Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”), and Rule 19b-4 thereunder, notice is hereby given that on August 1, 2003, the National Association of Securities Dealers, Inc. (“NASD”), through its subsidiary, The Nasdaq Stock Market, Inc. (“Nasdaq”), filed with the Securities and Exchange Commission (“Commission” or “SEC”) the proposed rule change as described in Items I, II, and III below, which Items have been prepared by Nasdaq.
The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. Start Printed Page 47122
I. Self-Regulatory Organization's Statement of the Terms of the Substance of the Proposed Rule Change
Nasdaq proposes to list and trade Index LeverAged StockMarkEt Return SecuritiesSM linked to the Nasdaq-100® Index (“Notes”) issued by Citigroup Global Markets Holdings Inc. (“CGMHI”).
II. Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, Nasdaq included statements concerning the purpose of and basis for the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item IV 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
Nasdaq proposes to list and trade Index LeverAged StockmarkEt Return Securities, the return on which is based upon the Nasdaq-100 Index.
Under NASD Rule 4420(f), Nasdaq may approve for listing and trading securities which cannot be readily categorized under traditional listing guidelines. Nasdaq proposes to list for trading notes based on the Nasdaq-100 Index under NASD Rule 4420(f).
The Notes, which will be registered under Section 12 of the Act, will initially be subject to Nasdaq's listing criteria for other securities under 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. In the case of an issuer which is unable to satisfy the income criteria set forth in paragraph (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;
(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.
CGMHI and the Notes will satisfy the criteria set forth above. In addition, CGMHI satisfies the listed marketplace requirement set forth in NASD Rule 4420(f)(2). Lastly, pursuant to NASD Rule 4420(f)(3), prior to the commencement of trading of the Notes, Nasdaq will distribute a circular to members providing guidance regarding compliance responsibilities and requirements, including suitability recommendations, and highlighting the special risks and characteristics of the Notes. In particular, Nasdaq will 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.
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 as required by NASD Rule 4310(c)(1). Nasdaq will also consider prohibiting the continued listing of the Notes if CGMHI is not able to meet its obligations on the Notes.
The Notes are a series of senior unsecured debt securities that will be issued by CGMHI. Each Index LASERS represents a principal amount of $10. Index LASERS may be transferred only in units of $10 and integral multiples of $10. The Notes will not pay interest and are not subject to redemption by CGMHI or at the option of any beneficial owner before maturity, which is expected on or about one year after the issue date.
At maturity, a beneficial owner will receive an amount in cash equal to $10 plus an index return amount, which may be positive, zero or negative. Because the index return amount may be negative, the maturity payment could be less than the $10 principal amount per Index LASERS and could be zero.
The index return amount will be based on the index return of the Nasdaq-100 Index. The index return will equal a fraction, the numerator of which is the Ending Value  minus the Starting Value  and the denominator of which is the Starting Value, provided that the index return will not in any circumstances be greater than a cap which is expected to be approximately 5% to 6%. How the index return is calculated will depend on whether the index return is positive, zero or negative.
If the index return is positive, the index return amount will equal the Start Printed Page 47123product of: (i) $10, (ii) the upside participation rate, and (iii) the index return. The upside participation rate is expected to be approximately 500% to 600%. Thus, if the ending value of the Nasdaq-100 Index exceeds its starting value by approximately 5% to 6% or less, the appreciation on an investment in the Notes will be approximately 5 to 6 times the return on an instrument directly linked to the Nasdaq-100 Index because of the upside participation rate. However, because the appreciation cap, together with the upside participation rate, limits the maximum index return amount at maturity to approximately 25% to 36% of the principal amount of the Notes, in no circumstances will the payment received by a beneficial owner at maturity be more than approximately $2.50 to $3.60 per Index LASERS.
If the index return is negative and the value of the Nasdaq-100 Index on any index business day after the date the Notes are priced for initial sale to the public up to and including approximately the third index business day before maturity (whether intra-day or at the close of trading on any index business day) is less than or equal to approximately 75% to 80% of the starting value of the Nasdaq-100 Index, then the index return amount will equal the product of (i) $10, (ii) the downside participation rate, and (iii) the index return. The downside participation rate is expected to be approximately 200%. Thus, the return on the Notes will be less than the return from an investment in an instrument directly linked to the Nasdaq-100 Index because the downside participation rate increases the participation in the index's depreciation by approximately 200%. Because of the downside participation rate, the payment at maturity will be zero if the ending value of the Nasdaq-100 Index is less than or equal to approximately 50% of its starting value. Consequently, investors could lose all or a significant portion of their investment if the Nasdaq-100 Index decreases as described above.
If the index return is negative and the value of the index on any index business day after the date the Notes are priced for initial sale to the public up to and including approximately the third index business day before maturity is not less than or equal to approximately 75% to 80% of the starting value of the Nasdaq-100 Index, then the index return amount will be zero and the maturity payment will be $10 per Index LASERS.
If the index return is zero, then the index return amount will be zero and the maturity payment will be $10 per Index LASERS.
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 Nasdaq-100 Index. The Commission has previously approved the listing of options on, and other securities the performance of which have been linked to or based on, the Nasdaq-100 Index. These options and other securities, however, do not have a downside participation rate as described above.
As of May 31, 2003, the adjusted market capitalization of the securities included in the Nasdaq-100 Index ranged from a high of $170.3 billion to a low of $2.2 billion. The average daily trading volume for these same securities for the last five months, as of the same date, ranged from a high of 68.1 million shares to a low of 527,400 shares.
