Self-Regulatory Organizations; National Association of Securities Dealers, Inc.; Notice of Filing and Order Granting Accelerated Approval of Proposed Rule Change and Amendment No. 1 Thereto Relating to the Listing and Trading of Strategic Total Return Securities SM, 70006-70010 [E5-6386]

Download as PDF 70006 Federal Register / Vol. 70, No. 222 / Friday, November 18, 2005 / Notices 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, as amended, or (B) Institute proceedings to determine whether the proposed rule change, as amended, should be disapproved. the principal office of the CHX. 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–CHX–2004–38 and should be submitted on or before December 9, 2005. For the Commission, by the Division of Market Regulation, pursuant to delegated authority.18 Jonathan G. Katz, Secretary. [FR Doc. E5–6380 Filed 11–17–05; 8:45 am] BILLING CODE 8010–01–P 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 (https://www.sec.gov/ rules/sro.shtml); or • Send an e-mail to rulecomments@sec.gov. Please include File Number SR–CHX–2004–38 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 No. SR–CHX–2004–38. 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 will also be available for inspection and copying at VerDate Aug<31>2005 15:21 Nov 17, 2005 Jkt 208001 SECURITIES AND EXCHANGE COMMISSION [Release No. 34–52756; File No. SR–NASD– 2005–119] Self-Regulatory Organizations; National Association of Securities Dealers, Inc.; Notice of Filing and Order Granting Accelerated Approval of Proposed Rule Change and Amendment No. 1 Thereto Relating to the Listing and Trading of Strategic Total Return Securities SM Linked to the CBOE Nasdaq-100 BuyWrite Index November 9, 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 Strategic Total Return Securities SM (‘‘STRS’’ or ‘‘Notes’’), the return on 18 17 CFR 200.30–3(a)(12). 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. PO 00000 Frm 00082 Fmt 4703 Sfmt 4703 which is based upon the CBOE Nasdaq100 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 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 payout on the Notes upon exchange, upon redemption, or at 4 Telephone conference between Jonathan Cayne, Associate General Counsel, Nasdaq, and Ronesha Butler, Special Attorney, Division of Market Regulation (‘‘Division’’), Commission, on November 8, 2005 (relating to additional descriptive material about the Notes provided in prospectus supplement). E:\FR\FM\18NON1.SGM 18NON1 Federal Register / Vol. 70, No. 222 / Friday, November 18, 2005 / Notices 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 70007 the closing value of the Index on the pricing date (‘‘Initial BXN Index Value’’) minus the Adjustment Amount 5 as of that trading day. In other words:  BXN T  NEVT = NEVT −1 *   − Adjustment Amount  BXN T −1  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. 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. The BXN Index 7 is a benchmark index designed to measure the performance of a hypothetical ‘‘buywrite’’ 8 strategy on the Nasdaq-100 Index.9 Developed by the CBOE in cooperation with Nasdaq, the Index was initially announced in 2005.10 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 11 on the covered Nasdaq-100 5 On any trading day, the Adjustment Amount is 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. 6 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). 7 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. 8 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. 9 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 Nasdaq100 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. 10 See supra note 6. 11 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 Description of the Index Continued VerDate Aug<31>2005 15:21 Nov 17, 2005 Jkt 208001 PO 00000 Frm 00083 Fmt 4703 Sfmt 4703 E:\FR\FM\18NON1.SGM 18NON1 EN18NO05.002</MATH> 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.6 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 above paragraph) equals or is less than $2.00 on any trading day. Furthermore, during the period from January 2006 to July 2011, 70008 Federal Register / Vol. 70, No. 222 / Friday, November 18, 2005 / Notices 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.12 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.13 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 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. 12 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. 13 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 Amex ‘‘generic’’ listing standards for notes linked to these indexes. See supra note 7. VerDate Aug<31>2005 15:21 Nov 17, 2005 Jkt 208001 Index. The Indicative Value may not reflect the precise value of the Notes. 