Federal Register / Vol. 66, No. 247 / Wednesday, December 26, 2001 / Notices 66485

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

2 17 CFR 240. 19b–4.

3See letter from Jeffrey P. Burns, Assistant

General Counsel, Amex, to Yvonne Fraticelli,

Special Counsel, Division of Market Regulation

(‘‘Division’’), Commission, dated November 20,

2001 (‘‘Amendment No. 1’’). In Amendment No. 1,

the Amex enclosed a draft circular that the Amex

will distribute to members. Among other things, the

circular described the Balanced Strategy Notes and

the suitability requirements applicable to the

Balanced Strategy Notes. In addition, the Amex

made the following clarifications: (1) with respect

to suitability recommendations and risks, the

Exchange will require members, member

organizations and employees thereof recommending

a transaction in the Balanced Strategy Notes to

determine that such transaction is suitable for the

customer, and to 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 transactions; (2) Merrill Lynch & Co.,

Inc. has designed the Balanced Strategy Notes for

investors who want to participate in the changes in

U.S. domestic equity and bond markets and who are

willing to forego market interest payments on the

Balanced Strategy Notes; (3) the Amex represents

that its surveillance procedures are adequate to

properly monitor the trading of the Balanced

Strategy Notes; and (4) the index divisor referenced

in connection with the Standard and Poor’s 500

Total Return Index keeps the index comparable

over time to its base period (1941–1943) and is the

reference point for all maintenance adjustments.

4The Amex clarified the definition of the U.S.

Bond Index by indicating that it intends to refer to

the U.S. Domestic Master Index as the U.S. Bond

Index. Telephone conversation between Jeffrey P.

Burns, Assistant General Counsel, Amex, and

Yvonne Fraticelli, Special Counsel, Division,

Commission, on December 7, 2001 )‘‘December 7

Conversation’’). As discussed more fully below, the

U.S. Bond Index, which is comprised of over 4,000

issues, is an indicator of the performance of the

investment grade U.S. domestic bond market.

5See Securities Exchange Act Release No. 27753

(March 1, 1990), 55 FR 8626 (March 8, 1990) (order

approving File No. SR–Amex–89–29) (‘‘Hybrid

Approval Order’’).

ATTACHMENT 1.—FY02 ADJUSTED STANDARDIZED AMOUNTS (ASA) BY MILITARY TREATMENT FACILITY—Continued

DMISID MTF name Serv Full cost rate Interagency

rate IMET rate TPC rate

0633 .......... 48th Med Grp—RAF Lakenheath ...................... F 9,742 9,293 3,958 9,742

0635 .......... 39th Med Grp—Incirlik AB ................................. F 9,742 9,293 3,958 9,742

0638 .......... 51st Med Grp—Osan AB ................................... F 9,742 9,293 3,958 9,742

0639 .......... 35th Med Grp—Misawa ..................................... F 9,742 9,293 3,958 9,742

0640 .......... 374th Med Grp—Yokota AB .............................. F 9,742 9,293 3,958 9,742

0805 .......... 52nd Med Grp—Spangdahlem .......................... F 9,742 9,293 3,958 9,742

0808 .......... 31st Med Grp—Aviano ...................................... F 9,742 9,293 3,958 9,742

2. Department of Health and Human

Services

For the Department of Health and

Human Services, Indian Health Service,

effective October 1, 2001 and thereafter:

Hospital Care Inpatient Day

General Medical Care.

Alaska ............................ $2,025

Rest of the United

States ......................... 1,571

Outpatient Medical

Treatment

Outpatient Visit.

Alaska ............................ 363

Rest of the United

States ......................... 196

Beginning October 1, 2001, the rates

prescribed herein superceded those

established by the Director of the Office

of Management and Budget October 31,

2000 (FR Doc. 00–27726).

Mitchell Daniels, Jr.,

Director, Office of Management and Budget.

[FR Doc. 01–31663 Filed 12–21–01; 8:45 am]

BILLING CODE 3110–01–P

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–45160; File No. SR–Amex–

2001–91]

Self-Regulatory Organizations; Notice

of Filing and Order Granting

Accelerated Approval to a Proposed

Rule Change and Amendment No. 1 by

the American Stock Exchange LLC

Relating to the Listing and Trading of

Balanced Strategy Notes

December 17, 2001.

