Document ID: SEC-2005-0230-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: National Association of Securities Dealers, Inc.
Posted Date: 2005-11-10T05:00Z

[Federal Register: November 10, 2005 (Volume 70, Number 217)]
[Notices]               
[Page 68486-68490]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr10no05-162]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-52725; File No. SR-NASD-2005-118]

 
Self-Regulatory Organizations; National Association of Securities 
Dealers, Inc.; Notice of Filing and Order Granting Accelerated Approval 
of a Proposed Rule Change and Amendment No. 1 Thereto Relating to the 
Listing and Trading of 9% Targeted Income Strategic Total Return 
SecuritiesSM Linked to the CBOE Nasdaq-100 BuyWrite Index

November 3, 2005.
    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 September 30, 2005, the National Association of Securities Dealers, 
Inc. (``NASD''), through its subsidiary, The Nasdaq Stock Market, Inc. 
(``Nasdaq''), filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission'') the proposed rule change as described in 
Items I and II below, which Items have been prepared by Nasdaq. On 
October 14, 2005, Nasdaq filed Amendment No. 1 to the proposed rule 
change.\3\ 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.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Amendment No. 1 replaced the original filing in its 
entirety.
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I. Self-Regulatory Organization's Statement of the Terms of the 
Substance of the Proposed Rule Change

    Nasdaq proposes to list and trade 9% Targeted Income Strategic 
Total Return SecuritiesSM (``9% STRS'' or ``Notes''), the 
return on which is based upon the CBOE Nasdaq-100 BuyWrite Index (``BXN 
Index'' or ``Index'') and issued by Morgan Stanley. The text of the 
proposed rule change is available on the NASD's Web site (http://www.nasd.com
), at the principal offices of the Nasdaq, and at the 

Commission's Public Reference Room.

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

[[Page 68487]]

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 proposes to list and trade the Notes. The Notes provide for 
a return based upon the BXN Index.
Description of Notes
    The Notes are non-convertible debt issued by Morgan Stanley that 
are due on October 30, 2011 and have a principal amount and issue price 
of $10. The Notes will trade as a single, exchange-listed security. 
However, the principal amount is initially reduce by underwriting 
commissions of 1.20%, so that the Notes, in fact, are initially valued 
at $9.88, which is known as the initial net entitlement value 
(``Initial NEV''). Additional fees of 2% each year reduce the Net 
Entitlement Value (``NEV''). Because the initial NEV is 1.20% less than 
the issue price of the securities and because the 2% per annum 
adjustment amount reduces the NEV over the term of the securities, the 
BXN Index must increase for the investor to receive an amount upon 
sale, exchange, redemption or at maturity equal to the issue price for 
each security. Thus, unlike ordinary debt, the Notes have no guaranteed 
return of principal and do not pay interest.\4\
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    \4\ Telephone conference between Jonathan Cayne, Associate 
General Counsel, Nasdaq, and Geoffrey Pemble, Special Counsel, 
Division of Market Regulation (``Division''), Commission, on 
November 1, 2005 (relating to additional descriptive material about 
the Notes provided in prospectus supplement).
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    The Notes will pay 9% per annum, payable monthly beginning November 
30, 2005. If the investor exchanges the Notes, or Morgan Stanley calls 
the Notes the investor will receive accrued but unpaid interim payments 
on the exchanged or redeemed Notes in exchange for a reduction of the 
NEV of the Notes (``Adjustment Amount''). This Adjustment Amount takes 
into account the interim payments on the Notes. As a result, for 
investing in the Notes, the investor will receive current income in the 
form of the interim payments on the Notes in exchange for a reduction 
in the NEV of the Notes.\5\
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    \5\ Id.
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    The payout on the Notes upon exchange, upon redemption, or at 
maturity will be based on the applicable NEV of the securities 
determined on a valuation date, as compared to the Initial NEV.
    For each trading day, the NEV is equal to $9.88 (e.g., the Initial 
NEV) multiplied by the ratio of the BXN Index closing value on that 
trading day over the closing value of the Index on the pricing date 
(``Initial BXN Index Value'') minus the Adjustment Amount \6\ as of 
that trading day. In other words:
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    \6\ On any trading day, the Adjustment Amount is the sum of (i) 
9% multiplied by the Issue Price multiplied by the number of 
calendar days since the previous calculation of NEW divided by 365 
plus (ii) 2% multiplied by NEV on the previous trading day 
multiplied by the number of calendar days since the previous 
calculation of NEV divided by 365.
[GRAPHIC] [TIFF OMITTED] TN10NO05.313