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. Specifically, the Notes will be subject to the equity margin rules. In addition, the regular equity trading hours of 9:30 am to 4:00 pm will apply to transactions in the Notes.
Due to the leveraged nature of the Notes, Nasdaq proposes requiring that the Notes only be sold to investors whose accounts have been approved for options trading pursuant to NASD Rule 2860(b)(16). In addition, the NASD's options suitability standards will apply to recommendations regarding the Notes. Furthermore, discretionary orders in the Notes must be approved and initialed on the day entered by the branch office manager or other Registered Options Principal, provided that if the branch office manager is not a Registered Options Principal, such approval shall be confirmed within a reasonable time by a Registered Options Principal. Lastly, 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.
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.
CGMHI 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 CGMHI's current procedure involving primary offerings.
2. Statutory Basis
Nasdaq believes that the proposed rule change is consistent with the provisions of Section 6(b)(5), in particular, in that it is designed to promote just and equitable principles of trade, to foster cooperation and coordination with persons engaged in regulating, clearing, settling, processing information with respect to, and facilitating transaction in securities, and, in general, to protect investors and the public interest. Specifically, the proposed rule change will provide investors with another investment vehicle based on the Nasdaq-100 Index.
B. Self-Regulatory Organization's Statement on Burden on Competition
Nasdaq does not believe that the proposed rule change will impose any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Act.
C. Self-Regulatory Organization's Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others
Written comments on the proposed rule change were neither solicited nor received. Start Printed Page 47124
III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action
Nasdaq has requested that the Commission shorten the comment period and approve the filing on an accelerated basis in order to allow the listing and trading of the Notes to begin the week of August 25th, 2003. Accordingly, Nasdaq requests that the Commission find good cause pursuant to Section 19(b)(2) for approving the proposed rule change prior to the 30th day after its publication in the Federal Register.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act, by August 22, 2003. Persons making written ssubmissions 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 NASD. All submissions should refer to file number SR-NASD-2003-119 and should be submitted by August 22, 2003.Start Signature
For the Commission, by the Division of Market Regulation, pursuant to delegated authority.
Margaret H. McFarland,
3. The Nasdaq-100 Index is a modified capitalization-weighted index of 100 of the largest non-financial companies listed on The Nasdaq National Market tier of The Nasdaq Stock Market. The Index constitutes a broadly diversified segment of the largest securities listed on The Nasdaq Stock Market and includes companies across a variety of major industry groups. The securities in the Index must, among other things, have an average daily trading volume on Nasdaq of at least 200,000 shares.
In order to limit domination of the Index by a few large stocks, the Index is calculated under a “modified capitalization-weighted” methodology, which is a hybrid between equal weighting and conventional capitalization weighting. Under the methodology employed, on a quarterly basis coinciding with Nasdaq's quarterly scheduled weight adjustment procedures, the Index Securities are categorized as either “Large Stocks” or “Small Stocks” depending on whether their current percentage weights (after taking into account such scheduled weight adjustments due to stock repurchases, secondary offerings, or other corporate actions) are greater than, or less than or equal to, the average percentage weight in the Index (i.e., as a 100-stock index, the average percentage weight in the Index is 1.0%). Such quarterly examination will result in an Index rebalancing if either one or both of the following two weight distribution requirements are not met: (1) The current weight of the single largest market capitalization Index component security must be less than or equal to 24.0%, and (2) the “collective weight” of those Index component securities whose individual current weights are in excess of 4.5%, when added together, must be less than or equal to 48.0%. Index securities are ranked by market value and are evaluated annually to determine which securities will be included in the Index. Moreover, if at any time during the year an Index security is no longer trading on the Nasdaq Stock Market, or is otherwise determined by Nasdaq to become ineligible for continued inclusion in the Index, the security will be replaced with the largest market capitalization security not currently in the Index that meets the Index eligibility criteria.
For a detailed description of the Nasdaq-100 Index, see the prospectus supplement that will be filed by CGMHI with the Commission prior to the issuance of the Notes.Back to Citation
4. See Securities Exchange Act Release No. 32988 (September 29, 1993); 58 FR 52124 (October 6, 1993).Back to Citation
5. 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 (“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.Back to Citation
6. The actual maturity date will be determined on the day the Notes are priced for initial sale to the public.Back to Citation
7. The Ending Value will be the closing value of the Nasdaq-100 Index on approximately the third index business day before the maturity date of the Notes.Back to Citation
8. The Starting Value will equal the closing value of the Nasdaq-100 Index on the date the Notes are priced for initial sale to the public.Back to Citation
9. The actual cap will be determined on the date the Notes are priced for initial sale to the public.Back to Citation
10. The upside participation rate will be determined on the date the Notes are priced for initial sale to the public.Back to Citation
11. The downside participation rate will be determined on the date the Notes are priced for initial sale to the public.Back to Citation
12. See Securities Exchange Act Release No. 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); Securities Exchange Act Release No. 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); Securities Exchange Act Release No. 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); Securities Exchange Act Release No. 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); Securities Exchange Act Release No. 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); Securities Exchange Act Release No. 33428 (January 5, 1994), 59 FR 1576 (January 11, 1994) (approving the listing and trading of options on the Nasdaq-100 Index).Back to Citation
13. See NASD Rule 2860(b)(19).Back to Citation
14. See NASD Rule 2860(b)(18).Back to Citation
[FR Doc. 03-20183 Filed 8-6-03; 8:45 am]
BILLING CODE 8010-01-P