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

29, 2001, the American Stock Exchange

LLC (‘‘Amex’’ or ‘‘Exchange’’) filed with

the Securities and Exchange

Commission (‘‘Commission’’ or (‘‘Sec’’)

a proposed rule change, as described in

Items I and II below, which Items have

been prepared by the Exchange. The

Amex amended its proposal on

November 21, 2001.3 The Commission

is publishing this notice to solicit

comments on the proposed rule change

and Amendment No. 1 from interested

persons and to approve the proposal, as

amended, on an accelerated basis.

I. Self-Regulatory Organization’s

Statement of the Terms of Substance of

the Proposed Rule Change

The Amex proposes to list and trade

Balanced Strategy Notes (‘‘Balanced

Strategy Notes’’ or ‘‘Notes’’), the return

on which is based on the Balanced

Strategy Index (‘‘Balanced Strategy

Index’’). The Balanced Strategy Index is

based upon the performance of the

Standard & Poor’s (‘‘S&P’’) 500 Total

Return Index (‘‘S&P 500 Total Return

Index’’) and the U.S. Domestic Master

Index (‘‘U.S. Bond Index’’ 4 (each, an

‘‘Underlying Index,’’ and together, the

‘‘Underlying Indexes’’) pursuant to the

methodology set forth below. Initially,

the Underlying Indexes will each have

a weighting of 50% of the Balanced

Strategy Index. The Amex will

rebalance the Balanced Strategy Index

annually to reset the weighting of the

Underlying Indexes to 50% each of the

weight of the Balanced Strategy Index.

II. Self-Regulatory Organization’s

Statement of the Purpose of, and

Statutory Basis for, the Proposed Rule

Change

In its filing with the Commission, the

Amex included statements concerning

the purpose of, and basis for, the

proposed rule change, as amended, and

discussed any comments it received on

the proposed rule change, as amended.

The text of these statements may be

examined at the places specified in Item

III 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

Statutory Basis for, the Proposed Rule

Change

(1) Purpose

Under Section 107A of the Amex

Company Guide (‘‘Company Guide’’),

the Exchange may approve for listing

and trading securities which cannot be

readily categorized under the listing

criteria for common and preferred

stocks, bonds, debentures, or warrants.5

The Amex proposes to list for trading

under Section 107A of the Company

Guide notes based on the Balanced

Strategy Index (‘‘Balance Strategy

Notes’’ or ‘‘Notes’’), as described below.

The Balanced Strategy Index will be

66486 Federal Register / Vol. 66, No. 247 / Wednesday, December 26, 2001 / Notices

6Subject to the criteria in the prospectus

supplement of the Notes regarding the construction

of the Balanced Strategy Index, the Exchange has

sole discretion regarding changes to the Balanced

Strategy Index.

7See Amendment No. 1, supra note 3.

8At the end of each day, the Balanced Strategy

Index will be reduced by a pro rata portion of the

annual index adjustment factor, expected to be

1.0% (i.e., 1.0% 365 days = 0.0027% daily). This

reduction of the value of the Balanced Strategy

Index will reduce the total return to investors upon

exchange or maturity. The Amex represents that an

explanation of this deduction will be included in

any marketing materials, fact sheets, or any other

material circulated to investors regarding the

trading of this product. 9The S&P 500 Total Return Index assumes the

reinvestment of dividends on a daily basis.

Monthly, quarterly, and annual total return

numbers are calculated by daily compounding of

reinvested dividends. 10The index divisor keeps the S&P 500 Total

Return Index comparable over time to its base

period (1941–1943) and is the reference point for

all maintenance adjustments. See Amendment No.

1, supra note 3.

11See Securities Exchange Act Release Nos.

19907 (June 24, 1983), 48 FR 30814 (July 5, 1983)

(File No. SR–CBOE–83–08) (approving the listing

and trading of options on the S&P 500 Index); 31591

(December 11, 1992), 57 FR 60253 (December 18,

1992) (File No. SR–Amex–92–18) (approving the

listing and trading of Portfolio Depositary Receipts

based on the S&P 500 Index); No. 27382 (October

26, 1989), 54 FR 45834 (October 31, 1989) (File No.