Where
    T = each trading day
    BXNT = the closing value of the BXN Index on T.

    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 similar and parallel buy-write 
indexes.\7\
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    \7\ The BXN Index is similar to Chicago Board Options Exchange's 
(``CBOE'') BXM and BXD indexes, which are buy-writes on the S&P 500 
and the Dow Jones Industrial Average, respectively. The Commission 
has previously, on multiple occasions, approved the listing and 
trading of notes linked to the BXM and BXD indexes. See Securities 
Exchange Act Release Nos. 51966, (July 1, 2005), 70 FR 40069 (July 
12, 2005) (approving an exception to the requirement in the American 
Stock Exchange LLC (``Amex'') ``generic'' listing standards pursuant 
to Rule 19b-4(e) for index-linked notes that index values be 
disseminated at least every 15 seconds, thereby allowing the listing 
and trading of notes linked to the BXM and BXD even though the BXM 
and BXD values are not so disseminated); 51840 (June 14, 2005), 70 
FR 35468 (June 20, 2005) (approving the listing and trading of 
JPMorgan Chase notes linked to the BXD Index); 51634 (April 29, 
2005), 70 FR 24138 (May 6, 2005) (approving the listing and trading 
of Wachovia notes linked to the BXM Index); 51426 (March 23, 2005), 
70 FR 16315 (March 30, 2005) (approving the listing and trading of 
Morgan Stanley notes linked to the BXM Index); and 50719 (November 
22, 2004), 69 FR 69644 (November 30, 2004) (approving the listing 
and trading of Morgan Stanley notes linked to the BXM Index).
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    Beginning in October 2008, upon at least 10 but not more than 30 
days notice to the holders, Morgan Stanley may redeem the Notes each 
quarter on certain dates specified in the prospectus (``Exchange 
Date''). In addition, prior to October 2008, Morgan Stanley may redeem 
the Notes for mandatory exchange on any Exchange Date if the NEV (which 
is a value calculated as described in the immediately following 
paragraph) equals or is less than $2.00 on any trading day. 
Furthermore, during the period from January 2006 to July 2011, a holder 
may exchange the Notes each quarter on certain specified dates for an 
amount of cash for each security equal to the NEV, plus accrued but 
unpaid interim payments, subject to a minimum of at least 10,000 Notes. 
The payout on the Notes upon exchange, upon redemption, or at maturity 
will be based on the applicable NEV of the securities determined on a 
valuation date, as compared to the Initial NEV.
Description of the Index
    The BXN Index \8\ is a benchmark index designed to measure the 
performance of a hypothetical ``buy-write'' \9\ strategy on the Nasdaq-
100 Index.\10\ Developed by the CBOE in

[[Page 68488]]

