Federal Register / Vol. 69, No. 228 / Monday, November 29, 2004 / Notices 69435

7 17 CFR 200.30–3(a)(12).

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

2Securities Exchange Act Release No. 50536 

(October 13, 2004), 69 FR 61699.

3MBSD’s Rules define ‘‘broker’’ as a member that 

is in the business of buying and selling securities 

as agent on behalf of dealers. Brokers are currently 

subject to a minimum net or liquid capital 

requirement of $5 million.

4Mortgage originators are state-regulated entities, 

and definitions of such entities vary with each state. 

Generally, these definitions target entities whose 

‘‘primary’’ business is the issuance of mortgages. 

MBSD has historically classified entities as 

mortgage bankers based upon an applicant’s 

representations made in its membership application 

and confirmed by management’s review of the 

applicant’s business.

5Article III, Rule 1, Section 1(f) provides a catchall category for membership for ‘‘firms in such other 

categories as the Corporation [FICC] from time to 

time may determine.’’ The proposed rule change 

was amended to add language to Addendum A of 

the MBSD Rules to clarify that entities that are 

deemed to be mortgage bankers would be 

considered to be one of the various entity types that 

fall under the catch-all category of membership.

6 15 U.S.C. 78q–1(b)(3)(F).

7 15 U.S.C. 78s(b)(2).

8 17 CFR 200.30–3(a)(12).

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

2CFR 240.19b–4.

inspection and copying at the principal 

office of DTC and on DTC’s Web site 

(http://www.dtc.org). All comments 

received will be posted without change; 

the Commission does not edit personal 

identifying information from 

submissions. You should submit only 

information that you wish to make 

available publicly. All submissions 

should refer to File Number SR–DTC–

2004–10 and should be submitted on or 

before December 20, 2004.

For the Commission by the Division of 

Market Regulation, pursuant to delegated 

authority.7

Margaret H. McFarland, 

Deputy Secretary.

[FR Doc. E4–3348 Filed 11–26–04; 8:45 am] 

BILLING CODE 8010–01–P

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–50712; File No. SR–FICC–

2004–07] 

Self-Regulatory Organizations; Fixed 

Income Clearing Corporation; Order 

Granting Approval of a Proposed Rule 

Change To Amend Its Rules To 

Eliminate the ‘‘Mortgage Banker’’

Category of Membership in Its 

Mortgage-Backed Securities Division 

November 22, 2004. 

I. Introduction 

On March 25, 2004, the Fixed Income 

Clearing Corporation (‘‘FICC’’) filed 

with the Securities and Exchange 

Commission (‘‘Commission’’) and on 

June 21, 2004, and October 13, 2004, 

amended proposed rule change File No. 

SR–FICC–2004–07 pursuant to Section 

19(b)(1) of the Securities Exchange Act 

of 1934 (‘‘Act’’).1 Notice of the proposed 

rule change was published in the 

Federal Register on October 20, 2004.2

No comment letters were received. For 

the reasons discussed below, the 

Commission is now granting approval of 

the proposed rule change.

II. Description 

The proposed rule change amends the 

rules of FICC’s Mortgage-Backed 

Securities Division (‘‘MBSD’’) to 

eliminate the ‘‘mortgage banker’’

category of membership. In accordance 

with Article III, Rule 1, Section 2, 

‘‘Financial Requirements for 

Participants and Limited Purpose 

Participants,’’ of MBSD’s Rules, 

mortgage bankers are subject to a 

minimum net worth requirement of $5 

million. With the exception of 

‘‘brokers,’’ all other applicants are 

subject to a minimum net worth or 

regulatory net capital requirement of 

$10 million.3

Historically, mortgage bankers (which 

generally act as mortgage originators) 

maintained relatively little capital. FICC 

considered a lower minimum capital 

standard appropriate to enable and 

encourage these types of firms to 

participate in FICC. The mortgage 

banker category of membership is now 

becoming obsolete for two principal 

reasons. First, changes in the mortgage 

business are causing small originators to 

use Fannie Mae and Freddie Mac, 

making MBSD membership less 

desirable and therefore making the 

relatively lower minimum capital 

standard less justified. Second, from a 

membership administration perspective 

there appears to be no precise, uniform 

definition for ‘‘mortgage banker.’’ 4

The proposed rule change eliminates 

the mortgage banker category from the 

MBSD Rules. Entities that would have 

previously qualified as mortgage 

bankers will now be classified under the 

catch-all category of membership in 

Article III, Rule 1, Section 1, 

‘‘Applicants Eligible to Become 

Participants or Limited Purpose 

Participants.’’ 5 This reclassification will 

increase the minimum net worth 

requirement from $5 million to $10 

million for these members. FICC does 

not anticipate that this increase will 

adversely affect existing mortgage 

banker members because member 

financial statements filed with FICC 

indicate that each mortgage banker 

member’s capitalization currently 

exceeds the new minimum.