SR–NYSE–89–05) (approving the listing and trading

of Exchange Stock Portfolios based on the value of

the S&P 500 Index); and 30394 (February 21, 1992),

57 FR 7409 (March 2, 1992) (File No. SR–AMEX–

90–06) (approving the listing and trading of a

unitinvestment trust linked to the S&P 500 Index).

12See Securities Exchange Act Release No. 41334

(April 27, 1999), 64 FR 23883 (May 4, 1999) (order

approving File No. SR–Amex–99–03) (‘‘1999

Order’’).

13 Information as to how the U.S. Bond Index is

calculated, including the inclusion rules, is

published on Bloomberg and the Merrill Lynch

public web site. Changes in any rules are generally

published approximately 30 days in advance of the

change.

14The Exchange’s Bond and Debenture Listing

Standards provide for the listing of individual bond

or debenture issuance provided the issue has an

aggregate market value or principal amount of at

least $5 million and either: The issuer of the debt

security has equity securities listed on the Exchange

(or on the NYSE); an issuer of equity securities

listed on Exchange (or on the NYSE) directly or

indirectly owns a majority interest in, or is under

common control with, the issuer of the debt

security; an issuer of equity securities listed on the

Exchange (or on the NYSE) has guaranteed the debt

security; a nationally recognized statistical rating

organization (an ‘‘NRSRO’’) has assigned a current

rating to the debt security that is no lower than an

S&P Corporation ‘‘B’’ rating or equivalent rating by

another NRSRO; or if no NRSRO has assigned a

rating to the issue, an NRSRO has currently

assigned: (i) An investment grade rating to an

determined, calculated and maintained

solely by the Amex.6

Description of the Notes

The Balanced Strategy Notes are

senior non-convertible debt securities of

Merrill Lynch & Co., Inc (‘‘Merrill

Lynch’’). Merrill Lynch has designed the

Balanced Strategy Notes for investors

who want to participate in changes in

U.S. domestic equity and bond markets

and who are willing to forego market

interest payments on the Notes, such as

floating interest rates paid on standard

senior non-callable debt securities.7 The

Notes will have a term of not less than

one, nor more than ten years. The Notes

will entitle the owner at maturity to

receive an amount based upon the

percentage change between the

‘‘Starting Index Value’’ and the ‘‘Ending

Index Value’’ (the ‘‘Redemption

Amount’’) less an index adjustment

factor, as described more fully below.

The ‘‘Starting Index Value’’ is the value

of the Balanced Strategy Index on the

date the issuer prices the Notes for

initial sale to the public. The ‘‘Ending

Index Value’’ is the value of the

Balanced Strategy Index over a period

shortly prior to the expiration of the

Notes. The Ending Index Value will be

used in calculating the amount owners

will receive upon maturity. The Notes

will not have a minimum principal

amount that will be repaid, and,

accordingly, payments on the Notes

prior to or at maturity may be less than

the original issue price of the Notes.

During a two-week period in the

designated month each year, investors

will have the right to require the issues

to repurchase the Balanced Strategy

Notes at a redemption amount based on

the value of the Balanced Strategy Index

at such repurchase date. The Balanced

Strategy Notes are not callable by the

issuer.

The Balanced Strategy Notes are cashsettled in U.S. dollars. The holder of a

Note does not have any right to receive

any of the securities comprising the

Underlying Indexes or any other

ownership right or interest in the

component securities of the Underlying

Indexes.

