Document ID: SEC-2006-1676-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: American Stock Exchange LLC
Posted Date: 2006-12-26T05:00Z

[Federal Register: December 26, 2006 (Volume 71, Number 247)]
[Notices]               
[Page 77422-77428]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr26de06-75]                         

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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-54943; File No. SR-Amex-2006-90]

 
Self-Regulatory Organizations; American Stock Exchange LLC; 
Notice of Filing of a Proposed Rule Change as Revised by Amendment Nos. 
1 and 2 Thereto Relating to the Listing and Trading of Notes Linked to 
the Performance of the Hang Seng China Enterprises Index

December 15, 2006.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 
1934, as amended (``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is 
hereby given that on September 22, 2006, the American Stock Exchange 
LLC (``Amex'' or ``Exchange'') 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 substantially 
prepared by Amex. On November 15, 2006, Amex submitted Amendment No. 1 
to the proposed rule change.\3\ On December 12, 2006, Amex submitted 
Amendment No. 2 to the proposed rule change.\4\ The Commission is 
publishing this notice to solicit comments on the proposed rule change, 
as amended, from interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(l).
    \2\ 17 CFR 240. 19b-4.
    \3\ Amendment No. 1 supersedes and replaces the original rule 
filing in its entirety.
    \4\ Amendment No. 2 supersedes and replaces the original rule 
filing and Amendment No. 1 in their entirety.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to list and trade notes linked to the 
performance of the Hang Seng China Enterprises Index (``Index''). The 
text of the proposed rule change (including Appendix A) is available on 
Amex's Web site at http://www.amex.com, at Amex's principal office, 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, Amex 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. Amex has prepared summaries, set forth in Sections A, 
B,

[[Page 77423]]

and C below, of the most significant aspects of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and the 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    Under Section 107A of the Amex 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\ Amex proposes to list for trading 
under Section 107A of the Company Guide notes linked to the performance 
of the Index (``Notes''). Citigroup Funding Inc. (``Issuer'') will 
issue the Notes under the name ``Stock Market Upturn Notes.'' The Notes 
provide for a multiplier of any positive performance of the Index 
during the stated term, subject to a maximum payment amount or ceiling 
to be determined at the time of issuance (``Capped Value'').\6\
---------------------------------------------------------------------------

    \5\ See Securities Exchange Act Release No. 27753 (March 1, 
1990), 55 FR 8626 (March 8, 1990) (order approving File No. SR-Amex-
89-29).
    \6\ The Exchange submits that the proposal is similar to several 
instruments that it currently lists and trades. See Securities 
Exchange Act Release No. 51563 (April 15, 2005), 70 FR 21257 (April 
25, 2005) (SR-Amex-2005-01); Securities Exchange Act Release No. 
51227 (February 18, 2005), 70 FR 9395 (February 25, 2005) (SR-Amex-
2005-010); and Securities Exchange Act Release No. 50016 (July 14, 
2004), 69 FR 43639 (July 21, 2004) (SR-Amex-2004-43).
---------------------------------------------------------------------------

    The Notes would conform to the initial listing guidelines under 
Section 107A \7\ and continued listing guidelines under Sections 1001-
1003 \8\ of the Company Guide. The Notes would be senior non-
convertible debt securities of the Issuer. The Issuer would issue the 
Notes on an ``Issue Date'' approximately three business days after the 
``Trade Date'' (as defined below) in denominations of whole units, with 
each unit representing a single Note. The Notes would mature on March 
7, 2008 (``Maturity Date'') approximately 1.5 years after the Issue 
Date. The original public offering price would be $10 per Note. The 
Notes would entitle the owner at maturity to receive an amount based 
upon the percentage change of the Index. The Notes would not have a 
minimum principal amount that would be repaid; accordingly, payment on 
the Notes prior to or at maturity might be less than the original issue 
price of the Notes.\9\ The Notes would not be callable by the issuer, 
Citigroup, or redeemable by the holder.
---------------------------------------------------------------------------