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.14 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.15 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.16 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).17 Lastly, pursuant to NASD Rule 4420(f)(3), prior 14 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. 15 See Securities Exchange Act Release No. 32988 (September 29, 1993); 58 FR 52124 (October 6, 1993). 16 Morgan Stanley satisfies this listing criterion. 17 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. PO 00000 Frm 00084 Fmt 4703 Sfmt 4703 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, 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.18 In 18 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 E:\FR\FM\18NON1.SGM 18NON1 Federal Register / Vol. 70, No. 222 / Friday, November 18, 2005 / Notices 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 4:00 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.19 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,20 in general, and with Section 15A(b)(6) of the Act,21 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 such other information used or considered to be reasonable by such member or registered representative in making recommendations to the customer. 19 Telephone conference between Jonathan Cayne, Associate General Counsel, Nasdaq, and Ronesha Butler, Special Counsel, Division of Market Regulation, Commission, on November 8, 2005. 20 15 U.S.C. 78o–3. 21 15 U.S.C. 78o–3(6). VerDate Aug<31>2005 15:21 Nov 17, 2005 Jkt 208001 70009 necessary or appropriate in furtherance of the purposes of the Act. should be submitted on or before December 9, 2005. C. Self-Regulatory Organization’s Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others 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 III. Solicitation of Comments accommodate the timetable of listing the Notes. In this regard, Nasdaq notes that Interested persons are invited to the Commission has previously submit written data, views, and approved the listing of securities the arguments concerning the foregoing, performance of which has been linked including whether the proposed rule to the Index.22 change is consistent with the Act. After careful review, the Commission Comments may be submitted by any of finds that the proposed rule change is the following methods: consistent with the requirements of the Electronic Comments Act and the rules and regulations thereunder applicable to a national • Use the Commission’s Internet securities association, and, in particular, comment form (https://www.sec.gov/ the requirements of section 15A of the rules/sro.shtml); or Act.23 Specifically, the Commission • Send an e-mail to rulefinds that the proposal is consistent comments@sec.gov. Please include File with section 15(A)(b)(6) of the Act, Number SR–NASD–2005–119 on the which requires that the rules be subject line. designed to promote just and equitable Paper Comments principles of trade, foster cooperation and coordination with persons engaged • Send paper comments in triplicate in processing information with respect to Jonathan G. Katz, Secretary, to and facilitating transactions in Securities and Exchange Commission, securities, as well as to remove Station Place, 100 F Street, NE., impediments to and perfect the Washington, DC 20549–9303. mechanism of a free and open market, All submissions should refer to File and, in general, to protect investors and Number SR–NASD–2005–119. This file the public interest.24 number should be included on the In approving the product, the subject line if e-mail is used. To help the Commission recognizes that the Index is Commission process and review your a passive total return index based on (1) comments more efficiently, please use only one method. The Commission will buying a portfolio consisting of the post all comments on the Commission’s component stocks of the Nasdaq-100, and (2) ‘‘writing’’ (or selling) near-term Internet Web site (https://www.sec.gov/ Nasdaq-100 call options, with the rules/sro.shtml). Copies of the closest out-of-the money strike price, submission, all subsequent generally on the third Friday of each amendments, all written statements month. Given the large trading volume with respect to the proposed rule and capitalization of the compositions change that are filed with the of the stocks underlying the Index, the Commission, and all written Commission believes that the listing and communications relating to the trading of the Notes that are linked to proposed rule change between the Commission and any person, other than the BXN Index should not unduly impact the market for the underlying those that may be withheld from the securities compromising the Nasdaq-100 public in accordance with the or raise manipulative concerns.25 provisions of 5 U.S.C. 552, will be available for inspection and copying in 22 See supra note 10. the Commission’s Public Reference 23 15 U.S.C. 78o–3. Room. Copies of such filing also will be 24 In approving the proposed rule, the available for inspection and copying at Commission has considered the proposed rule’s impact on efficiency, competition, and capital the principal office of the NASD. All formation. 