Document ID: SEC-2007-0223-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: American Stock Exchange LLC
Posted Date: 2007-02-13T05:00Z

[Federal Register: February 13, 2007 (Volume 72, Number 29)]
[Notices]               
[Page 6795-6796]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr13fe07-77]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-55248; File No. SR-Amex-2006-90]

 
Self-Regulatory Organizations; American Stock Exchange LLC; Order 
Approving Proposed Rule Change, as Modified by Amendment Nos. 1 and 2 
Thereto, To List and Trade Notes Linked to the Performance of the Hang 
Seng China Enterprises Index

February 6, 2007.
    On September 22, 2006, the American Stock Exchange LLC (``Amex'' or 
``Exchange'') submitted to the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change to list and trade notes linked to the performance 
of the Hang Seng China Enterprises Index (``Index''). Amex amended the 
proposal on November 15, 2006 and subsequently on December 12, 2006.\3\ 
The proposed rule change, as amended, was published for comment in the 
Federal Register on December 26, 2006.\4\ No comments were received on 
the proposal. This order approves the proposed rule change, as amended.
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    \1\ 15 U.S.C. 78s(b)(l).
    \2\ 17 CFR 240. 19b-4.
    \3\ Amendment No. 2 replaced and superseded the original rule 
filing and Amendment No. 1 in their entirety.
    \4\ Securities Exchange Act Release No. 54943 (December 15, 
2006), 71 FR 77422 (``Notice'').
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    Under Section 107A of its Company Guide (``Company Guide''), Amex 
proposes to list notes issued by Citigroup Funding, Inc. (the 
``Issuer'') under the name ``Stock Market Upturn Notes'' that are based 
on the value of the Index (the ``Notes''). The Index is currently based 
on 37 common stocks that are listed and traded on the Stock Exchange of 
Hong Kong and are among the largest companies in the 200-stock Hang 
Seng Composite Index (``HSCI''). The Index is compiled by HSI Services 
Limited (the ``Index Calculator''), a wholly owned subsidiary of Hang 
Seng Bank. The Index is capitalization-weighted and revised twice each 
year to eliminate any components whose weight might exceed 15% of the 
Index.
    The Notes would offer investors exposure to certain stocks traded 
on the Stock Exchange of Hong Kong. The Notes would be cash-settled in 
U.S. dollars, must be held to maturity, and would pay out according to 
a formula set forth in the notice of Amex's proposal.\5\ Unlike 
traditional debt securities, the Notes would not have a minimum 
principal amount that would be repaid at maturity and thus the return 
could be less than the original issue price. The Notes would entitle 
the holder at maturity to receive an amount based on the percentage 
change of the Index, subject to a maximum payment determined at the 
time of issuance.
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    \5\ See Notice, supra note 4, 71 FR at 77423-24.
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    The Notes would be senior non-convertible debt securities of the 
Issuer. Like traditional debt securities, therefore, the Notes are 
dependent upon the creditworthiness of the Issuer. This credit risk is 
addressed by the listing standards in Amex Rule 107A, which provide 
that a security may not be listed on the Exchange unless its issuer 
satisfies certain financial requirements.
    Section 107A of the Company Guide also requires a market value of 
$4 million for initial listing. In addition, the Notes would have to 
comply with continued listing standards in Sections 1001-1003 of the 
Amex Company Guide. Under Section 1002(b) of the Company Guide, the 
Exchange would 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 to make 
further dealings on the Exchange inadvisable.\6\
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    \6\ In this case, the Exchange would look for guidance to 
Section 1003(b)(iv)(A) (relating to bonds) which states that the 
Exchange would normally consider suspending dealings in, or removing 
from the list, a security if the aggregate market value or the 
principal amount of the bonds publicly held is less than $400,000.
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    The Notes would trade as equity securities subject to Amex rules 
governing, among other things, priority, parity, and precedence of 
orders; specialist responsibilities; margin; and customer suitability 
requirements. In addition, the Exchange would halt trading in the Notes 
if the circuit breaker parameters of Exchange Rule 117 are reached. In 
exercising its discretion to halt or suspend trading in the Notes, the 
Exchange may consider the factors set forth in Exchange Rule 918C(b), 
and other factors that may be relevant. In particular, if the Index 
value is not being disseminated as required, the Exchange may halt 
trading during the day in which the interruption to the dissemination 
of the Index value occurs. If the interruption to the dissemination of 
the Index value persists past the trading day in which it occurred, the 
Exchange would halt trading no later than the beginning of the trading 
day following the interruption.
    Amex has represented that it would rely on its existing 
surveillance procedures governing index-linked securities, which Amex 
represents are adequate to properly monitor trading in the Notes. The 
Exchange has an information-sharing agreement with the Stock Exchange 
of Hong Kong for the purpose of providing information in connection 
with trading in or related to the components comprising the Index.
    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 
exchange.\7\ In particular the Commission finds that the proposed rule 
change is consistent with the requirements of section 6(b)(5) of the