III. Discussion 

Section 17A(b)(3)(F) of the Act 

requires among other things that the 

rules of a clearing agency be designed to 

assure the safeguarding of securities and 

funds in its custody or control or for 

which it is responsible.6 The 

Commission finds that FICC’s proposed 

rule change is consistent with this 

requirement because by removing the 

mortgage banker category from the 

MBSD Rules and by providing that 

entities that currently are classified as 

such meet a higher minimum financial 

requirement, it enhances the ability of 

FICC to maintain a financially sound 

membership base without an adverse 

effect on itself or its members.

IV. Conclusion 

On the basis of the foregoing, the 

Commission finds that the proposed 

rule change is consistent with the 

requirements of the Act and in 

particular Section 17A of the Act and 

the rules and regulations thereunder. 

It is therefore ordered, pursuant to 

section 19(b)(2) of the Act,7 that the 

proposed rule change (File No. SR–

FICC–2004–07) be and hereby is 

approved.

For the Commission by the Division of 

Market Regulation, pursuant to delegated 

authority.8

Margaret H. McFarland, 

Deputy Secretary.

[FR Doc. E4–3350 Filed 11–26–04; 8:45 am] 

BILLING CODE 8010–01–P

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–50710, File No. SR–NASD–

2004–157] 

Self-Regulatory Organizations; Notice 

of Filing and Order Granting 

Accelerated Approval of Proposed 

Rule Change by National Association 

of Securities Dealers, Inc. Relating to 

the Listing and Trading of Performance 

Leveraged Upside Securities Linked to 

the Russell 2000 Index 

November 19, 2004. 

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 October 

21, 2004, the National Association of 

Securities Dealers, Inc. (‘‘NASD’’), 

through its subsidiary, the Nasdaq Stock 

Market, Inc. (‘‘Nasdaq’’), filed with the 

Securities and Exchange Commission 

(‘‘Commission’’) the proposed rule 

change as described in Items I and II 

69436 Federal Register / Vol. 69, No. 228 / Monday, November 29, 2004 / Notices 

3For additional information regarding the Index 

see http://www.russell.com.

4As of August 31, 2004, the total market 

capitalization of the Index was $953.34 billion.

5Telephone conference between Alex Kogan, 

Associate General Counsel, Nasdaq, and Florence 

Harmon, Senior Special Counsel, Division of 

Market Regulation, (‘‘Division’’), Commission, 

dated November 16, 2004.

6November 16, 2004 telephone conference 

between Alex Kogan, Associate General Counsel, 

Nasdaq, and Florence Harmon, Senior Special 

Counsel, Division, Commission.

7November 16, 2004 telephone conference 

between Alex Kogan, Associate General Counsel, 

Nasdaq, and Florence Harmon, Senior Special 

Counsel, Division, Commission.

below, which Items have been prepared 

by Nasdaq. The Commission is 

publishing this notice to solicit 

comments on the proposed rule change 

from interested persons and is 

approving the proposal on an 

accelerated basis.

I. Self-Regulatory Organization’s 

Statement of the Terms of the Substance 

of the Proposed Rule Change 

Nasdaq proposes to list and trade 

Performance Leveraged Upside 

SecuritiesSM (‘‘PLUS’’), the return on 

which is based upon the Russell 2000 

Index (‘‘Notes’’) issued by Morgan 

Stanley. 

II. Self-Regulatory Organization’s 

Statement of the Purpose of, and 

Statutory Basis for, the Proposed Rule 

Change 

In its filing with the Commission, 

Nasdaq 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 III below. Nasdaq 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 

Nasdaq proposed to list and trade the 

PLUS which provide for a return based 

upon the Russell 2000 Index (the 

‘‘Index’’). 

Index 

The Index is a capitalization-weighted 

index maintained by Frank Russell 

company (‘‘FRC’’).3 It is designed to 

track the performance of 2,000 common 

stocks of corporations with small market 

capitalizations relative to other stocks in 

the U.S. equity market. The companies 

represented in the Index are domiciled 

in the U.S. and its territories and cover 

a wide range of industry groups. All 

2,000 stocks are traded on the New York 

Stock Exchange, the American Stock 

Exchange, or Nasdaq and form a part of 

the Russell 3000 Index. The Russell 

3000 Index is composed of the 3,000 

largest U.S. companies, based on market 

capitalization, and represents 

approximately 98% of the U.S. equity 

market.

The Index measures the price 

performance of the shares of common 

stock of the smallest 2,000 companies 

included in the Russell 3000 Index, 

which represent approximately 8% of 

the total market capitalization of the 

Russell 3000 Index as of August 31, 

2004.4 The Index is designed to track 

the performance of the small 

capitalization segment of the U.S. equity 

market. The Index is defined, assembled 

and calculated by FRC without regard to 

the Notes.

Only companies domiciled in the U.S. 

and its territories are eligible for 

inclusion in the Index. Companies 

domiciled in other countries are 

excluded, even if their common stock 

shares are traded on U.S. markets. 