15 U.S.C. 78c(f). comments received will be posted 25 The issuer, Morgan Stanley, disclosed in the without change; the Commission does prospectus that the original issue price of the Notes not edit personal identifying includes commissions (and the secondary market prices are likely to exclude commissions) and information from submissions. You Morgan Stanley’s costs of hedging its obligations should submit only information that you wish to make available publicly. All under the Notes. These costs could increase the initial value of the Notes, thus affecting the submissions should refer to File payment investors receive at maturity. Continued Number SR–NASD–2005–119 and Written comments were neither solicited nor received. PO 00000 Frm 00085 Fmt 4703 Sfmt 4703 E:\FR\FM\18NON1.SGM 18NON1 70010 Federal Register / Vol. 70, No. 222 / Friday, November 18, 2005 / Notices 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.26 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 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. 26 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). VerDate Aug<31>2005 15:21 Nov 17, 2005 Jkt 208001 this product is similar to several other instruments currently listed and traded on the Nasdaq.27 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,28 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,29 to approve the proposal, on an accelerated basis. V. Conclusion It is therefore ordered, pursuant to section 19(b)(2) of the Act,30 that the proposed rule change (SR–NASD–2005– 119) is hereby approved on an accelerated basis. For the Commission, by the Division of Market Regulation, pursuant to delegated authority.31 Jonathan G. Katz, Secretary. [FR Doc. E5–6386 Filed 11–17–05; 8:45 am] BILLING CODE 8010–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–52761; File No. SR–NYSE– 2005–76] Self-Regulatory Organizations; New York Stock Exchange, Inc.; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change Relating to iShares Index Funds of iShares Trust and iShares, Inc. November 10, 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 October 28, 2005, the New York Stock Exchange, Inc. (‘‘NYSE’’ or ‘‘Exchange’’) filed with the Securities and Exchange Commission (‘‘Commission’’) the proposed rule change as described in Items I and II below, which Items have been prepared by the NYSE. The Exchange filed the proposed rule change as a ‘‘non-controversial’’ rule change under Rule 19b–4(f)(6) under the Act,3 which renders the proposal effective upon filing with the Commission. The 27 See supra note 10. U.S.C. 78f(b)(5) and 78s(b)(2). 29 15 U.S.C. 78o3(b)(6) and 78s(b)(2). 30 15 U.S.C. 78s(b)(2). 31 17 CFR 200.30–3(a)(12). 1 15 U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 3 17 CFR 240.19b–4(f)(6). 28 15 PO 00000 Frm 00086 Fmt 4703 Sfmt 4703 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 NYSE proposes to list and trade the following iShares Index Funds, which are Investment Company Units (‘‘ICUs’’) under section 703.16 of the Exchange Listed Company Manual: iShares MSCISM Brazil Index Fund, iShares MSCI Hong Kong Index Fund, iShares MSCI Japan Index Fund, iShares MSCI Malaysia Index Fund, iShares MSCI Singapore Index Fund, iShares MSCI South Korea Index Fund, iShares MSCI Taiwan Index Fund, iShares MSCI United Kingdom Index Fund, and iShares S&P Europe 350 Index Fund.4 II. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, the NYSE 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. The NYSE 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, Proposed Rule Change 1. Purpose The NYSE notes that it has adopted listing standards applicable to ICUs, which are consistent with the listing criteria currently used by other exchanges, and trading standards pursuant to which the Exchange may trade ICUs on the Exchange, including on an unlisted trading privileges (‘‘UTP’’) basis.5 The Exchange now proposes to list the following iShares Index Funds (‘‘Funds’’), which are ICUs, under section 703.16 of the Exchange 4 MSCI and MSCI Indices are registered service marks of Morgan Stanley & Co., Incorporated. 5 In 1996, the Commission approved section 703.16 of the Listed Company Manual, which sets forth the rules related to the listing of ICUs. See Securities Exchange Act Release No. 36923, March 5, 1996; 61 FR 10410, March 13, 1996 (SR–NYSE– 95–23). In 2000, the Commission also approved the Exchange’s generic listing standards for the listing and trading, or the trading pursuant to UTP, of ICUs under Section 703.16 of the Listed Company Manual and Exchange Rule 1100. See Securities Exchange Act Release No. 43679, December 5, 2000; 65 FR 77949, December 13, 2000 (SR–NYSE–00– 46). E:\FR\FM\18NON1.SGM 18NON1