cooperation with Nasdaq, the Index was initially announced in 2005.\11\ 
The CBOE developed the BXN Index in response to requests by options 
portfolio managers that the CBOE provide an objective benchmark for 
evaluating the performance of buy-write strategies, one of the most 
popular option trading strategies. In addition, the BXN Index could 
provide investors with a straightforward indicator of the risk-reducing 
character of options.
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    \8\ Morgan Stanley and Nasdaq have entered into a non-exclusive 
license agreement providing for the use of the Index by Morgan 
Stanley in connection with the Notes. Nasdaq is not responsible for 
and will not participate in the issuance of the Notes.
    \9\ A ``buy-write'' is a conservative options strategy in which 
an investor buys a stock or portfolio and writes call options on the 
stock or portfolio. This strategy is also known as a ``covered 
call'' strategy. A buy-write strategy provides option premium income 
to cushion decreases in the value of an equity portfolio, but will 
underperform stocks in a rising market. A buy-write strategy tends 
to lessen overall volatility in a portfolio.
    \10\ The BXN Index consists of a long position in the component 
securities of the Nasdaq-100 Index and options on the Nasdaq-100 
Index. The Commission has approved the listing of numerous 
securities linked to the performance of the Nasdaq-100 Index as well 
as options on the Nasdaq-100 Index. See, e.g., Securities Exchange 
Act Release Nos. 50916 (December 22, 2004), 69 FR 78508 (December 
30, 2004) (approving the listing and trading of Performance 
Leveraged Upside Securities based on the value of the Nasdaq-100 
Index); 48065 (June 19, 2003), 68 FR 38414 (June 27, 2003) 
(approving the listing and trading of Performance Leveraged Upside 
Securities based on the value of the Nasdaq-100 Index); 45429 
(February 11, 2002), 67 FR 7438 (February 19, 2002) (approving the 
listing and trading of Enhanced Return Notes Linked to the Nasdaq-
100 Index); 45024 (November 5, 2001), 66 FR 56872 (November 13, 
2001) (approving the listing and trading of Enhanced Return Notes 
Linked to the Nasdaq-100 Index); 44913 (October 9, 2001), 66 FR 
52469 (October 15, 2001) (approving the listing and trading of 
Performance Leveraged Upside Securities based upon the performance 
of the Nasdaq-100 Index); 43000 (June 30, 2000), 65 FR 42409 (July 
10, 2000) (approving the listing and trading of options based upon 
one-tenth of the value of the Nasdaq-100 Index); 41119 (February 26, 
1999), 64 FR 11510 (March 9, 1999) (approving the listing and 
trading of Portfolio Depositary Receipts based on the Nasdaq-100 
Index); and 33428 (January 5, 1994), 59 FR 1576 (January 11, 1994) 
(approving the listing and trading of options on the Nasdaq-100 
Index).
    As of the close of business on September 30, 2005, the adjusted 
market capitalization of the securities included in the Index ranged 
from a high of $178 billion to a low of $3 billion. As of the same 
date, the average daily trading volume for these same securities 
since the beginning of 2005 ranged from a high of 67 million shares 
to a low of 450,000 shares.
    \11\ See supra note 7.
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    The BXN Index is a passive total return index based on (1) buying a 
portfolio consisting of the component stocks of the Nasdaq-100, and (2) 
``writing'' (or selling) near-term Nasdaq-100 call options with the 
closest out-of-the money strike price, generally on the third Friday of 
each month. This strategy consists of a hypothetical portfolio 
consisting of a ``long'' position indexed to the Nasdaq-100 on which 
are deemed sold a succession of one-month, at-the-money call options on 
the Nasdaq-100 listed on the CBOE. Dividends paid on the component 
stocks underlying the Nasdaq-100 and the dollar value of option premium 
deemed received from the sold call options are functionally 
``reinvested'' in the covered Nasdaq-100 portfolio.
    The value of the BXN Index on any given date will equal: (1) The 
value of the BXN Index on the previous day, multiplied by (2) the daily 
rate of return \12\ on the covered Nasdaq-100 portfolio on that date. 
Thus, the daily change in the BXN Index reflects the daily changes in 
value of the covered Nasdaq-100 portfolio, which consists of the 
Nasdaq-100 (including dividends) and the component Nasdaq-100 option. 
The daily closing price of the BXN Index is calculated and disseminated 
by the CBOE on its Web site at http://www.cboe.com and via the Options 