    \7\ The initial listing standards for the Notes require: (1) A 
market value of at least $4 million and (2) a minimum public 
distribution requirement of one million trading units with a minimum 
of 400 public shareholders. In addition, the listing guidelines 
require that the issuer have assets in excess of $100 million and 
stockholders' equity of at least $10 million, and pre-tax 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 which is unable to 
satisfy the earning criteria stated in Section 101 of the Company 
Guide, the Exchange requires 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.
    \8\ The Exchange's continued listing guidelines are set forth in 
Sections 1001 through 1003 of Part 10 to the Exchange's Company 
Guide. Section 1002(b) of the Company Guide states that 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. With respect to 
continued listing guidelines for distribution of the Notes, the 
Exchange would rely, in part, on the guidelines for bonds in Section 
1003(b)(iv). Section 1003(b)(iv)(A) provides 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 
bonds publicly held is less than $400,000.
    \9\ A negative return of the Index would reduce the redemption 
amount at maturity with the potential that the holder of the Note 
could lose his entire investment amount.
---------------------------------------------------------------------------

    The payment that a holder or investor of a Note would be entitled 
to receive (``Redemption Amount'') would depend on the relation of: (1) 
The level of the Index at the close of the market on a single business 
day, March 4, 2008 (``Valuation Date''), shortly prior to maturity of 
the Notes (``Final Index Level''); and (2) the closing value of the 
Index on the date the Notes are priced for initial sale to the public 
(``Initial Index Level''). If there is a ``Market Disruption Event'' 
(as defined below) when determining the Final Index Level, the Final 
Index Level may be deferred up to two business days if deemed 
appropriate by the calculation agent.
    Depending upon whether the Final Index Level (as defined below) is 
less than or equal to or greater than the Initial Index Level (as 
defined below), the Notes would entitle the owner at maturity to 
receive:
     If the Final Index Level is less than or equal to Initial 
Index Level:
[GRAPHIC] [TIFF OMITTED] TN26DE06.001

     If the Final Index Level is greater than Initial Index 
Level:
[GRAPHIC] [TIFF OMITTED] TN26DE06.003

    The Initial Index Level would be the closing level of the Index on 
August 24, 2006, the date the Notes priced for initial sale to the 
public (``Trade Date'') and the Final Index Level would be the closing 
level of the Index on the Valuation Date on March 4, 2008. The 
Participation Rate (in the formula above) is 300%.

The Hang Seng China Enterprises Index

    The Hang Seng China Enterprises Index was launched on August 8, 
1994, to track the performance of the shares of all Chinese enterprises 
listed on the Stock Exchange of Hong Kong (``H-Shares''). This was one 
year after the first H-Share company was listed on the Stock Exchange 
of Hong Kong. Before the launch of the 200-stock Hang Seng Composite 
Index (``HSCI'') on October 3, 2001, the Index included all H-Shares 
listed on the Main Board of the Stock Exchange of Hong Kong, but after 
the launch of the HSCI, the Index contains only those components that 
are included in the HSCI. Constituents of the Index comprise only the 
largest H-

[[Page 77424]]

Shares companies that are included in the HSCI. The Index is a 
capitalization-weighted index. The base value of the Index is 2000 as 
of January 3, 2000. The Index replaced the old HSCE index on October 3, 
2001. The Index components are subject to review semi-annually at the 
same time as the HSCI. H-Share companies joining or leaving the HSCI 
are automatically included or excluded from the Index.
    As of July 31, 2006, the Index consisted of H-Shares of 38 separate 
entities. Information relating to the Index and components is available 
on the Web site for the Stock Exchange of Hong Kong at http://www.hkex.com.hk, Hang Seng Indexes at http://www.hsi.com.hk, as well as 

various market data vendors and financial news publications.

Annual Reweighting and Rebalancing of the Index

    The Index is published and compiled by HSI Services Limited, a 
wholly owned subsidiary of Hang Seng Bank.\10\ The Index is reviewed 
twice each year at the same time the HSCI is reviewed. As previously 
mentioned, H-Share companies joining or leaving the HSCI are 
automatically included or excluded from the Index. The weightings 
(freefloat-adjusted market capitalization weightings, described below) 
for the Index, as well as any associated Cap Factors (described below), 
are reviewed and announced generally twice each year within the first 
six weeks of Q1 and Q3 under the supervision of HSI Services Limited. 
The current weightings, as listed in Appendix A, were updated on August 
11, 2006, which resulted in 37 companies being included in the Index.
---------------------------------------------------------------------------

    \10\ HSI Services Limited is a member of the Hang Seng Bank 
Group and affiliated with broker dealers. HSI Services Limited has 
represented to the Exchange that the following exist: (1) 
Appropriate firewalls to ensure independence of operations among 
different units within the Hang Seng Group; and (2) policies and 
procedures containing among other things, insider trading 
prohibitions, designed to prevent conflicts of interest.
---------------------------------------------------------------------------