At the outset, the Underlying Indexes

will each approximate 50% of the

Starting Index Value. Specifically, both

the S&P 500 Total Return Index and the

U.S. Bond Index will be assigned a

multiplier on the date of issuance so

that each Underlying Index represents

approximately an equal percentage of

the value of the Balanced Strategy Index

on the date the Notes are priced for

initial sale to the public. The multiplier

indicates the percentage of the

Underlying Index, given its current

value, to be included in the calculation

of the Balanced Strategy Index. The

Balanced Strategy Index will initially be

set to provide a benchmark value of

100.00 at the close of trading on the date

the Notes are priced for initial sale to

the public. The value of the Balanced

Strategy Index at any time will equal the

sum of values of each Underlying Index

multiplied by their respective multiplier

less a pro rata portion of the annual

index adjustment factor.8

The S&P 500 Total Return Index is a

broad-based stock index that provides

an indication of the performance of the

U.S. equity market. The S&P 500 Total

Return Index is a capitalizationweighted index reflecting the total

market value, including the

reinvestment of dividends, of 500

widely-held component stocks relative

to a particular base period. The S&P 500

Total Return Index is computed by

dividing the total market value, plus

dividends reinvested,9 of the 500

companies in the S&P 500 Total Return

Index by an index divisor.10 The

securities included in the S&P 500 Total

Return Index are listed on the Amex or

the New York Stock Exchange, Inc.

(‘‘NYSE’’), or traded through the

facilities of the National Association of

Securities Dealers, Inc. Automated

Quotation (‘‘Nasdaq’’) System and listed

as Nasdaq National Market securities.

As of October 22, 2001, the market

capitalization of the securities included

in the S&P 500 Total Return ranged from

a high of $373,58 billion to a low

$329.04 million. The average daily

trading volume for these same securities

for the last six months, as of the same

date, ranged from a high of 22 million

shares to a low of 1.1 million shares.

The Amex and other options exchanges

previously have listed options and other

securities whose performance has been

linked to or based on the S&P 500

Composite Stock Price Index (‘‘S&P 500

Index’’),11 which is identical to the S&P

500 Total Return Index except that the

S&P 500 Total Return Index includes

dividends paid on the underlying

component stocks of the S&P 500 Index.

The Commission previously approved

an Amex proposal to list and trade

seven bond index-linked term notes

under Section 107A of the Company

Guide.12 One of the bond indexes

included in the 1999 Order was the U.S.

Bond Index. The U.S. Bond Index,

established in 1975 and sponsored and

calculated by the Merrill Lynch

Research Portfolio Strategy Group, is an

indicator of the performance of the

investment grade U.S. domestic bond

market. It is a broad-based index

consisting of over 4,000 bonds with a

market value of over $5 trillion. For a

bond to qualify for inclusion in the U.S.

Bond Index, the bond must meet a preestablished and defined list of objective

criteria.13 The bonds included in the

U.S. Bond Index also meet or exceed the

Exchange’s Bond and Debenture Listing

Standards set forth in Section 104 of the

Company Guide.14 The U.S. Bond Index

Federal Register / Vol. 66, No. 247 / Wednesday, December 26, 2001 / Notices 66487

immediately senior issue; or (ii) a rating that is no

lower than an S&P Corporation ‘‘B’’ rating, or an

equivalent rating by another NRSRO, to a pari passu

or junior issue.

15See December 7 Conversation, supra note 4.

16See note 5, supra.

17See Amendment No. 1, supra note 3.

18Amex Rule 411 requires that every member,

member firm or member corporation use due

diligence to learn the essential facts, relative to

every customer and to every order or account

accepted.

19See note 5, supra.

20See Amendment No. 1, supra note 3.

21 Id.

is rebalanced on the last calendar day of

the month. Bonds meeting the U.S.

Bond Index’s inclusion criteria on the

last calendar day of the month are

included in the U.S. Bond Index for the

following month. Issues that no longer

meet the criteria during the course of

the month remain in the U.S. Bond

Index until the next month-end

rebalancing, at which point they are

dropped from the U.S. Bond Index.

Bonds included in the U.S. Bond Index

are held constant throughout the month

until the following monthly rebalancing.

Bond weightings for the U.S. Bond

Index are based on a bond’s total

outstanding capitalization (sum of the

product of total face value currently

outstanding multiplied by the price and

accrued interest). Returns and weighted

average characteristics are published

daily.