Preferred stock, convertible preferred 

stock, participating preferred stock, 

paired shares, warrants, and rights are 

also excluded. Trust receipts, Royalty 

Trusts, limited liability companies, OTC 

Bulletin Board and Pink Sheets’ quoted 

stock, closed-end mutual funds, and 

limited partnerships that are traded on 

U.S. exchanges, are also ineligible for 

inclusion. Real Estate Investment Trusts 

and Beneficial Trusts are eligible for 

inclusion, however. In general, only one 

class of securities of a company is 

allowed in the Russell 3000 Index, 

although exceptions to this general rule 

have been made where FRC has 

determined that each class of securities 

acts independent of the other. 

The primary criteria used to 

determine the initial list of securities 

eligible for the Russell 3000 Index is 

total market capitalization, which is 

defined as the price of the shares times 

the total number of shares outstanding. 

Based on closing values on May 31 of 

each year, FRC reconstitutes the 

composition of the Russell 3000 Index 

using the then existing market 

capitalizations of eligible companies to 

reflect changes in capitalization 

rankings and shares available. If a stock 

ceases to trade as a result of a merger or 

acquisition during the year, the stock is 

deleted from the Index and will be 

replaced during the subsequent annual 

recapitalization. No interim 

replacements will be made. As of June 

30 of each year, the Index is adjusted to 

reflect the reconstitution of the Russell 

3000 Index for that year.

As of September 30, 2004, the market 

capitalization of the Index components 

ranged from approximately $68 million 

to approximately $2.353 billion. As of 

the same date, the Index’s highest 

weighted component stock constituted 

approximately 0.213% of the Index’s 

market capitalization, and the top five 

component stock constituted 

approximately 0.9968% of the Index’s 

market capitalization. For a 30-day 

period prior to August 19, 2004, the 

average daily trading volume of the 

average of all of the Index’s components 

was approximately 195,000 shares.5

As a capitalization-weighted index, 

the Index reflects changes in the 

capitalization, or market value, of the 

component stocks relative to the 

capitalization on a base date. The 

current index value is calculated by 

adding the market values of the Index’s 

component stocks, which are derived by 

multiplying the price of each stock by 

the number of shares outstanding, to 

arrive at the total market capitalization 

of the 2,000 stocks. The total market 

capitalization is then divided by a 

divisor, which represents the ‘‘adjusted’’

capitalization of the Index on the base 

date of December 31, 1986. To calculate 

the Index, last sale prices are used for 

exchanged-traded and Nasdaq stocks. If 

a component stock is not open for 

trading, the most recently traded price 

for that security is used in calculating 

the Index. In order to provide continuity 

for the Index’s value, the divisor is 

adjusted periodically to reflect events 

including changes in the number of 

common shares outstanding for 

component stocks, company additions 

or deletions, corporate restructurings 

and other capitalization changes. 

The Index value is widely 

disseminated throughout the trading 

day because complete, ‘‘real time’’

dissemination of the Index value 

updated at least every 15 seconds, is 

available from sources independent of 

the issuer and Nasdaq, such as 

numerous vendors, including 

Bloomberg and Rueters. The value of the 

Index on a delayed basis can be 

accessed by individual investors at 

http://finance.yahoo.com/

q?s=∧RUT&d=t. The last sale 

information for the Notes is 

disseminated on a real time basis on 

Tape C and a variety of other sources.6

In the event that the calculation and 

dissemination of the Index from an 

independent third-party source is 

discontinued, Nasdaq states that it will 

delist the Notes.7

Federal Register / Vol. 69, No. 228 / Monday, November 29, 2004 / Notices 69437

8See Securities Exchange Act Release No. 32988 

(September 29, 1993), 58 FR 52124 (October 6, 

1993) (SR–NASD–93–15).

9Morgan Stanley satisfies this listing criterion.

10NASD Rule 4420(f)(2) requires issuers of 

securities designated pursuant to this paragraph to 

be listed on The Nasdaq National Market or the 

New York Stock Exchange (‘‘NYSE’’) or be an 

affiliate of a company listed on The Nasdaq 

National Market or the NYSE; provided, however, 

that the provisions of Rule 4450 will be applied to 

sovereign issuers of ‘‘other’’ securities on a case-bycase basis.

11The actual Maximum Payment at Maturity will 

be determined at the time of pricing of the Notes.

12The Leveraged Upside Payment is the product 

of (i) $10 and (ii) 300% and (iii) the Index Percent 

Increase (a fraction, the numerator of which is the 

Final Index Value minus the Initial Index Value and 

the denominator of which is the Initial Index 

Value).

13The Index Performance Factor is a fraction, the 

numerator of which is the Final Index Value and 

the denominator of which is the Initial Index Value.

14See Securities Exchange Act Release No. 31382 

(October 30, 1992), 57 FR 52802 (November 5, 1992) 

(SR–CBOE–92–02) (approving the listing and 

trading of options on the Index); Securities 

Exchange Act Release No. 49388 (March 10, 2004), 

69 FR 12720 (March 17, 2004) (SR–CBOE–2003–51) 

(approving the listing and trading of options on 3 

Russell indexes; order contains the list of 12 

additional Russell indexes that were approved by 

the Commission at various times in the past for 

option listing and trading).