Pricing and Reporting Authority (``OPRA'') at the end of each trading 
day. The value of the Nasdaq-100 Index is disseminated at least once 
every fifteen (15) seconds throughout the trading day. Nasdaq believes 
that the intraday dissemination of the Nasdaq-100 Index along with the 
ability of investors to obtain real-time, intraday Nasdaq-100 call 
option pricing provides sufficient transparency regarding the BXN 
Index.\13\ In addition, as indicated above, the value of the BXN Index 
is calculated once every trading day, thereby providing investors with 
a daily value of such ``hypothetical'' buywrite options strategy on the 
Nasdaq-100.
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    \12\ The daily rate of return on the covered Nasdaq-100 
portfolio is based on (a) the change in the closing value of the 
stocks in the Nasdaq-100 portfolio, (b) the value of ordinary cash 
dividends on the stocks underlying the Nasdaq-100 that are trading 
``exdividend'' on that date (that is, when transactions in the stock 
on an organized securities exchange or trading system no longer 
carry the right to receive that dividend or distribution) as 
measured from the close in trading on the previous day and (c) the 
change in the market price of the call option.
    \13\ Call options on the Nasdaq-100 are traded on the CBOE, and 
both last sale and quotation information for the call options are 
disseminated in real-time through OPRA. Nasdaq states that the value 
of the BXN can be readily approximated as a function of observable 
market prices throughout the trading day. In particular, such a 
calculation would require information on the current price of the 
Nasdaq-100 Index and specific nearest-to-expiration call and put 
options on that Index. These components trade in highly liquid 
markets, and real-time prices are available continuously throughout 
the trading day from a number of sources including Bloomberg and the 
CBOE.
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    As noted above, the Index is not calculated or disseminated 
continuously throughout the trading day. Instead, the CBOE calculates 
the value of the Index shortly after the close.\14\ In addition, CBOE 
will disseminate daily an updated value of the amount investors would 
receive for the Notes if exchanged or redeemed (``Indicative Value''). 
The Indicative Value equals the performance of the Index less fees and 
other adjustment amounts, if any. The Indicative Value is calculated by 
the CBOE after the close of trading and after the BXN is calculated for 
use by investors during the next trading day. It is designed to provide 
investors with a daily reference value of the adjusted Index. The 
Indicative Value may not reflect the precise value of the Notes.
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    \14\ The Commission previously approved the listing and trading 
of notes linked to similar CBOE indexes (BXM and BXD) that are not 
disseminated every 15 seconds. The Commission also recently approved 
an exception to the 15-second requirement in the American Stock 
Exchange ``generic'' listing standards for notes linked to these 
indexes. See supra note 7.
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    As stated below, in the event the calculation and dissemination of 
the Index is discontinued, Nasdaq will consult with the Commission and 
will prohibit the continued listing of the Notes unless otherwise 
authorized by the Commission.\15\
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    \15\ Prior to such change in the manner in which the Index is 
calculated, or in the event of any Index substitution, Nasdaq will 
file a proposed rule change pursuant to Rule 19b-4, which must be 
approved by the Commission prior to continued listing and trading in 
the Notes.
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Listing and Trading Rules
    Under NASD Rule 4420(f), Nasdaq may approve for listing and trading 
innovative securities that cannot be readily categorized under 
traditional listing guidelines.\16\ Nasdaq proposes to list and trade 
Notes based on the BXN Index under NASD Rule 4420(f).
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    \16\ See Securities Exchange Act Release No. 32988 (September 
29, 1993); 58 FR 52124 (October 6, 1993).
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    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 NASD Rule 4420(f). Specifically, under NASD Rule 
4420(f)(1):
    (A) The issuer shall have assets in excess of $100 million and 
stockholders' equity of at least $10 million.\17\ 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;
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    \17\ Morgan Stanley satisfies this listing criterion.
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    (B) 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;
    (C) For equity securities designated pursuant to this paragraph, 
there must be a minimum public distribution of 1,000,000 trading units;
    (D) 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 NASD Rule 4420(f)(2).\18\ Lastly, pursuant to 
NASD Rule 4420(f)(3), prior to the commencement of trading of the 
Notes, Nasdaq will distribute a circular

[[Page 68489]]