As of the close of business on each

anniversary date (the anniversary of the

day the Balanced Strategy Index was

initially calculated and set to 100), the

Amex will rebalance the Balanced

Strategy Index so that each Underlying

Index will represent approximately 50%

of the value of the Balanced Strategy

Index. To effectuate this result, the

Amex will determine the multiplier for

each Underlying Index and will indicate

the percentage allocated to each

Underlying Index, given their respective

closing values on the anniversary date,

so that each Underlying Index

represents an equal percentage of the

Balanced Strategy Index value at the

close of business on an anniversary

date. For example, if the Balanced

Strategy Index value at the close of

business on an anniversary date was

200, then each of the Underlying

Indexes would be allocated a portion of

the value of the Index equal to 100, and

if the closing market price of one

Underlying Index on the anniversary

date was 160, the applicable share

multiplier would be reset to 0.625.

Conversely, if the Balanced Strategy

Index value was 80, then each of the

Underlying Indexes would be allocated

the value of the Balanced Strategy Index

equal to 40, and if the closing market

price of one Underlying Index on the

anniversary date was 20, the applicable

share multiplier would be reset to 2.

The Exchange will continuously

calculate the Balanced Strategy Index

and, similar to other stock index values

published by the Exchange, the value of

the Balanced Strategy Index will be

disseminated every 15 seconds over the

Consolidated Tape Association’s

Network B.

Criteria for Initial and Continued

Listing

The Balanced Strategy Notes will

conform to the initial listing guidelines

under Section 107A of the Company

Guide and continued listing guidelines

under Sections 1001–1003 of the

Company Guide. Specifically, under

Section 107A of the Company Guide,

the initial listing standards for the Notes

require: (1) A minimum public

distribution of one million units; (2) a

minimum of 400 shareholders; (3) a

market value of at least $4 million; and

(4) a term of at least one year. In

addition, the listing guidelines provide

that the issuer shall have assets in

excess of $100 million, stockholder’s

equity of at least $10 million, and pretax income of at least $750,000 in the

last fiscal year or in two of the three

prior fiscal years. In the case of an issuer

that is unable to satisfy the earning

criteria stated in Section 101 of the

Company Guide, Section 107A of the

Company Guide provides that the

Exchange will require the issuer to have

the following: (1) Assets in excess of

$200 million and stockholders’ equity of

at least $10 million; or (2) assets in

excess of $100 million and stockholders’

equity of at least $20 million.

The continued listing guidelines are

set forth under Sections 1001 through

1003 of Part 10 to the Company Guide.

Section 1002(b) of the Company Guide

states that the Exchange will consider

removing from listing any security

where, in the opinion of the Exchange,

it appears that the extent of public

distribution or aggregate market value

has become so reduced as to make

further dealings on the Exchange

inadvisable. With respect to the

continued listing guidelines for

distribution of the Notes, the Exchange

will rely, in part, on the guidelines for

bonds in Section 1003(b)(iv) of the

Company Guide. Section 1003(b)(iv)(A)

of the Company Guide provides that the

Exchange will normally consider

suspending dealings in, or removing

from the list, a security if the aggregate

market value or the principal amount of

bonds publicly held less than $400,000.

The Notes will be registered under

Section 12 of the Act.15

Lastly, in conjunction with the

Amex’s Hybrid Approval Order,16 the

Exchange will, prior to trading the

Notes, distribute a circular to the

membership providing guidance

regarding member firm compliance

responsibilities and requirements,

including suitability recommendations,

and highlighting the special risks and

characteristics of the Notes. In

particular, with respect to suitability

recommendations and risks, the

Exchange will require members,

member organizations and employees

thereof 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.17

Rules Applicable to the Trading of the

Notes

Because the Notes are linked, in part

to a portfolio consisting of equity

securities, the Amex’s existing equity

floor trading rules will apply to the

trading of the Notes. First, pursuant to

Amex Rule 411, ‘‘Duty to Know and

Approve Customers,’’ 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 the Notes.18 Second, the

Notes will be subject to the equity

margin rules of the Exchange. Third, as

discussed earlier, in conjunction with

the Amex’s Hybrid Approval Order,19

the Exchange will, prior to trading the

Notes, distribute a circular to the

membership providing guidance with

regard to member firm compliance

responsibilities (including suitability

recommendations) when handling

transactions in the Notes and

highlighting the special risks and

characteristics of the Notes.

Furthermore, the Amex represents

that its surveillance procedures are

adequate to properly monitor the

trading of Balanced Strategy Notes.