15As stated, prior to the execution of a 

transaction in the Notes that has been 

recommended to a non-institutional customer, Rule 

Continued

Other Information 

Under Rule 4420(f), Nasdaq may 

approve for listing and trading 

innovative securities that cannot be 

readily categorized under traditional 

listing guidelines.8 Nasdaq proposes to 

list and trade notes based on the Index 

under Rule 4420(f).

The Notes, which will be registered 

under Section 12 of the Act, will 

initially be subject to Nasdaq’s listing 

criteria for other securities under Rule 

4420(f). Specifically, under Rule 

4420(f)(1): 

(A) The issuer shall have assets in 

excess of $100 million and 

(B) stockholders’ equity of at least $10 

million.9 In the case of an issuer which 

is unable to satisfy the income criteria 

set forth in Rule 4420(a)(1), Nasdaq 

generally will require the issuer to have 

the following: (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;

(C) There must be a minimum of 400 

holders of the security; provided, 

however, that if the instrument is traded 

in $1,000 denominations, there must be 

a minimum of 100 holders; 

(D) For equity securities designated 

pursuant to this paragraph, there must 

be a minimum public distribution of 

1,000,000 trading units; 

(E) The aggregate market value/

principal amount of the security will be 

at least $4 million. 

In addition, Morgan Stanley satisfies 

the listed marketplace requirement set 

forth in Rule 4420(f)(2).10 Lastly, 

pursuant to Rule 4420(f)(3), prior to the 

commencement of trading of the Notes, 

Nasdaq will distribute a circular to 

members providing guidance regarding 

compliance responsibilities, and 

requirements, including suitability 

recommendations, and highlighting the 

special risks and characteristics of the 

Notes. In particular, Nasdaq will advice 

members recommending a transaction 

in the Notes to: (1) Determine that such 

transaction is suitable for the customer; 

and (2) have a reasonable basis for 

believing that the customer can evaluate 

the special characteristics of, and is able 

to bear the financial risks of, such 

transaction. In addition, pursuant to 

NASD Rule 2310(b), before executing a 

transaction in the Notes that has been 

recommended to a non-institutional 

customer, a member shall make 

reasonable efforts to obtain information 

concerning: (1) The customer’s financial 

status; (2) the customer’s tax status; (3) 

the customer’s investment objectives; 

and (4) such other information used or 

considered to be reasonable by such 

member in making recommendations to 

the customer.

The Notes will be subject to Nasdaq’s 

continued listing criterion for other 

securities pursuant to Rule 4450(c). 

Under this criterion, the aggregate 

market value or principal amount of 

publicly held units must be at least $1 

million. The Notes also must have at 

least two registered and active market 

makers, which is a continued listing 

requirement under Rule 4310(c)(1). The 

Notes will be subject to the NASD’s 

existing trading halt rules. Nasdaq 

represents that it will consider 

prohibiting the continued listing of the 

Notes if Morgan Stanley is not able to 

meet its obligations on the Notes. 

Description of the Notes 

The Notes are a series of mediumterm, senior non-convertible debt 

securities that will be issued by Morgan 

Stanley. The original public offering 

price of the Notes will be $10 per PLUS. 

The Notes will not pay interest and are 

not subject to redemption by Morgan 

Stanley or at the option of any beneficial 

owner before maturity (approximately 

1.25 years from the pricing date).

At maturity, if the value of the Index 

has increased, a beneficial owner will be 

entitled to receive a payment on the 

Notes based on 300% the amount of that 

percentage increase, subject to a 

maximum total payment at maturity that 

is expected to be between $11.35 and 

$11.65 per Note (the ‘‘Maximum 

Payment at Maturity’’).11 Thus, the 

Notes provide investors the opportunity 

to obtain leveraged returns based on the 

Index subject to a cap that is expected 

to represent an appreciation of 11.5% to 

16.5% over the original issue price of 

the Notes. However, the Notes are not 

leveraged on the downside; rather, the 

value of the Notes declines on a one-toone basis with the Index. Unlike 

ordinary debt securities, the Notes do 

not guarantee any return of principal at 

maturity. Therefore, if the value of the 

Index has declined from the time of 

pricing to the time of maturity, a 

beneficial owner will receive less, and 

possibly significantly less, than the 

original issue price of $10 per PLUS.

