 FR 43877 (August 25, 1994) (order approving the listing of

ELNs by the NYSE linked to securities issued by non-U.S. companies)

(``Exchange Act Release No. 34545''); and 34549 (August 18, 1994),

59 FR 43873 (August 25, 1994) (order approving the listing of ELNs

by the Amex linked to securities issued by non-U.S. companies)

(``Exchange Act Release No. 34549'') (collectively, ``Equity-Linked

Note Approval Orders'').

\11\See Amendment No. 1, supra note 4.

---------------------------------------------------------------------------

An issuer of ELNs may provide for periodic interest payments to

holders, whether based on a fixed or floating rate.\12\ Furthermore, a

particular issuance of ELNs may also be subject to a ``cap'' on the

maximum principal amount to be repaid to holders upon maturity of the

ELNs, and, additionally, may feature a ``floor'' on the minimum

principal amount to be repaid to holders upon maturity of the ELNs. The

Exchange believes that the listing flexibility available to an issuer

of ELNs will permit the creation of securities which will offer

investors the opportunity to more precisely focus on a specific

investment strategy.

---------------------------------------------------------------------------

\12\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. Id. The Commission, at

that time, may require the CBOE 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.

---------------------------------------------------------------------------

ELNs will conform to the listing guidelines under CBOE Rule 31.5.F,

which provide that: (1) Issuers must satisfy certain asset/equity

requirements;\13\ and (2) issues must have (a) a minimum public

distribution of one million trading units; (b) a minimum of 400 unit

holders; and (c) an aggregate market value of at least $4 million.\14\

Several additional criteria will also apply to the listing of ELNs.

First, the issuer must have a minimum tangible net worth of $150

million. Second, the original issue price of a series of ELNs, when

combined with all of the issuer's other ELNs listed on a national

securities exchange or otherwise publicly traded in the United States,

may not be greater than 25% of the issuer's net worth at the time of

issuance. Third, ELNs will have an original term to maturity of not

less than two years and not more than seven years, except ELNs linked

to a security issued by a non-U.S. company\15\ (including a sponsored

ADR) must have an original term to maturity of not more than three

years. Additionally, ELNs will be treated as equity instruments for,

among other purposes, margin requirements.\16\

---------------------------------------------------------------------------

\13\Specifically, issuers must have assets in excess of $100

million and stockholders' equity of at least $10 million. In the

case of an issuer which does not satisfy the earnings criteria set

forth in CBOE 31.5.A (see supra note 6), the Exchange generally will

require the issuer to have: (i) Assets in excess of $200 million and

stockholders' equity of at least $10 million; or (ii) assets in

excess of $100 million and stockholders' equity of at least $20

million.

\14\See Amendment No. 1, supra note 4.

\15\The Exchange defines a non-U.S. company as any company which

was formed or incorporated outside of the U.S. Id.

\16\Id.

---------------------------------------------------------------------------

Although the Exchange does not believe that ELNs will have any

discernible impact on the trading market for the underlying linked

stock, it nevertheless proposes that each equity security (including

sponsored ADRs) on which the value of the ELN is based must either

have: (1) A market capitalization of at least $3 billion and U.S.

trading volume of at least 2.5 million shares during the one-year

period preceding the listing of the ELN, (2) a market capitalization of

at least $1.5 billion and U.S. trading volume of at least 20 million

shares during the one-year period preceding the listing of the ELN, or

(3) a market capitalization of at least $500 million and U.S. trading

volume of at least 80 million shares during the one-year period

preceding the listing of the ELN. Moreover, the proposed rule change

would provide the Exchange with flexibility, subject to the concurrence

of the staff of the Commission, to list an ELN linked to a security

that does not meet the specific market capitalization and volume

criteria.\17\ In addition to the market capitalization and trading

volume requirements, the underlying security to which an ELN is linked

must be: (1) Issued by a company which is subject to reporting

requirements under the Act; (2) listed on a national securities

exchange or traded through Nasdaq; and (3) subject to last sale

reporting pursuant to Rule 11As3-1 of the Act.\18\ Finally, without the

concurrence of the staff of the Commission, an issue of ELNs linked to

a security issued by a U.S. company may not be linked to more than 5%

of the total outstanding shares of that security.\19\

---------------------------------------------------------------------------

\17\Depending on the proposed facts, the Commission may require

the Exchange to submit a rule filing to the Commission pursuant to

section 19(b) of the Act to address the regulatory issues raised by

any proposed offering of ELNs that does not satisfy the market

capitalization and/or trading volume requirements set forth above.

