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, 68486-68490 [05-22414]
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68486
Federal Register / Vol. 70, No. 217 / Thursday, November 10, 2005 / Notices
distributing a Regulatory Information
Circular prior to the implementation of
any change.
2. Statutory Basis
The Exchange believes the proposal is
consistent with Section 6(b) of the Act 7,
in general, and furthers the objectives of
Section 6(b)(5) of the Act,8 in particular,
in that it is designed to promote just and
equitable principles of trade, remove
impediments to and perfect the
mechanisms of a free and open market
and a national market system, and, in
general, to protect investors and the
public interest in that it would promote
efficient interaction of market maker
quotations.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
The Exchange believes the proposed
rule change does not 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
No written comments were solicited
or received by the Exchange on this
proposal.
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 Exchange consents,
the Commission will:
(A) By order approve the proposed
rule change, or
(B) Institute proceedings to determine
whether the proposed rule change
should be disapproved.
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:
• Send an e-mail to rulecomments@sec.gov. Please include File
Number SR–ISE–2005–48 on the subject
line.
Paper Comments
• Send paper comments in triplicate
to Jonathan G. Katz, Secretary,
Securities and Exchange Commission,
100 F Street, NE., Washington, DC
20549–9303.
All submissions should refer to File
Number SR–ISE–2005–48. 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 (https://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 the 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
Number SR–ISE–2005–48 and should be
submitted on or before December 1,
2005.
For the Commission, by the Division of
Market Regulation, pursuant to delegated
authority.9
Jonathan G. Katz,
Secretary.
[FR Doc. 05–22416 Filed 11–9–05; 8:45 am]
BILLING CODE 8010–01–P
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.
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 (https://
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
Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 Amendment No. 1 replaced the original filing in
its entirety.
2 17
7 15
8 15
U.S.C. 78f(b).
U.S.C. 78f(b)(5).
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Federal Register / Vol. 70, No. 217 / Thursday, November 10, 2005 / Notices
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
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
68487
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
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:
BXN T
NEVT = NEVT −1 *
− Adjustment Amount
BXN T −1
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.
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 buywrite indexes.7
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
The BXN Index 8 is a benchmark
index designed to measure the
performance of a hypothetical ‘‘buywrite’’ 9 strategy on the Nasdaq-100
Index.10 Developed by the CBOE in
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).
5 Id.
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.
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).
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 Nasdaq100 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
Continued
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EN10NO05.313</MATH>
Description of the Index
68488
Federal Register / Vol. 70, No. 217 / Thursday, November 10, 2005 / Notices
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 riskreducing character of options.
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 Nasdaq100 call options with the closest out-ofthe 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
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.
12 The daily rate of return on the covered Nasdaq100 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
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19:02 Nov 09, 2005
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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 https://
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 Nasdaq100 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.
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.
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-toexpiration 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.
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
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).
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;
(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
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.
16 See Securities Exchange Act Release No. 32988
(September 29, 1993); 58 FR 52124 (October 6,
1993).
17 Morgan Stanley satisfies this listing criterion.
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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Federal Register / Vol. 70, No. 217 / Thursday, November 10, 2005 / Notices
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, 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
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
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19:02 Nov 09, 2005
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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.
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
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.
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.
representative in making recommendations to the
customer.
20 Telephone conference between Jonathan
Cayne, Associate General Counsel, Nasdaq, and
Geoffrey Pemble, Special Counsel, Division of
Market Regulation, Commission, on November 1,
2005.
21 15 U.S.C. 78o–3.
22 15 U.S.C. 78o–3(6).
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68489
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 (https://www.sec.gov/
rules/sro.shtml); or
• Send an e-mail to rulecomments@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 (https://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.
E:\FR\FM\10NON1.SGM
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68490
Federal Register / Vol. 70, No. 217 / Thursday, November 10, 2005 / Notices
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
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
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
23 See
supra note 10.
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).
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
24 15
VerDate Aug<31>2005
19:02 Nov 09, 2005
Jkt 208001
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.
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
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 realtime call option pricing on the Nasdaq100 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
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.
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).
28 See supra not 10.
PO 00000
Frm 00099
Fmt 4703
Sfmt 4703
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.
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.
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.
For the Commission, by the Division of
Market Regulation, pursuant to delegated
authority.32
Jonathan G. Katz,
Secretary.
[FR Doc. 05–22414 Filed 11–9–05; 8:45 am]
BILLING CODE 8010–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–52715; File No. SR–NYSE–
2005–65]
Self-Regulatory Organizations; New
York Stock Exchange, Inc.; Notice of
Filing of Proposed Rule Change
Regarding the Euro Currency Trust
November 1, 2005.
Pursuant to section 19(b)(1) 1 of the
Securities Exchange Act of 1934 (the
‘‘Exchange Act’’) 2 and Rule 19b–4
thereunder,3 notice is hereby given that
on September 29, 2005, the New York
Stock Exchange, Inc. (‘‘NYSE’’ or
‘‘Exchange’’) filed with the Securities
and Exchange Commission (‘‘SEC’’ or
‘‘Commission’’) the proposed rule
change as described in Items I, II, III
below, which Items have been prepared
by the Exchange. The Commission is
publishing this notice to solicit
comments on the proposed rule change
from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange proposes to list and
trade under new NYSE Rules 1300A et
seq. (‘‘Currency Trust Shares’’) Euro
29 15
U.S.C. 78f(b)(5) and 78s(b)(2).
U.S.C. 78o3(b)(6) and 78s(b)(2).
31 15 U.S.C. 78s(b)(2).
32 17 CFR 200.30–3(a)(12).
1 15 U.S.C. 78s(b)(1).
2 15 U.S.C. 78a.
3 17 CFR 240.19b–4.
30 15
E:\FR\FM\10NON1.SGM
10NON1
]]>Agencies
[Federal Register Volume 70, Number 217 (Thursday, November 10, 2005)]
[Notices]
[Pages 68486-68490]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 05-22414]
-----------------------------------------------------------------------
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.
---------------------------------------------------------------------------
\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.
---------------------------------------------------------------------------
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 (https://
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\
---------------------------------------------------------------------------
\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).
---------------------------------------------------------------------------
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\
---------------------------------------------------------------------------
\5\ Id.
---------------------------------------------------------------------------
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:
---------------------------------------------------------------------------
\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\
---------------------------------------------------------------------------
\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).
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
\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.
---------------------------------------------------------------------------
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 https://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.
---------------------------------------------------------------------------
\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.
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
\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.
---------------------------------------------------------------------------
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\
---------------------------------------------------------------------------
\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.
---------------------------------------------------------------------------
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).
---------------------------------------------------------------------------
\16\ See Securities Exchange Act Release No. 32988 (September
29, 1993); 58 FR 52124 (October 6, 1993).
---------------------------------------------------------------------------
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;
---------------------------------------------------------------------------
\17\ Morgan Stanley satisfies this listing criterion.
---------------------------------------------------------------------------
(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.
---------------------------------------------------------------------------
\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.
---------------------------------------------------------------------------
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 (https://
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 (https://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