Specifically, the Amex will rely on its

existing surveillance procedures

governing equities to monitor trading in

the Notes.20 In addition, the Amex also

has a general policy that prohibits the

distribution of material, non-public

information by its employees.21

Disclosure and Dissemination of

Information

The Amex will issue a circular to the

membership providing guidance with

regard to member firm compliance

66488 Federal Register / Vol. 66, No. 247 / Wednesday, December 26, 2001 / Notices

22Telephone conversation between Jeffrey P.

Burns, Assistant General Counsel, Amex, and Cyndi

Nguyen, Attorney, Division, Commission, on

December 13, 2001 (‘‘December 13 Conversation’’).

23 15 U.S.C. 78f(b)

24 15 U.S.C. 78f(b)(5).

25See Securities Exchange Act Release Nos.

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

(File No. SR–Amex–2001–40) (approving the listing

and trading of non-principal protected

exchangeable notes linked to the Institutional

Holdings Index); 44437 (June 18, 2001), 66 FR

33585 (June 22, 2001) (File No. SR–Amex–2001–39)

(approving the listing and trading of non-principal

protected exchangeable notes linked to the

Industrial 15 Index); 44342 (May 23, 2001), 66 FR

29613 (May 31, 2001) (File No. SR–Amex–2001–28)

(approving the listing and trading of non-principal

protected exchangeable notes linked to the Select

Ten Index); and 42582 (March 27, 2000), 65 FR

17685 (April 4, 2000) (File No. SR–Amex–99–42)

(approving the listing and trading of notes linked

to a basket of no more than twenty equity

securities). See also 1999 Order, supra note 12.

26 15 U.S.C. 78f(b)(5).

27 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).

28See Amendment No. 1, supra note 3. Although

holders of the Notes will not receive interest

payments during the term of the Notes, holders of

the Notes will have the right, during a two-week

period in the designated month each year, to

require the issuer to repurchase the Notes at a

redemption amount based on the value of the

Balanced Strategy Index at the repurchase date.

29As discussed above, the Amex will require

members, member organizations, and employees

thereof recommending a transaction in the Notes to:

(1) determine that the 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, the transaction. See Amendment No. 1,

supra note 3.

responsibilities when handling

transactions in the Notes and explaining

the special characteristics and risks of

the Notes. Furthermore, Merrill Lynch

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 Merrill

Lynch’s current procedure involving

primary offerings.22

(2) Basis

The Exchange believes that the

proposed rule change is consistent with

Section 6 of the Act 23 in general, and

furthers the objectives of Section

6(b)(5) 24 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 and

perfect the mechanism of a free and

open market an a national market

system.

B. Self-Regulatory Organization’s

Statement on Burden on Competition

The Exchange does not believe that

the proposed rule change will impose

any burden on competition.

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.

III. Solicitation of Comments

Interested persons are invited to

submit written data, views, and

arguments concerning the foregoing,

including whether the proposed rule

change and Amendment No. 1 are

consistent with the Act. Persons making

written submissions should file six

copies thereof with the Secretary,

Securities and Exchange Commission,

450 Fifth Street, NW, Washington, DC

20549–0609. Copies of the submission,

all subsequent amendments, all written

statements with respect to the proposed

rule change that are filed with the

Commission, and all written

communications relating to the

proposed rule change between the

Commission and any person, other than

those that may be withheld from the

public in accordance with the

provisions of 5 U.S.C. 552, will be

available for inspection and copying in

the Commission’s Public Reference

Room. Copies of such filing will also be

available for inspection and copying at

the principal office of the Amex. All

submissions should refer to file number

SR–Amex–2001–91 and should be

submitted by January 16, 2002.