The payment that a beneficial owner 

will be entitled to receive at maturity 

depends entirely on the relation of the 

value of the Index generally on the 

second trading day prior to the date 

when the Notes are due (the ‘‘Final 

Index Value’’) and the value of the 

Index on the day they are priced for 

initial sale to the public (the ‘‘Initial 

Index Value’’). If the Final Index Value 

is greater than the Initial Index Value, 

the payment at maturity per PLUS will 

equal the lesser of (a) $10 plus the 

Leveraged Upside Payment 12 and (b) 

the Maximum Payment at Maturity. If 

the Final Index Value is less than or 

equal to the Initial Index Value, the 

payment at maturity per PLUS will 

equal $10 times the Index Performance 

Factor.13

The Notes are cash-settled in U.S. 

dollars and do not give the holder any 

right to receive a portfolio security, 

dividend payments or any other 

ownership right or interest in the 

portfolio or index of securities 

comprising the Index. The Commission 

has previously approved the listing of 

options on, and other securities the 

performance of which have been linked 

to or based on, the Index and to other 

Russell indexes.14

Since the Notes will be deemed equity 

securities for the purpose of Rule 

4420(f), the NASD and Nasdaq’s existing 

equity trading rules will apply to the 

Notes. First, pursuant to Rule 2310 and 

IM–2310–2, members must have 

reasonable grounds for believing that a 

recommendation to a customer 

regarding the purchase, sale or exchange 

of any security is suitable for such 

customer upon the basis of the facts, if 

any, disclosed by such customer as to 

his other security holdings and as to his 

financial situation and needs.15 In 

69438 Federal Register / Vol. 69, No. 228 / Monday, November 29, 2004 / Notices 

2310(b) requires members to make reasonable 

efforts to obtain information concerning a 

customer’s financial status, a customer’s tax status, 

the customer’s investment objectives, and such 

other information used or considered to be 

reasonable by such member or registered 

representative in making recommendations to the 

customer.

16 15 U.S.C. 78o–3.

17 15 U.S.c. 78o3(b)(6).

18 15 U.S.C. 78o–3(b)(6). 19 In approving the proposed rule, the 

Commission has considered the proposed rule’s 

impact on efficiency, competition, and capital 

formation. 15 U.S.C. 78c(f).

addition, as previously described, 

Nasdaq will distribute a circular to 

members providing guidance regarding 

compliance responsibilities and 

requirements, including suitability 

recommendations, and highlighting the 

special risks and characteristics of the 

Notes. Furthermore, the Notes will be 

subject to the equity margin rules. 

Lastly, the regular equity trading hours 

of 9:30 a.m. to 4 p.m. will apply to 

transactions in the Notes.

Nasdaq represents that NASD 

Regulation’s surveillance procedures are 

adequate to properly monitor the 

trading of the Notes. Specifically, NASD 

Regulation will rely on its current 

surveillance procedures governing 

equity securities and will include 

additional monitoring on key pricing 

dates. 

Pursuant to Securities Exchange Act 

Rule 10A–3, 17 CFR 240.10A–3 and 

Section 3 of the Sarbanes-Oxley Act of 

2002, Pub. L. No. 107–204, 116 Stat. 745 

(2002), Nasdaq will prohibit the initial 

or continued listing of any security of an 

issuer that is not in compliance with the 

requirements set forth therein. 

Morgan Stanley will deliver a 

prospectus in connection with the 

initial purchase of the Notes. The 

procedure for the delivery of a 

prospectus will be the same as Morgan 

Stanley’s current procedure involving 

primary offerings. 

2. Statutory Basis 

Nasdaq believes that the proposed 

rule change is consistent with the 

provisions of Section 15A of the Act,16

in general, and with Section 15A(b)(6) 17

of the Act, in particular, in that the 

proposal 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, in general, to protect investors and 

the public interest. Specifically, the 

proposed rule change will provide 

investors with another investment 

vehicle based on the Index.

B. Self-Regulatory Organization’s 

Statement on Burden on Competition 

Nasdaq does not believe that the 

proposed rule change will result in any 

burden on competition that is not 

necessary or appropriate in furtherance 

of the purposes of the Act, as amended. 

C. Self-Regulatory Organization ’s 

Statement on Comments on the 

Proposed Rule Change Received From 

Members, Participants, or Others 

Written comments were neither 

solicited nor received. 

III. 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. 

Comments may be submitted by any of 

the following methods: 

Electronic Comments 

• Use the Commission’s Internet 

comment form (http://www.sec.gov/

rules/sro.shtml); or 

• Send an e-mail to rulecomments@sec.gov. Please include File 

Number SR–NASD–2004–157 on the 

subject line. 

Paper Comments 

• Send paper comments in triplicate 

to Jonathan G. Katz, Secretary, 

Securities and Exchange Commission, 

450 Fifth Street, NW., Washington, DC 

20549–0609. 

All submissions should refer to File 

Number SR–NASD–2004–157. This file 

number should be included on the 

subject line if e-mail is used. To help the 

Commission process and review your 

comments more efficiently, please use 

only one method. The Commission will 

post all comments on the Commission’s 

Internet Web site (http://www.sec.gov/

rules/sro.shtml). 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 20549. Copies of such 

filing also will be available for 

inspection and copying at the principal 

office of the NASD. All comments 

received will be posted without change; 

the Commission does not edit personal 

identifying information from 

submissions. You should submit only 

information that you wish to make 

available publicly. 

All submissions should refer to File 

Number SR–NASD–2004–157 and 

should be submitted on or before 

December 20, 2004. 