In this connection, the Commission notes that any proposal to list

an ELN linked to a security with a market capitalization of less

than $500 million would raised significant regulatory concerns for

which a section 19(b) rule filing would be required.

\18\See Amendment No. 1, supra note 4.

\19\As with the market capitalization and trading volume

requirements, the Commission notes that based on the proposed facts,

the Exchange may be required to submit a rule filing to the

Commission pursuant to section 19(b) of the Act to address

regulatory issues raised by any Exchange proposal to list an ELN

related to more than the allowable percentages of outstanding shares

of the underlying security.

---------------------------------------------------------------------------

With regard to ELNs linked to securities issued by non-U.S.

companies (including sponsored ADRs) subject to reporting requirements

under the Act, the following additional requirements apply: (1) The

term of such ELNs shall be limited to between two and three years; (2)

either (i) the Exchange must have in place a comprehensive market

information sharing agreement\20\ 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 primarily

traded), or (ii) at least 50% of the market for the underlying security

and all related securities\21\ for the six months prior to issuance

must occur in the U.S. market (as defined below);\22\ (3) if linked to

an ADR, the ADR must be sponsored;\23\ (4) there must be a minimum of

2,000 holders of the linked security; (5) 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 and all related securities 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 and all related securities 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 and all related

securities for the six months prior to listing occurred in the U.S.

market; and (6) no ELN may be listed if the U.S. market for the

underlying security and all related securities accounted for less than

30% of the worldwide trading volume for the security and related

securities during the prior six months, regardless of whether the

relevant comprehensive market information sharing agreement is in

place.\24\ With the concurrence of the staff of the Commission, the

Exchange may determine to list an ELN linked to a security (including a

sponsored ADR) issued by a non-U.S. company subject to reporting

requirements under the Act that exceeds the above percentages.\25\

---------------------------------------------------------------------------

\20\See Amendment No. 1, supra note 4. 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. 33554 (January 31, 1994), 59 FR

5622 (February 7, 1994) (order approving File No. SR-CBOE-93-38)

(``ADR Approval Order'').

\21\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 Amendment No. 1, supra note 4; and ADR

Approval Order, supra note 20.

\22\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.

\23\ See Amendment No. 1, supra note 4.

\24\Additionally, without a comprehensive market information

sharing agreement, an ELN may not be listed linked to a security

issued by a non-U.S. company (including a sponsored ADR) if the U.S.

market for the security and all related securities for the prior six

months was less than 50% of the worldwide market for such

securities. Id.

\25\See supra note 18.

---------------------------------------------------------------------------

The proposal defines the U.S. market\26\ as the U.S. self-

regulatory organizations that are members of the Intermarket

Surveillance Group (``ISG'')\27\ and whose markets are linked together

by the Intermarket Trading System (``ITS'').\28\

---------------------------------------------------------------------------

\26\See Amendment No. 1, supra note 4; and ADR Approval Order,

supra note 20.

\27\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 CBOE; the Chicago Stock

Exchange, Inc.; the Cincinnati Stock Exchange, Inc.; the National

Association of Securities Dealers, Inc.; the NYSE; 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.

\28\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

multiple 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.

---------------------------------------------------------------------------

As with CVRs, because ELNs are linked to another security, the

Exchange has proposed safeguards that are designed to meet the investor

protection concerns raised by the trading of ELNs.\29\ First, pursuant

to CBOE Rule 30.50(c), 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 ELNs. Second, consistent with CBOE

Rule 30.50(c), the Exchange will further require that a member or

member firm specifically approve a customer's account for trading ELNs

prior to, or promptly after, the completion of the transaction. Third,

prior to the commencement of trading of ELNs, the Exchange will

evaluate the nature and complexity of the issue and, if appropriate,

distribute a circular to the membership providing guidance regarding

member firm compliance responsibilities (including suitability

recommendations and account approval) when handling transactions in

ELNs.\30\

---------------------------------------------------------------------------

\29\See Amendment No. 1, supra note 4.

\30\The Commission notes that the ELNs are subject to the equity

margin rules of the Exchange. Id.