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 advise 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.
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    \18\ NASD 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, Inc. (``NYSE'') or 
be an affiliate of a company listed on The Nasdaq National Market or 
the NYSE; provided, however, that the provisions of NASD Rule 4450 
will be applied to sovereign issuers of ``other'' securities on a 
case-by-case basis.
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    The Notes will be subject to Nasdaq's continued listing criterion 
for other securities pursuant to NASD 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 NASD Rule 4310(c)(1). In addition, Nasdaq 
will commence delisting or removal proceedings with respect to the 
Notes (unless the Commission has approved the continued trading of the 
Notes) under any of the following circumstances:
    (i) If the aggregate market value or the principal amount of the 
Notes publicly held is less than $400,000;
    (ii) If the value of the Index is no longer calculated or widely 
disseminated as described above in this filing; or
    (iii) If such other event shall occur or condition exist which, in 
the opinion of Nasdaq, makes further dealings on Nasdaq inadvisable.
    Nasdaq will also consider prohibiting the continued listing of the 
Notes if Morgan Stanley is not able to meet its obligations on the 
Notes. The Notes will be subject to the NASD's existing trading halt 
rules.
    Since the Notes will be deemed equity securities for the purpose of 
NASD Rule 4420(f), the NASD and Nasdaq's existing equity trading rules 
will apply to the Notes. First, pursuant to NASD 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.\19\ In 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.
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    \19\ NASD Rule 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.
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Surveillance
    Nasdaq represents that NASD's surveillance procedures are adequate 
to properly monitor the trading of the Notes. Specifically, NASD will 
rely on its current surveillance procedures governing equity securities 
and will include additional monitoring on key pricing dates, such as 
redemption, call, and maturity dates.\20\
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    \20\ Telephone conference between Jonathan Cayne, Associate 
General Counsel, Nasdaq, and Geoffrey Pemble, Special Counsel, 
Division of Market Regulation, Commission, on November 1, 2005.
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    Pursuant to Rule 10A-3 of the Act 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 every 
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,\21\ in general, and with 
Section 15A(b)(6) of the Act,\22\ 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.
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    \21\ 15 U.S.C. 78o-3.
    \22\ 15 U.S.C. 78o-3(6).
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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.

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, as amended, 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-NASD-2005-118 on the subject line.

Paper Comments

     Send paper comments in triplicate to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, Station Place, 100 F 
Street, NE., Washington, DC 20549-9303.

All submissions should refer to File Number SR-NASD-2005-118. 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 Room. 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-2005-118 and should be submitted on or before 
December 1, 2005.

[[Page 68490]]