IV. Commission’s Findings and Order 

Granting Accelerated Approval for 

Proposed Rule Change 

Nasdaq has asked the Commission to 

approve the proposal on an accelerated 

basis to accommodate the timetable for 

listing the Notes. After careful 

consideration, 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 association, and, in particular, 

with the requirements of Section 

15A(b)(6) of the Act,18 which requires in 

part that the rules be designed to 

promote just and equitable principles of 

trade, to remove impediments to and 

perfect the mechanism of a free and 

open market, and in general, to protect 

investors and the public interest.19

The Notes are medium-term, senior 

non-convertible debt securities the 

return on which is based on the Index. 

The Notes, however, will not pay 

interest and are not subject to 

redemption by Morgan Stanley or at the 

option of any beneficial owner before 

maturity (approximately 1.25 years from 

the pricing date). Unlike ordinary debt 

securities, the Notes do not guarantee 

any return of principal at maturity. 

Therefore, if the value of the Index has 

declined from the time of pricing to the 

time of maturity, a beneficial owner will 

receive less, and possibly significantly 

less, than the original issue price of $10 

per PLUS. The Commission believes 

that the Notes provide investors with 

the opportunity to obtain upside 

leveraged returns based on the Index 

subject to a cap that is expected to 

represent an appreciation of 13.5% to 

16.5% over the original issue price of 

the Notes. The Commission notes that 

the return of the Notes, if the Index 

declines, is not leveraged. 

The Commission notes that issues are 

raised by the fact that the Notes are debt 

securities that do not guarantee a return 

of principal, that return on the Notes is 

limited by the Maximum Payment at 

maturity, and that the Final Index Value 

is derivatively priced and based on the 

performance value of an index of 

securities. As set forth below, the 

Commission believes that these 

concerns are adequately addressed by 

Nasdaq’s proposals. 

Federal Register / Vol. 69, No. 228 / Monday, November 29, 2004 / Notices 69439

20Nasdaq will advise members recommending a 

transaction in the Notes to: (1) Determine that the 

transaction is suitable for a customer; and (2) have 

a reasonable basis for believing that the customer 

can evaluate the special characteristics of, and is 

able to bear the financial risks involved in the 

transaction.

21See Securities and Exchange Act Release Nos. 

44913 (October 9, 2001), 66 FR 52469 (October 15, 

2001) (order approving File No. SR–NASD–2001–

73) (approving the listing and trading of notes 

issued by Morgan Stanley Dean Witter & Co. whose 

return is based on the performance of the Index); 

44483 (June 27, 2001), 66 FR 35677 (July 6, 2001) 

(order approving File No. SR–Amex–2001–40) 

(approving the listing and trading of notes issued 

by Merrill Lynch whose return is based on a 

portfolio of 20 securities selected by the Amex 

Institutional Index); and 37744 (September 27, 

1996) (order approving File No. SR–Amex–96–27) 

(approving the listing and trading of notes issued 

by Merrill Lynch the return of which is based on 

a weighted portfolio of healthcare/biotechnology 

industry securities).

22See Securities Exchange Act Release No. 31382 

(October 30, 1992), 57 FR 52802 (November 5, 1992) 

(SR–CBOE–92–02) (approving the listing and 

trading of options on the Index); Securities 

Exchange Act Release No. 49388 (March 10, 2004), 

69 FR 12720 (March 17, 2004) (SR–CBOE–2003–51) 

(approving the listing and trading of options on 3 

Russell indexes; order contains the list of 12 

additional Russell indexes that were approved by 

the Commission at various times in the past for 

option listing and trading).

23See Securities Exchange Act Release No. 50501 

(October 7, 2004), 69 FR 61533 (October 19, 2004) 

(SR–NASD–2004–138) (approving the listing and 

trading of PLUS based on the value of the Dow 

Jones Euro Stoxx 50 Index); Securities Exchange 

Act Release No. 48065 (June 19, 2003), 68 FR 38414 

(June 27, 2003) (SR–NASD–2003–100) (approving 

the listing and trading of PLUS based on the value 

of the Nasdaq–100).

24 15 U.S.C. 78s(b)(2).

First, the Commission notes that 

NASD Rule 4420(f) addresses the 

concerns stemming from the trading of 

hybrid securities such as the Notes. The 

Commission believes that the hybrid 

listing standards, suitability for 

recommendations standards 20 and 

compliance requirements will enable 

Nasdaq to address the potential 

problems that could arise from the 

hybrid nature of the Notes. The 

Commission notes that pursuant to Rule 

4420(f)(3), prior to the commencement 

of trading on the Notes, Nasdaq will 

distribute a circular to members 

providing guidance regarding 

compliance responsibilities and 

requirements, including suitability 

recommendations, and highlighting the 

special risks and characteristics of the 

Notes. Specifically, among other things, 

the circular will note that the Notes do 

not guarantee a total return of principal 

at maturity, that they are subject to 

maximum total payment at maturity that 

is expected to be between $11.35 and 

$11.65 per Note (the ‘‘Maximum 

Payment at Maturity’’), that the Notes 

will not pay interest, and that the Notes 

will provide exposure to the Index. 