---------------------------------------------------------------------------

C. Paired Securities

The Exchange is also proposing to add Rule 31.5.J to its rules to

set forth specific listing criteria for ``paired securities.'' Under

proposed Rule 31.5.J, the term ``paired securities'' would be defined

as securities which may be transferred and traded only in combination

with one another as a single economic unit and for which the securities

are printed back-to-back on the same certificate.\31\ Under the

proposed rule, the issuers of the paired securities would be required

to satisfy, on an aggregate basis, the size and earnings criteria set

forth in Exchange Rule 31.5.A.\32\ In the event the pairing agreement

between the issuers of the paired securities is terminated, the issuer

which initially met the original listing criteria need only satisfy the

Exchange's continued listing guidelines in order to remain listed on

the Exchange. The other security, however, which at the time of listing

did not qualify for listing under CBOE Rule 31.5.A must, at the time of

termination, meet both the net worth, earnings, and distribution

requirements of Rule 31.5.A in order to remain listed on the

Exchange.\33\ The Exchange has represented that it will only list an

issue of paired securities as a competitive response to the listing of

an issue of paired securities by another securities exchange and where

the securities are being paired for purposes other than for bypassing

the Exchange's equity listing standards.\34\

---------------------------------------------------------------------------

\31\See Amendment No. 1, supra note 4.

\32\See supra note 7.

\33\See Amendment No. 1, supra note 4; and supra note 7.

\34\See Amendment No. 1, supra note 4.

---------------------------------------------------------------------------

III. Commission Findings and Conclusions

For the reasons discussed below, 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).\35\

---------------------------------------------------------------------------

\35\15 U.S.C. 78f(b)(5) (1988). Pursuant to section 6(b)(5) of

the Act the Commission must predicate approval of exchange trading

for new products upon a finding that the introduction of the product

is in the public interest. Such a finding would be difficult with

respect to a product that served no investment, hedging, or other

economic function, because any benefits that might be derived by

market participants would likely be outweighed by the potential for

manipulation, diminished public confidence in the integrity of the

markets, and other valid regulatory concerns.

---------------------------------------------------------------------------

A. Contingent Value Rights

The Commission believes that the CBOE's proposal to establish

listing criteria for CVRs addresses the special concerns raised by

these investment products. As with the equity-linked debt securities

approved for listing by the NYSE and the Amex,\36\ CVRs are not

leveraged instruments. Their price, however, will still be derived and

based upon the related security. The Commission believes, however, that

the CBOE proposal adequately minimizes the Commission's regulatory

concerns that arise because the final rate of return of a CVR is

derivatively priced, based on the performance of the related security.

The proposed quantitative listing standards should ensure that only

substantial companies capable of meeting their financial obligations

issue CVRs. This is important in light of the contingent financial

obligations created by these instruments, and should serve to protect

investors and the public interest by ensuring that the companies

listing CVRs on the Exchange have sufficient financial means to meet

their settlement obligations. Additionally, the proposed suitability,

disclosure, and compliance requirements noted above, adequately address

the potential public customer concerns that could arise from the hybrid

nature of CVRs. In this regard, before any listing occurs, the CBOE

would be required to distribute a circular to the membership providing

guidance regarding member firm compliance responsibilities (including

suitability recommendations and account approval) when handling

transactions in CVRs.

---------------------------------------------------------------------------

\36\See Equity-Linked Note Approval Orders, supra note 10.

---------------------------------------------------------------------------

Finally, the Commission notes that the criteria proposed by the

Exchange for the listing of CVRs are virtually the same as those

previously approved by the Commission for the listing and trading of

CVRs by the NYSE and the Amex.\37\

---------------------------------------------------------------------------

\37\See Securities Exchange Act Release Nos. 28072 (May 30,

1990), 55 FR 23166 (June 6, 1990) (order approving the listing of

CVRS by the NYSE); and 27753 (March 1, 1990), 55 FR 8624 (March 8,

1990) (order approving the listing of CVRs by the Amex).

---------------------------------------------------------------------------

B. Equity-Linked Term Notes

The Commission believes that the availability of ELNs will permit

investors to more closely approximate their desired investment

objectives through, for example, shifting some of the opportunity for

upside gain in return for additional income. Accordingly, for these

reasons, as well as the reasons stated in the Equity-Linked Note

Approval Orders,\38\ the Commission finds that the CBOE's proposed

standards for the listing and trading of ELNs are consistent with the

Act and that the listing and trading of ELNs is in the public interest.

---------------------------------------------------------------------------

\38\See Equity-Linked Note Approval Orders, supra note 10.