IV. Commission's Findings and Order Granting Accelerated Approval of 
the Proposed Rule Change

    Nasdaq requests that the Commission approve this filing on an 
accelerated basis since it raises no new or novel issues and will 
enable Nasdaq to accommodate the timetable of listing the Notes. In 
this regard, Nasdaq notes that the Commission has previously approved 
the listing of securities the performance of which has been linked to 
the Index.\23\
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    \23\ See supra note 10.
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    After careful review, 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, the requirements of Section 15A of the Act.\24\ 
Specifically, the Commission finds that the proposal is consistent with 
Section 15A(b)(6) of the Act, which requires that the rules be designed 
to promote just and equitable principles of trade, foster cooperation 
and coordination with persons engaged in processing information with 
respect to and facilitating transactions in securities, as well as to 
remove impediments to and perfect the mechanism of a free and open 
market, and, in general, to protect investors and the public 
interest.\25\
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    \24\ 15 U.S.C. 78o-3.
    \25\ 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).
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    In approving the product, the Commission recognizes that the Index 
is a passive total return index based on (1) buying a portfolio 
consisting of the component stocks of the Nasdaq-100, and (2) 
``writing'' (or selling) near-term Nasdaq-100 call options, with the 
closest out-of-the money strike price, generally on the third Friday of 
each month. Given the large trading volume and capitalization of the 
compositions of the stocks underlying the Index, the Commission 
believes that the listing and trading of the Notes that are linked to 
the BXN Index should not unduly impact the market for the underlying 
securities compromising the Nasdaq-100 or raise manipulative 
concerns.\26\ Moreover, the issuers of the underlying securities 
comprising the Nasdaq-100 are subject to reporting requirements under 
the Act, and all of the component stocks are either listed or traded 
on, or traded through the facilities of, U.S. securities markets.
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    \26\ The issuer, Morgan Stanley, disclosed in the prospectus 
that the original issue price of the Notes includes commissions (and 
the secondary market prices are likely to exclude commissions) and 
Morgan Stanley's costs of hedging its obligations under the Notes. 
These costs could increase the initial value of the Notes, thus 
affecting the payment investors receive at maturity. Additionally, 
the issuer discloses in the prospectus that the hedging activities 
of its affiliates, including selling call options on the Nasdaq-100, 
could affect the value of these call option during the half hour 
period in which their value is determined for purposes of inclusion 
in the BXN Index. Such hedging activity must, of course, be 
conducted in accordance with applicable regulatory requirements.
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    The Commission also believes that any concerns that a broker-
dealer, such as Morgan Stanley, or a subsidiary providing a hedge for 
the issuer, will incur undue position exposure are minimized by the 
size of the Notes issuance in relation to the net worth of Morgan 
Stanley.\27\
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    \27\ See Securities Exchange Act Release Nos. 44913 (October 9, 
2001), 66 FR 52469 (October 15, 2001) (order approving the listing 
and trading of notes whose return is based on the performance of the 
Nasdaq-100 Index) (SR-NASD-2001-73); 44483 (June 27, 2001), 66 FR 
35677 (July 6, 2001) (order approving the listing and trading of 
notes whose return is based on a portfolio of 20 securities selected 
from the Amex Institutional Index) (File No. SR-Amex-2001-40); and 
3774 (September 27, 1996), 61 FR 52480 (October 7, 1996) (order 
approving the listing and trading of notes whose return is based on 
a weighted portfolio of healthcare/biotechnology industry 
securities) (SR-Amex-96-27).
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    Finally, the Commission notes that the value of the Index will be 
calculated and disseminated by CBOE once every trading day after the 
close of trading. However, the Commission notes that the value of the 
Nasdaq-100 will be widely disseminated at least once every fifteen 
seconds throughout the trading day and that investors are able to 
obtain real-time call option pricing on the Nasdaq-100 Index during the 
trading day. Further, the Indicative Value, which will be calculated by 
the CBOE after the close of trading and after the CBOE calculates the 
BXN Index for use by investors the next trading day, is designed to 
provide investors with a daily reference value of the adjusted Index.
    Further, the Commission notes that the Nasdaq has agreed to 
undertake to delist the Notes in the event that CBOE ceases to 
calculate and disseminate the Index, and Morgan Stanley is unable to 
arrange to have the BXN Index calculated and widely disseminated 
through a third party.
    The Commission finds good cause for approving the proposed rule 
change prior to the 30th day after the date of publication of the 
notice of filing thereof in the Federal Register. Nasdaq has requested 
accelerated approval because this product is similar to several other 
instruments currently listed and traded on the Nasdaq.\28\ 
Additionally, the Notes will be listed pursuant to Nasdaq's existing 
hybrid security listing standards as described above. Therefore, the 
Commission finds good cause, consistent with Section 19(b)(2) of the 
Act,\29\ to approve the proposal on an accelerated basis.
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    \28\ See supra not 10.
    \29\ 15 U.S.C. 78f(b)(5) and 78s(b)(2).
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    Accordingly, the Commission believes there is good cause, 
consistent with Sections 15A(b)(6) and 19(b)(2) of the Act,\30\ to 
approve the proposal, on an accelerated basis.
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    \30\ 15 U.S.C. 78o3(b)(6) and 78s(b)(2).
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V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\31\ that the proposed rule change (SR-NASD-2005-118) is hereby 
approved on an accelerated basis.
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    \31\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\32\
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    \32\ 17 CFR 200.30-3(a)(12).
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Jonathan G. Katz,
Secretary.
[FR Doc. 05-22414 Filed 11-9-05; 8:45 am]

BILLING CODE 8010-01-P