    To ensure that no H-Share company has a weighting exceeding 15%, a 
Cap Factor (``CF'') is calculated based on market value as of each 
regular semi-annual review date. A review of the CF is conducted semi-
annually to coincide with the regular review of the freefloat-adjusted 
market capitalization weightings for the Index. For constituents whose 
weightings do not exceed 15% of the Index, the CF is set at 100% and 
for those constituents whose weightings exceed 15% of the Index, the CF 
is set so as to ensure the weighting does not exceed 15% as of the 
semi-annual review date. Individual constituent weightings may exceed 
15% during the periods between the semi-annual reviews. The current CFs 
for the Index were set as of September 8, 2006, with a CF of 100% for 
all constituent companies other than PetroChina (CF of 77.66%).
    A freefloat-adjusted market capitalization weighting with a cap of 
15% for the H-Share portion of each constituent company has been 
adopted for the Index calculation since March 6, 2006. The freefloat 
adjustment is calculated by excluding the following types of holdings:
     Shares held by strategic shareholder(s) who individually 
or collectively control more than 30% of the shareholdings (``Strategic 
Holdings'');
     Shares held by director(s) who individually control more 
than 5% of the shareholdings (``Directors' Holdings'');
     Shares held by a Hong Kong-listed company which controls 
more than 5% of the shareholdings as investments (``Cross-Holdings''); 
and
     Shares held by shareholder(s) who individually or 
collectively represent more than 5% of the shareholdings in the company 
and with a publicly disclosed lock-up arrangement (``Lock-Up Shares'').

    The data used for the freefloat adjustment are taken from publicly 
available sources, including annual reports and Securities Notification 
History Reports from Hong Kong Exchanges and Clearing Limited.

Index Calculation Disruption Events

    From time to time, disruptions can occur in trading on exchanges. 
The daily calculation of the Index would be adjusted in the event of 
the occurrence or existence of any suspension of or limitation imposed 
on trading (by reason of movements in price exceeding limits permitted 
by any relevant exchange or market or otherwise) of, or the 
unavailability, through a recognized system of public dissemination of 
transaction information, for a period longer than two hours, or during 
the one-half hour period preceding the close of trading, on the 
applicable exchange or market, of accurate price, volume or related 
information in respect of:
    (1) Stocks which then comprise 20% or more of the value of the Hang 
Seng China Enterprises Index or any successor index;
    (2) Any options or futures contracts, or any options on such 
futures contracts relating to the Hang Seng China Enterprises Index or 
any successor index; or
    (3) Any options or futures contracts relating to stocks which then 
comprise 20% or more of the value of the Hang Seng China Enterprises 
Index or any successor index on any exchange or market, if in each 
case, any such suspension, limitation, or unavailability is considered 
to be material by Citigroup Global Markets (each, a ``Market Disruption 
Event'').\11\
---------------------------------------------------------------------------

    \11\ Options and futures contracts relating to the Index, the 
Hang Seng China Enterprises Index, or stocks comprising the Hang 
Seng Enterprises Index are indicators of the liquidity of said 
stocks or indexes.
---------------------------------------------------------------------------

    In the case of a temporary disruption in connection with the 
trading of the H-Shares comprising the Index or a Market Disruption 
Event, the Exchange believes that it is unnecessary for a filing 
pursuant to Section 19(b) under the Act to be submitted to the 
Commission. The Exchange submits that for a temporary disruption of 
said securities or a Market Disruption Event, the Exchange would 
typically use the last available price, except that if and to the 
extent determined by Citigroup Global Markets the value of the Index 
for that day would be the arithmetic mean of the value of the Index 
obtained from as many dealers in equity securities, but not exceeding 
three such dealers (``fair value'' pricing). The Exchange represents 
that, if the use of the last available price or ``fair value'' pricing 
for an Index constituent or the Index is more than of a temporary 
nature, the Exchange will submit a proposed rule change pursuant to 
Rule 19b-4 seeking the Commission's approval to continue to trade the 
Notes. Unless approved for continued trading, the Exchange would 
commence delisting proceedings.