Agencies

[Federal Register Volume 70, Number 222 (Friday, November 18, 2005)]
[Notices]
[Pages 70006-70010]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E5-6386]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-52756; File No. SR-NASD-2005-119]


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

November 9, 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 Strategic Total Return Securities 
\SM\ (``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 may be examined at the places specified in 
Item III below. Nasdaq has prepared summaries, set forth in Sections A, 
B, and C below, of the most significant aspects of such statements.

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

1. Purpose
    Nasdaq proposes to list and trade the Notes. The Notes provide for 
a return based upon the BXN Index.

Description of Notes

    The Notes are non-convertible debt issued by Morgan Stanley that 
are due on October 30, 2011 and have a principal amount and issue price 
of $10. The Notes will trade as a single, exchange-listed security. 
However, the principal amount is initially reduce by underwriting 
commissions of 1.20%, so that the Notes, in fact, are initially valued 
at $9.88, which is known as the initial net entitlement value 
(``Initial NEV''). Additional fees of 2% each year reduce the Net 
Entitlement Value (``NEV''). Because the initial NEV is 1.20% less than 
the issue price of the securities and because the 2% per annum 
adjustment amount reduces the NEV over the term of the securities, the 
BXN Index must increase for the investor to receive an amount upon 
sale, exchange, redemption or at maturity equal to the issue price for 
each security. Thus, unlike ordinary debt, the Notes have no guaranteed 
return of principal and do not pay interest.\4\
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    \4\ Telephone conference between Jonathan Cayne, Associate 
General Counsel, Nasdaq, and Ronesha Butler, Special Attorney, 
Division of Market Regulation (``Division''), Commission, on 
November 8, 2005 (relating to additional descriptive material about 
the Notes provided in prospectus supplement).
---------------------------------------------------------------------------

    The payout on the Notes upon exchange, upon redemption, or at

[[Page 70007]]

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 \5\ as of 
that trading day. In other words:
---------------------------------------------------------------------------

    \5\ On any trading day, the Adjustment Amount is 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] TN18NO05.002

---------------------------------------------------------------------------
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.\6\
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    \6\ 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 above 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. 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 \7\ is a benchmark index designed to measure the 
performance of a hypothetical ``buy-write'' \8\ strategy on the Nasdaq-
100 Index.\9\ Developed by the CBOE in cooperation with Nasdaq, the 
Index was initially announced in 2005.\10\ 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.
---------------------------------------------------------------------------

    \7\ 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.
    \8\ 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.
    \9\ 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.
    \10\ See supra note 6.
---------------------------------------------------------------------------

    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 \11\ on the covered Nasdaq-100

[[Page 70008]]

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.\12\ 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.
---------------------------------------------------------------------------

    \11\ 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.
    \12\ 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.\13\ 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.
---------------------------------------------------------------------------

    \13\ 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 Amex ``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.\14\
---------------------------------------------------------------------------

    \14\ 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.\15\ Nasdaq proposes to list and trade 
Notes based on the BXN Index under NASD Rule 4420(f).
---------------------------------------------------------------------------

    \15\ 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.\16\ 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;
---------------------------------------------------------------------------

    \16\ 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).\17\ 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.
---------------------------------------------------------------------------

    \17\ 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.\18\ In

[[Page 70009]]

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 4:00 p.m. will apply to 
transactions in the Notes.
---------------------------------------------------------------------------

    \18\ 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.
---------------------------------------------------------------------------

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.\19\
---------------------------------------------------------------------------

    \19\ Telephone conference between Jonathan Cayne, Associate 
General Counsel, Nasdaq, and Ronesha Butler, Special Counsel, 
Division of Market Regulation, Commission, on November 8, 2005.
---------------------------------------------------------------------------

    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,\20\ in general, and with 
Section 15A(b)(6) of the Act,\21\ 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.
---------------------------------------------------------------------------

    \20\ 15 U.S.C. 78o-3.
    \21\ 15 U.S.C. 78o-3(6).
---------------------------------------------------------------------------

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 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-2005-119 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-2005-119. 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-2005-119 and should be submitted on or before 
December 9, 2005.

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.\22\
---------------------------------------------------------------------------

    \22\ See supra note 10.
---------------------------------------------------------------------------

    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.\23\ 
Specifically, the Commission finds that the proposal is consistent with 
section 15(A)(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.\24\
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    \23\ 15 U.S.C. 78o-3.
    \24\ 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.\25\

[[Page 70010]]

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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    \25\ 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.\26\
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    \26\ 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.\27\ 
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,\28\ to approve the proposal on an accelerated basis.
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    \27\ See supra note 10.
    \28\ 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,\29\ to 
approve the proposal, on an accelerated basis.
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    \29\ 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,\30\ that the proposed rule change (SR-NASD-2005-119) is hereby 
approved on an accelerated basis.
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    \30\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\31\
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    \31\ 17 CFR 200.30-3(a)(12).
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Jonathan G. Katz,
Secretary.
 [FR Doc. E5-6386 Filed 11-17-05; 8:45 am]
BILLING CODE 8010-01-P
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