---------------------------------------------------------------------------

As with the CVRs discussed above, ELNs 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 an ELNs is similar to the risk involved in

the purchase or sale of traditional common stock. Nonetheless, in

considering the proposals by the Amex and the NYSE to list and trade

equity-linked notes, the Commission had several specific concerns with

this type of product because the final rate of return of an ELN is

derivatively priced, based on the performance of the underlying

security. These concerns included: (1) Investor protection concerns;

(2) dependence on the credit of the issuer of the instrument; (3)

systemic concerns regarding position exposure of issuers with partially

hedged positions or dynamically hedged positions; and (4) the impact on

the market for the underlying linked security.\39\ The Commission

concluded, however, that the proposals adequately addressed each of

these issues such that the Commission's regulatory concerns were

adequately minimized.\40\ Similarly, in this proposal, the CBOE has

proposed safeguards, as described above, which the Commission finds to

be equivalent to those approved for the trading of ELNs by the Amex and

the NYSE. In particular, by imposing the listing standards,

suitability, disclosure, and compliance requirements noted above, the

CBOE has adequately addressed the potential public customer concerns

that could arise from the hybrid nature of ELNs.

---------------------------------------------------------------------------

\39\Id.

\40\Id.

---------------------------------------------------------------------------

Except in two respects, the Commission finds that Amendment No. 1

confirms the proposal to rule changes already approved by the

Commission for the listing and trading of ELNs by the Amex and the

NYSE.\41\ The two new items included in this proposal are: (1) An

additional market capitalization and trading volume requirement that

allows the listing of ELNs linked to an underlying security with a

minimum market capitalization of $500 million and a trading volume in

the year prior to listing of at least 80 million shares; and (2)

allowing flexibility for the CBOE, with the concurrence of the staff of

the Commission, to determine on a case-by-case basis to list ELNs that

either do not satisfy the market capitalization and trading volume

requirements discussed above, and/or that exceed the percentage limits

regarding the outstanding shares of the linked security. The Commission

believes that neither of these proposals raises any significant

regulatory issues that were not addressed in the Equity-Linked Note

Approval Orders.\42\ The Commission finds that the proposal to add the

third tier of eligible linked securities will expand the number of

securities that can be linked to these equity-linked products while

maintaining the requirement that the linked security be an actively

traded common stock issued by a highly capitalized issuer. While the

proposal introduces a third alternative for ELN eligibility that

reduces the minimum market capitalization requirement of the linked

security, the stock of such an issuer could only be linked to an issue

of ELNs if its trading volume for the prior one-year period is at least

80 million shares, which is four times higher than the current minimum

trading volume for these products as currently allowed on the Amex and

the NYSE. Moreover, in recently approving proposals by the NYSE and the

Amex to list and trade ELNs linked to securities (including sponsored

ADRs) issued by non-U.S. companies subject to reporting requirements

under the Act, the NYSE and the Amex represented to the Commission that

no problems had been reported to either exchange regarding the listing

and trading of these products.\43\ The Commission believes that

together, the new capitalization and trading volume requirements will

continue to ensure that ELNs are only issued on highly liquid

securities of broadly capitalized companies and that these requirements

will reduce the likelihood of any adverse market impact on the

securities underlying ELNs.

---------------------------------------------------------------------------

\41\Id.

\42\Id.

\43\See Exchange Act Release Nos. 34545 and 34549, supra note

10.

---------------------------------------------------------------------------

Additionally, allowing the CBOE, with the concurrence of the staff

of the Commission, to approve, on a case-by-case basis, an issue of

ELNs that does not satisfy one of the existing requirements regarding

market capitalization and trading volume,\44\ or that exceeds the

maximum allowable percentage of shares of the underlying security,\45\

merely adds flexibility to the proposed rule change. The Commission

believes that this portion of the proposal does not raise any

regulatory concerns, particularly given the requirement of obtaining

the concurrence of the staff of the Commission prior to listing.\46\

---------------------------------------------------------------------------

\44\See supra note 16.

\45\See supra note 18.

\46\If the CBOE proposed an ELN that raised unique or

significant regulatory concerns, the staff of the Commission would

require the CBOE to submit a rule filing to the Commission pursuant

to section 19(b) of the Act.

---------------------------------------------------------------------------

C. Paired Securities

The Commission believes that the CBOE's proposed listing standards

for paired securities do not raise any substantial regulatory concerns.