Distribution of the circular should help 

to ensure that only customers with an 

understanding of the risks attendant to 

the trading of the Notes and who are 

able to bear the financial risks 

associated with the transactions in the 

Notes will trade the Notes. Nasdaq also 

represents that Morgan Stanley will 

deliver a prospectus in connection with 

the initial purchase of the Notes.

Second, the Commission notes that 

the final rate of return on the Notes 

depends in part upon the individual 

credit of the issuer, Morgan Stanley. To 

come extent this credit risk is 

minimized by NASD’s listing standards 

in NASK Rule 4420(f), which provide 

that only issuers satisfying substantial 

asset and equity requirements may issue 

these types of hybrid securities. NASD’s 

hybrid listing standards further require 

that the Notes have at least $4 million 

in market value. In addition, financial 

information regarding Morgan Stanley 

will be publicly available. 

Third, the Notes will be registered 

under Section 12 of the Act. NASD and 

Nasdaq’s existing equity trading rules 

will apply to the Notes which will be 

subject to equity margin rules and will 

trade during the regular equity trading 

hours of 9:30 a.m. and 4 p.m. NASD 

Regulation’s surveillance procedures for 

the Notes will be the same as its current 

surveillance procedures for equity 

securities and will include additional 

monitoring on key pricing dates. The 

Commission believes that these rules 

and procedures will deter potential 

manipulation of the Notes. 

Fourth, the Commission has a 

systematic concern that a broker-dealer, 

such as Morgan Stanley, or a subsidiary 

providing a hedge for the issuer will 

incur position exposure. As discussed 

in prior approval orders for other hybrid 

instruments issued by broker dealers,21

the Commission believes that this 

concern is minimal, given the size of the 

Notes issuance in relation to the net 

worth of Morgan Stanley.

Fifth, the Commission believes the 

general broad diversification, level of 

capitalization, and trading activity in 

the markets for the Index’s component 

stocks minimize the potential for 

manipulation of the Index. The Index is 

a capitalization-weighted index 

maintained by FRC. It is designed to 

track the performance of 2,000 common 

stocks of corporations with small market 

capitalizations relative to other stocks in 

the U.S. equity market. The companies 

represented in the Index are domiciled 

in the U.S. and its territories and 

represent a wide range of industry 

groups. All 2,000 stocks are traded on 

the New York Stock Exchange, the 

American Stock Exchange, or Nasdaq 

and form a part of the Russell 3000 

Index. As of August 31, 2004, the total 

market capitalization of the Index was 

$953.34 billion and as of September 31, 

2004, the market capitalization of the 

Index components ranged from 

approximately $68 million to 

approximately $2.353 billion. As of the 

same date, the Index’s highest weighted 

component stock constituted 

approximately 0.213% of the Index’s 

market capitalization and the top five 

component stocks constituted 

approximately 0.9968% of the Index’s 

market capitalization. For a 30-day 

period prior to August 19, 2004, the 

average daily trading volume of the 

average of all of the Index’s components 

was approximately 195,000 shares. The 

Commission notes that the 

overwhelming majority of the stocks 

that comprise the Index are not 

inactively traded. The Commission also 

believes that the listing and trading of 

the Notes should not unduly impact the 

market for underlying securities 

comprising the Index. Finally, the 

Commission notes that the value of the 

Russell 2000 Index will be widely 

disseminated on a real-time basis (at 

least every 15 seconds) throughout the 

trading day. In the event that the 

calculation and dissemination of the 

index from an independent third-party 

source is discontinued, Nasdaq states 

that it will delist the Notes. 

The Commission finds good cause for 

approving the proposed rule change 

prior to the thirtieth day after the date 

of publication of notice thereof in the 

Federal Register. In determining to 

grant the accelerated approval for good 

cause, the Commission notes that it has 

previously approved the listing of 

options on/ and or securities, the 

performance of which has been based 

on the Index.22 In addition, the 

Commission has previously approved 

the listing of securities with a structure 

that is the same or substantially the 

same as the Notes.23 The Commission 

believes the Notes will provide 

investors with an additional investment 

choice and that the accelerated approval 

of the proposal will allow investors to 

begin trading the Notes promptly. 

Accordingly, the Commission finds 

good cause, pursuant to Section 19(b)(2) 

of the Act for approving the proposed 

rule change prior to the thirtieth day 

after the date of publication in the 

Federal Register.

V. Conclusion 

It is therefore ordered, pursuant to 

Section 19(b)(2) of the Act 24 that the 

proposed rule change (SR–NASD–2004–

69440 Federal Register / Vol. 69, No. 228 / Monday, November 29, 2004 / Notices 

25 17 CFR 200.30–3(a)(12).

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

2 17 CFR 240.19b–4.

3 15 U.S.C. 78s(b)(3)(A)(iii).

4 17 CFR 240.19b–4(f)(3). 5 15 U.S.C. 78f(b)(1).

6See telephone conversation between Jennifer M. 