IV. Commissions Findings and Order

Granting Accelerated Approval of the

Proposed Rule Change

The Amex has asked the Commission

to approve the proposal and

Amendment No. 1 on an accelerated

basis because the Amex believes that the

Notes are similar to several instruments

listed and currently trading on the

Amex.25

The Commission finds that the

proposed rule change, as amended, is

consistent with the requirements of the

Act and the rules and regulations

thereunder applicable to a national

securities exchange and, in particular,

with the requirements of Section 6(b)(5)

of the Act,26 in that it is designed to

promote just and equitable principles of

trade, foster cooperation and

coordination with persons engaged in

facilitating transactions in securities,

and remove impediments to and perfect

the mechanism of a free and open

market and a national market system.27

The Commission believes that the Notes

will provide investors who are willing

to forego market interest payments

during the term of the Notes with a

means to participate in the U.S.

domestic equity and bond markets.28

Specifically, as described more fully

above, at maturity, or upon exchange,

the holder of a Note will receive an

amount based upon the percentage

change in the value of the Balanced

Strategy Index, less the index

adjustment factor.

The Notes are debt instruments whose

price will be derived from and based

upon the value of the Balanced Strategy

Index. In addition, as discussed more

fully above, the Notes do not guarantee

any return of principal at maturity.

Thus, if the Balanced Strategy Index has

declined at maturity, the holder of the

Note may receive significantly less than

the original public offering price of the

Note. Accordingly, the level of risk

involved in the purchase or sale of the

Notes is similar to the risk involved in

the purchase or sale of traditional

common stock. Because the final rate of

return on the Notes is derivatively

priced and based upon the performance

of an index of securities and because the

Notes are instruments that do not

guarantee a return of principal, there are

several issues regarding trading of this

type of product. For the reasons

discussed below, the Commission

believes that the Amex’s proposal, as

amended, adequately addresses the

concerns raised by this type of product.

First, the Commission notes that the

protections of Section 107A of the

Company Guide were designed to

address the special concerns attendant

to the trading of hybrid securities like

the Notes. In particular, by imposing the

hybrid listing standards, heighted

suitability for recommendations,29 and

compliance requirements, noted above,

the Commission believes that the

Exchange has adequately addressed the

potential problems that could arise from

the hybrid nature of the Notes. The

Commission notes that the Amex will

distribute a circular to its membership

that provides guidance regarding

member firm compliance

responsibilities and requirements,

including suitability recommendations,

and highlights the special risks and

characteristics associated with the

Notes. Specifically, among other things,

the circular notes that the issuer will

make no payments prior to maturity,

that the value of the Balanced Strategy

Index must increase for holders to

receive at least the original public

offering price of $10 per Note upon

exchange or at maturity, and that

holders will receive less, and possibly

Federal Register / Vol. 66, No. 247 / Wednesday, December 26, 2001 / Notices 66489

30See December 13 Conversation, supra note 22. 31See Amendment No. 1, supra note 3. 32See, e.g., Securities 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 Nasdaq100 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 from the Amex

Institutional Index); and 37744 (September 27,

1996), 61 FR 52480 (October 7, 1996) (order

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

the listing and trading of notes issued by Merrill

Lynch whose return is based on a weighted

portfolio of healthcare/biotechnology industry

securities).

33See Order, supra note 12 (concluding that the

U.S. Bond Index is well-established and broadbased); and Securities Exchange Act Release No.

19907 (June 24, 1983), 48 FR 30814 (July 5, 1983)

(order approving File No. SR–CBOE–83–8)(noting

that the S&P 500 Index is a broad-based index).

34See 1999 Order, supra note 12.

35See Securities Exchange Act Release No. 44994

(October 26, 2001), 66 FR 55722 (November 2, 2001)

(order approving File No. SR–CBOE–2001–22)

(‘‘2001 Order’’). In the 2001 Order, the Commission

also noted that, as of October 2001, the market

capitalization of the S&P 500 Index was $9.81

trillion.

36 15 U.S.C. 78f(b)(5) and 78s(b)(2).

37 15 U.S.C. 78s(b)(2).

38 17 CFR 200.30–3(a)(12).

significantly less than $10 per Note if

the Balanced Strategy Index declines.

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 transactions in the

Notes will trade the Notes. In addition,

the Commission notes that Merrill

Lynch will deliver a prospectus in

connection with the initial purchase of

the Notes.30

Second, the Commission notes that

the final rate of return on the Notes

depends, in part, upon the individual

credit of the issuer, Merrill Lynch. To

some extent this credit risk is

minimized by the Exchange’s listing

standards in Section 107A of the

Company Guide, which provide that

only issuers satisfying substantial asset

and equity requirements may issue

these types of hybrid securities. In

addition, the Exchange’s hybrid listing

standards further require that the Notes

have at least $4 million in market value.