Exchange Rules Applicable to the Notes

    The Notes are cash-settled in U.S. dollars and do not give the 
holder any right or other ownership interest in the Index or 
commodities comprising the Index. The Notes are designed for investors 
who desire to participate in, or gain exposure to, an index composed of 
H-Shares and are willing to hold the investment to maturity.
    The Notes would trade as equity securities subject to Amex equity 
trading rules including, among others, rules governing priority, 
parity, and precedence of orders; specialist responsibilities; account 
opening, and customer suitability requirements. In addition, the Notes 
would be subject to the equity margin rules of the Exchange.\12\ The 
Exchange would, prior to trading the Notes, distribute a circular to 
the membership providing guidance with regard to member firm compliance

[[Page 77425]]

responsibilities (including suitability recommendations) when handling 
transactions in the Notes and highlighting the special risks and 
characteristics of the Notes. With respect to suitability 
recommendations and risks, the Exchange would require members, member 
organizations, and employees thereof recommending a transaction in the 
Notes: (1) To determine that such transaction is suitable for the 
customer; and (2) 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 transaction. In addition, the Issuer 
would deliver a prospectus in connection with the initial sales of the 
Notes.
---------------------------------------------------------------------------

    \12\ See Amex Rule 462.
---------------------------------------------------------------------------

Criteria for Initial and Continued Listing

    The Exchange represents that it prohibits the initial and/or 
continued listing of any security that is not in compliance with Rule 
10A-3 under the Securities Act of 1934.\13\ The Exchange also has a 
general policy that prohibits the distribution of material, non-public 
information by its employees.
---------------------------------------------------------------------------

    \13\ See 17 CFR 240.10A-3(c)(1).
---------------------------------------------------------------------------

    The Exchange represents that it would file a proposed rule change 
pursuant to Rule 19b-4 under the Act, seeking approval to continue 
trading the Notes and unless approved, the Exchange would commence 
delisting the Notes if:
     HSCI substantially changes either the index component 
selection methodology or the weighting methodology;
     If 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
     If a successor or substitute index is used in connection 
with the Notes. The filing would address, among other things the 
listing and trading characteristics of the successor or substitute 
index and the Exchange's surveillance procedures applicable thereto.

If the Index value does not change during some or all of the period 
when trading is occurring on the Exchange because of time zone 
differences or holidays in Hong Kong, then the last official calculated 
Index value would remain available throughout Exchange trading hours.

Trading Halts

    The Exchange would halt trading in the Notes if the circuit breaker 
parameters of Exchange Rule 117 have been reached. In exercising its 
discretion to halt or suspend trading in the Notes, the Exchange may 
consider factors such as those set forth in Exchange Rule 918C(b), in 
addition to 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.
    The Exchange represents that its surveillance procedures are 
adequate to properly monitor the trading of the Notes. Amex, has stated 
that it would rely on its existing surveillance procedures governing 
index-linked securities. The Exchange currently has in place 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.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6 of the Act \14\ in general and furthers the objectives 
of Section 6(b)(5) \15\ 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 and a national market system.
---------------------------------------------------------------------------

    \14\ 15 U.S.C. 78f(b).
    \15\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

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

    The Exchange did not receive any written comments on the proposed 
rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) As the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) By order approve such proposed rule change, or
    (B) Institute proceedings to determine whether the proposed rule 
change should be disapproved.
    Amex has requested accelerated approval of this proposed rule 
change, as amended, prior to the 30th day after the date of publication 
of the notice of the filing thereof, following the conclusion of a 15-
day comment period. The Commission has determined that a 15-day comment 
period is appropriate before taking any action.

IV. 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 at http://www.sec.gov/rules/sro.shtml
 or send an e-mail to rule-comments@sec.gov. 

Please include File No. SR-Amex-2006-90 on the subject line.

Paper Comments

     Send paper comments in triplicate to Nancy M. Morris, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.

All submissions should refer to File No. SR-Amex-2006-90. 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 at 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

[[Page 77426]]

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, 100 F Street, NE., Washington, DC 20549. Copies of such 
filing also will be available for inspection and copying at the 
principal office of the Exchange. 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 No. SR-Amex-2006-90 and should be submitted on or before January 
10, 2007.
---------------------------------------------------------------------------

    \16\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\16\
Nancy M. Morris
Secretary.
BILLING CODE 8011-01-P

[[Page 77427]]

[GRAPHIC] [TIFF OMITTED] TN26DE06.002

[[Page 77428]]

[FR Doc. 06-9844 Filed 12-22-06; 8:45 am]

BILLING CODE 8011-01-C