Lamie, Assistant General Counsel and Secretary, the 

Exchange, and Steve L. Kuan, Attorney, Division of 

Market Regulation, Commission, on October 27, 

2004.

7 15 U.S.C. 78s(b)(3)(A)(iii).

8 17 CFR 240.19b–4(f)(3).

9 15 U.S.C. 78s(b)(3)(C).

157) is hereby approved on an 

accelerated basis.

For the Commission, by the Division of 

Market Regulation, pursuant to delegated 

authority.25

Margaret H. McFarland, 

Deputy Secretary.

[FR Doc. 04–26304 Filed 11–26–04; 8:45 am] 

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–50708; File No. SR–NSX–

2004–06] 

Self-Regulatory Organizations; Notice 

of Filing and Immediate Effectiveness 

of Proposed Rule Change by National 

Stock Exchange To Amend Its ByLaws and Rules To Change the 

Designation of Its Board 

November 19, 2004. 

Pursuant to Section 19(b)(1) of the 

Securities Exchange Act of 1934 (the 

‘‘Act’’) 1 and Rule 19b–4 thereunder,2

notice is hereby given that on October 

19, 2004, the National Stock 

Exchange SM (‘‘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 Exchange. The 

Exchange filed the proposal pursuant to 

Section 19(b)(3)(A)(iii) of the Act 3 and 

Rule 19b–4(f)(3) thereunder 4 as being 

concerned solely with the 

administration of the Exchange, which 

renders the proposal effective upon 

filing with the Commission. The 

Commission is publishing this notice to 

solicit comments on the proposed rule 

change from interested persons.

I. Self-Regulatory Organization’s 

Statement of the Terms of Substance of 

the Proposed Rule Change 

The Exchange proposes to amend its 

By-Laws and Rules to change all 

references to its governing board from 

the ‘‘Board of Trustees’’ to the ‘‘Board of 

Directors,’’ and to change all references 

to each member of the governing board 

from ‘‘Trustee’’ to ‘‘Director.’’ The text 

of the proposed rule change is available 

at the Office of the Secretary of the 

Exchange 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 

Exchange has prepared summaries, set 

forth in Sections A, B, and C below, of 

the most significant parts of such 

statements. 

A. Self-Regulatory Organization’s 

Statement of the Purpose of, and 

Statutory Basis for, the Proposed Rule 

Change 

1. Purpose 

The Exchange’s By-Laws and Rules 

currently refer to the Exchange’s 

governing board as the ‘‘Board of 

Trustees’’ and to each member of the 

governing board as a ‘‘Trustee.’’ The 

Exchange proposes to change the name 

of its governing board to the ‘‘Board of 

Directors’’ and to change all references 

to each member of the governing board 

to ‘‘Director.’’ Accordingly, the 

Exchange proposes to amend its ByLaws and Rules to reflect the change in 

nomenclature. The Exchange represents 

that this filing has no effect on the 

Exchange’s governance structure and 

would not affect any of the operations 

of the Exchange. 

2. Statutory Basis 

The Exchange believes that the 

proposed rule change is consistent with 

Section 6(b)(1) of the Act 5 in that it 

helps to assure that the Exchange is so 

organized and has the capacity to be 

able to carry out the purposes of the Act 

and to comply, and to enforce 

compliance by its members and persons 

associated with its members, with the 

provisions of the Act, the rules and 

regulations thereunder, and the rules of 

the Exchange.

B. Self-Regulatory Organization’s 

Statement of 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 of Comments on the 

Proposed Rule Change Received From 

Members, Participants, or Others 

The Exchange represents that written 

comments were neither solicited nor 

received with respect to the proposed 

rule change.6

III. Date of Effectiveness of the 

Proposed Rule Change and Timing for 

Commission Action 

The proposed rule change has become 

effective pursuant to Section 

19(b)(3)(A)(iii) of the Act 7 and Rule 

19b–4(f)(3) thereunder 8 because the 

proposed rule change is concerned 

solely with the administration of the 

Exchange. At any time within sixty (60) 

days of the filing of such proposed rule 

change, the Commission may summarily 

abrogate such rule change if it appears 

to the Commission that such action is 

necessary or appropriate in the public 

interest, for the protection of investors, 

or otherwise in furtherance of the 

purposes of the Act.9

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. 

Comments may be submitted by any of 

the following methods: 

Electronic Comments 

• Use the Commission’s Internet 

comment form (http://www.sec.gov/

rules/sro.shtml); or 

• Send an e-mail to

rule-comments@sec.gov. Please include 

File Number SR–NSX–2004–06 on the 

subject line. 

Paper Comments 

• Send paper comments in triplicate 

to Jonathan G. Katz, Secretary, 

Securities and Exchange Commission, 

450 Fifth Street, NW., Washington, DC 

20549–0609. 

All submissions should refer to File 

Number SR–NSX–2004–06. This file 

number should be included on the 

subject line if e-mail is used. To help the 

Commission process and review your 

comments more efficiently, please use 

only one method. The Commission will 

post all comments on the Commission’s 

Internet Web site (http://www.sec.gov/