Financial information regarding Merrill

Lynch will be publicly available.

Third, the Notes will be registered

under Section 12 of the Act. As noted

above, the Amex’s existing equity floor

trading rules will apply to the Notes,

which will be subject to the Amex’s

equity margin rules. The Amex will rely

on its existing surveillance procedures

for equities to monitor trading in the

Notes.31

Fourth, the Commission has systemic

concern that a broker-dealer, such as

Merrill Lynch, or a subsidiary providing

a hedge for the issuer will incur position

exposure. However, as the Commission

has concluded in previous approval

orders for other hybrid instruments

issued by broker-dealers,32 the

Commission believes that this concern

is minimal given the size of the Notes

issuance in relation to the net worth of

Merrill Lynch.

Fifth, the Commission believes that

the listing and trading of the Notes

should not unduly impact the market

for the securities underlying the

Balanced Strategy Index or raise

manipulative concerns. As discussed

more fully above, the Balanced Strategy

Index is based upon the return of the

Underlying Indexes. Each of the

Underlying Indexes will have a

weighting of 50% of the weight of the

Balanced Strategy Index, initially and

immediately following each annual

rebalancing of the Balanced Strategy

Index. Both of the Underlying Indexes

are well-established and broad-based,33

and the Commission has concluded

previously that the Underlying Indexes

are not readily susceptible to

manipulation. For example, in the 1999

Order, the Commission found that the

U.S. Bond Index, and the other bond

indexes reviewed in the 1999 Order,

were not readily susceptible to

manipulation based on the indexes’

issue size, market value, and the

representative nature of different sectors

of the fixed income securities market.34

Similarly, in approving a proposal to

eliminate position and exercise limits

for S&P 500 Index options, S&P 100

Index options, and Dow Jones Industrial

Index options, the Commission noted

that the enormous capitalization of and

deep, liquid markets for the underlying

securities contained in the indexes

significantly reduced concerns

regarding market manipulation or

disruption in the underlying market.35

In addition, the Amex’s surveillance

procedures should serve to deter as well

as detect any potential manipulation of

the Balanced Strategy Index.

Finally, the Commission notes that

the value of the Balanced Strategy Index

will be disseminated at least once every

fifteen seconds throughout the trading

day. The Commission believes that

disseminating the value of the Balanced

Strategy Index at least once every fifteen

seconds throughout the trading date is

useful and will benefit investors in the

Notes.

The Commission finds good cause for

approving the proposed rule change, as

amended, prior to the thirtieth day after

the day of publication of notice of filing

thereof in the Federal Register. The

Commission believes that the Notes will

provide investors with an additional

investment choice and that accelerated

approval of the proposal, as amended,

will allow investors to begin trading the

Notes promptly. Amendment No. 1

strengthens the Amex’s proposal by,

among other things, noting the

surveillance procedures that will apply

to trading in the Notes and requiring

members, member organizations, and

employees thereof recommending

transactions in the Notes to: (1)

Determine that the 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, the transaction.

Accordingly, the commission believes

that there is good cause, consistent with

Sections 6(b)(5) and 19(b)(2) of the

Act 36 to approve the proposal and

Amendment No. 1 on an accelerated

basis.

The Commission is approving the

Amex’s proposed listing standards for

the Notes. The commission specifically

notes that, notwithstanding approval of

the listing standards for the Notes, other

similarly structured products will

require review by the Commission prior

to being listed and traded on the Amex.

V. Conclusion

It is therefore ordered, pursuant to

Section 19(b)(2) of the Act37, that the

proposed rule change, as amended, (File

No. SR-Amex-2001-91) be, and it hereby

is, approved.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.38

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 01–31564 Filed 12–21–01; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–45162; File No. SR–NASD–

2001–89]

Self-Regulatory Organizations; Notice

of Filing and Order Granting

Accelerated Approval of a Proposed

Rule Change by the National

Association of Securities Dealers, Inc.

To Extend the Effectiveness of the

Pilot Injunctive Relief Rule

December 18, 2001.

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

Securities Exchange Act of 1934