[[Page 6796]]

Act,\8\ which requires among other things, that the Exchange's rules be 
designed to promote just and equitable principles of trade, to 
facilitate transactions in securities, to remove impediments to and 
perfect the mechanism of a free and open market and a national market 
system, and, in general, to protect investors and the public interest. 
The Commission notes that it has previously approved the listing and 
trading of other index-linked securities that have a structure similar 
to the Notes.\9\
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    \7\ In approving the rule, the Commission notes that it has 
considered the proposed rule's impact on efficiency, competition and 
capital formation. See 15 U.S.C. 78c(f).
    \8\ 15 U.S.C. 78f(b)(5).
    \9\ See Securities Exchange Act Release No. 51563 (April 15, 
2005), 70 FR 21257 (April 25, 2005) (SR-Amex-2005-01) (approving 
generic listing standards for index-linked securities); Securities 
Exchange Act Release No. 51227 (February 18, 2005), 70 FR 9395 
(February 25, 2005) (SR-Amex-2005-010) (approving the listing and 
trading of notes linked to the performance of the Nikkei 225 Index); 
and Securities Exchange Act Release No. 50016 (July 14, 2004), 69 FR 
43639 (July 21, 2004) (SR-Amex-2004-43) (approving the listing and 
trading of notes linked to the performance of the Nikkei 225 Index).
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    The Commission further believes that the proposal is consistent 
with section 11A(a)(1)(C)(iii) of the Exchange Act,\10\ which sets 
forth Congress' finding that it is in the public interest and 
appropriate for the protection of investors and the maintenance of fair 
and orderly markets to assure the availability to brokers, dealers, and 
investors of information with respect to quotations for and 
transactions in securities. Quotations for and last-sale information 
regarding the Notes will be disseminated through the Consolidated 
Quotation System. The index value is calculated and disseminated daily 
and may be verified by a number of independent sources.\11\ 
Furthermore, financial information regarding the Issuer would be 
publicly available, thus allowing investors to confirm the 
creditworthiness of the Issuer. The Commission believes that Amex's 
proposal is reasonably designed to promote transparency in the pricing 
of the Notes, and to prevent trading when a reasonable degree of 
transparency cannot be assured. The proposal also appears reasonably 
designed to prevent conveyance of inside information from the Index 
Calculator to market participants who may trade the Notes.
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    \10\ 15 U.S.C. 78k-1(a)(1)(C)(iii).
    \11\ See e-mail dated January 30, 2007 from Sudhir C. 
Bhattacharyya, Assistant General Counsel, Amex, to Mitra Mehr, 
Special Counsel, Division of Market Regulation, Commission.
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    In support of this proposal, the Exchange has made the following 
representations:
    (1) Amex has received a representation from HSCI Services Limited, 
the Index Calculator, that: (a) Appropriate firewalls exist to ensure 
independence of operations among different units within the Hang Seng 
Group; and (b) policies and procedures are in place containing, among 
other things, insider trading prohibitions, designed to prevent 
conflicts of interest.
    (2) Amex would distribute a circular to its 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. In addition, the Issuer would deliver a prospectus in connection 
with the initial sale of the Notes.
    (3) Amex would rely on its existing surveillance procedures 
governing index-linked securities, which are adequate to properly 
monitor trading in the Notes.
    (4) Amex prohibits the initial and/or continued listing of any 
security that is not in compliance with Rule 10A-3 under the Act.\12\
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    \12\ See 17 CFR 240.10A-3(c)(1).
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    This order is conditioned on Amex's adherence to these 
representations.
    In addition, Amex has represented that it would file a proposed 
rule change pursuant to Rule 19b-4 under the Act if: (1) HSCI 
substantially changes either the index component selection methodology 
or the weighting methodology; (2) a new component is added to the Index 
(or pricing information is used for a new or existing component) that 
constitutes more than 10% of the weight of the Index with whose 
principal trading market the Exchange does not have a comprehensive 
surveillance-sharing agreement; or (3) a successor or substitute index 
is used in connection with the Notes. The Commission believes that each 
of these circumstances represents material changes to the 
characteristics of the Index described herein and on which the 
Commission is basing its findings. Under these circumstances, the 
Exchange could not rely on this approval to list and trade the Notes.
    It is therefore ordered, pursuant to section 19(b)(2) of the Act, 
that the proposed rule change (SR-Amex-2006-90), as modified by 
Amendment No. 2 be, and it hereby is, approved.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\13\
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    \13\ 17 CFR 200.30-3(a)(12).
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Nancy M. Morris,
Secretary.
 [FR Doc. E7-2417 Filed 2-12-07; 8:45 am]

BILLING CODE 8010-01-P