First, the proposed rule is identical to a rule previously adopted by

the Amex.\47\ Second, the Exchange will only list an issue of paired

securities in response to competitive pressures resulting from the

listing of an issue of paired securities by another securities exchange

and where the securities to be listed by the CBOE are being paired for

purposes other than for bypassing the Exchange's equity listing

standards.\48\ These standards should serve to protect investors by

preventing an issuer from listing a security on the CBOE that does not

satisfy the Exchange's listing criteria, terminating the pairing

agreement, and then trading the securities as separate securities. The

certificate requirement serves to further protect investors and

minimize confusion by ensuring that investors are on notice when they

receive such a certificate that the security is a paired security and

cannot be traded separately from the security to which it is paired.

Moreover, requiring that in the event of the termination of the pairing

agreement that the security that did not originally meet the CBOE's

listing criteria must satisfy those criteria at the time of the

termination or else be delisted, minimizes the potential that the

paired security vehicle will be used as a means of listing a security

that otherwise could not be listed on the Exchange.

---------------------------------------------------------------------------

\47\See Section 117 of the Amex Company Guide.

\48\See Amendment No. 1, supra note 4. The Commission would be

concerned about companies being paired simply to allow one or both

companies to meet the listing standards. The Commission believes

that paired securities should only be allowed to be listed where

there is a special relationship or reason, other than listing

requirements, that makes pairing necessary.

---------------------------------------------------------------------------

The Commission finds good cause for approving Amendment Nos. 1 and

2 to the proposed rule change prior to the thirtieth day after the date

of publication of notice thereof in the Federal Register in order to

allow the CBOE to begin listing hybrid securities satisfying the

listing standards discussed above without delay. With respect to CVRs,

the Commission finds that Amendment Nos. 1 and 2 more closely conforms

the Exchange's proposal to proposals previously approved by the

Commission with respect to the listing and trading of CVRs by the Amex

and the NYSE. For that reason and for the reasons stated above, the

Commission believes that the proposal to list and trade CVRs does not

raise any significant regulatory issues that were not addressed when

the NYSE and the Amex proposals were approved.

With regard to ELNs, as discussed above, except for two aspects the

proposal merely provides the CBOE with the ability to list equity-

linked debt securities on the same basis as the NYSE and the Amex.

Moreover, the Commission notes that the proposals by the NYSE and the

Amex to list and trade equity-linked debt securities were published by

the Commission for the full comment period without any comments being

received by the Commission. With respect to the two aspects of the ELN

proposal which expand on the standards previously approved for the NYSE

and the Amex, for the reasons discussed above, the Commission believes

that no significant regulatory issues are raised that were not

adequately addressed in the Equity-Linked Note Approval Orders.\49\

---------------------------------------------------------------------------

\49\See Equity-Linked Note Approval Orders, supra note 10.

---------------------------------------------------------------------------

Finally, Amendment No. 1 to the proposal also lowers the minimum

size for an issue of securities listed pursuant to CBOE Rule 31.5.F

from $20 million to $4 million. The Commission notes that this

amendment merely conforms the CBOE's rules to those of the NYSE which

provide that an issue of a hybrid security must have a minimum market

value at issuance of at least $4 million.\50\

---------------------------------------------------------------------------

\50\See section 703.19 of the NYSE Listed Company Manual.

---------------------------------------------------------------------------

Accordingly, the Commission believes it is consistent with sections

6(b)(5)\51\ and 19(b)(2)\52\ of the Act to approve Amendment Nos. 1 and

2 to the proposal on an accelerated basis.

---------------------------------------------------------------------------

\51\15 U.S.C. 78f(b)(5) (1988).

\52\15 U.S.C. 78s(b)(2) (1988).

---------------------------------------------------------------------------

Interested persons are invited to submit written data, views and

arguments concerning Amendment Nos. 1 and 2 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-CBOE-94-04 and should be submitted by October 27, 1994.

It is Therefore Ordered, pursuant to Section 19(b)(2) of the

Act,\53\ that the proposed rule change (File No. SR-CBOE-94-04), as

amended, is approved.

\53\15 U.S.C. 78s(b)(2) (1988).

---------------------------------------------------------------------------

For the Commission, by the Division of Market Regulation,

pursuant to delegated authority.\54\

---------------------------------------------------------------------------

\54\17 CFR 200.30-3(a)(12) (1993).

---------------------------------------------------------------------------

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 94-24794 Filed 10-5-94; 8:45 am]

BILLING CODE 8010-01-M