

[Federal Register: May 23, 2007 (Volume 72, Number 99)]
[Notices]               
[Page 29015-29019]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr23my07-102]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-55776; File No. SR-Amex-2007-29]

 
Self-Regulatory Organizations; American Stock Exchange LLC; Order 
Granting Accelerated Approval of a Proposed Rule Change, as Modified by 
Amendment No. 1 Thereto, Relating to the Listing and Trading of Notes 
Linked to the Performance of the Dow Jones-AIG Commodity Index Total 
Return

May 17, 2007.

I. Introduction

    On March 2, 2007, the American Stock Exchange LLC (``Amex'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') a proposed rule change pursuant to Section 19(b)(1) of 
the Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 
thereunder.\2\ On April 5, 2007, Amex filed Amendment No. 1 to the 
proposed rule change. The proposed rule change, as amended, was 
published for comment in the Federal Register on May 1, 2007 for a 15-
day comment period.\3\ The Commission received no comments on the 
proposal. This order approves the proposed rule change, as modified by 
Amendment No. 1, on an accelerated basis.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 55661 (April 24, 
2007), 72 FR 23862 (``Notice'').
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II. Description of the Proposal

    Under Section 107A of the Amex Company Guide (``Company Guide''), 
the Exchange may approve for listing and trading securities which 
cannot be readily categorized under the listing criteria for common and 
preferred stocks, bonds, debentures, or warrants, including index and 
currency warrants. Amex proposes to list for trading under

[[Page 29016]]

Section 107A of the Company Guide floating rate notes (the ``Notes'') 
linked to the performance of the Dow Jones-AIG Commodity Index Total 
Return (the ``Index'').\4\
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    \4\ Lehman Brothers Holdings Inc. (``Lehman''), Dow Jones & 
Company, Inc. (``Dow Jones'') and AIG International, Inc. (``AIGI'') 
have entered into a non-exclusive license agreement providing for 
the use of the Index by Lehman and certain affiliates and 
subsidiaries thereof in connection with certain securities including 
the Notes.
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    The Exchange states that the Notes will conform to the initial 
listing guidelines under Section 107A of the Company Guide and the 
continued listing guidelines under Sections 1001-1003 of the Company 
Guide. The Notes are senior, non-convertible debt securities of Lehman, 
have a term of thirteen months, and will provide for participation in 
the positive performance of the Index during their term. The Notes are 
cash-settled in United States (``U.S.'') dollars and do not give the 
holder any right or other ownership interest in the Index or 
commodities comprising the Index. The Notes are designed for investors 
who desire to participate in, or gain exposure to, an index composed of 
a basket of actively-traded commodities, receive monthly coupon 
interest payments, and are willing to forego principal protection on 
the Notes during their term. Lehman will issue the Notes in 
denominations of whole units, with each unit representing a single 
Note. The original public offering price will be $1,000 per Note.
    Unless the Notes have been redeemed earlier, at maturity, a holder 
would receive per each $1,000 Note, a cash amount equal to the Daily 
Value per $1,000 Note as of the Valuation Date\5\, plus accrued and 
unpaid coupon payments, to, but excluding, the stated maturity date. 
Lehman may redeem the Notes early if, on any Index Business Day prior 
to the Valuation Date, the Daily Value per $1,000 Note falls below a 
certain pre-determined amount. This day is known as the ``Early 
Redemption Determination Date.'' This pre-determined amount will be 
determined at the time of issuance of the Notes. In the event of 
redemption, Lehman will pay an amount per $1,000 Note equal to the 
Daily Value per $1,000 Note calculated as of the first Index Business 
Day following the Early Redemption Determination Date, plus accrued and 
unpaid coupon payments to, but excluding, the Early Redemption 
Determination Date.
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    \5\ See Notice at 23862 (providing a detailed discussion of the 
calculation methodology of the ``Daily Value'' per $1000 Note as of 
the Valuation Date). Terms not otherwise defined herein shall have 
the same meaning as the meaning given in the Notice, supra note 3.
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    If an event of default occurs and the maturity of the Notes are 
accelerated, Lehman will pay holders an amount equal to the amount that 
would have been payable at maturity, calculated as though the date of 
acceleration was the stated maturity date, and the date three Index 
Business Days before the date of acceleration was the Valuation Date. 
If a bankruptcy proceeding is commenced, the claims of a holder of a 
Note may be limited.

Index Description

    The Index, developed by AIGI, is a proprietary index that is 
calculated by Dow Jones, AIGI, and AIG Financial Products Corp. (``AIG-
FP'' and, together with AIGI and Dow Jones, the ``Sponsors'') and 
published by Dow Jones.\6\ The methodology for determining the 
composition and weighting of the Index and for calculating its level is 
subject to modification by the Sponsors at any time.\7\ Dow Jones 
disseminates the Index level at least every 15 seconds from 8 a.m. to 3 
p.m. Eastern Time (``ET''),\8\ and publishes a daily Index level at 
approximately 4 p.m. ET on each DJ-AIG Business Day on its Web site at 
http://www.djindexes.com and on Bloomberg's Web site.

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    \6\ AIG-FP is not a broker-dealer or futures commission 
merchant; however, AIG-FP may have such affiliates. Therefore, AIG-
FP (1) maintains and agrees to continue to maintain procedures 
reasonably designed to prevent the use and dissemination by relevant 
employees of AIG-FP, in violation of applicable laws, rules and 
regulations, of material non-public information relating to changes 
in the composition or method of computation or calculation of the 
Index or the Dow Jones-AIG Commodity Index and (2) agrees to 
periodically check the application of such procedures as they relate 
to personnel of AIG-FP responsible for such changes. Dow Jones has 
informed the Exchange that it does not have any affiliates engaged 
in the securities or commodities trading businesses and, as such, 
does not believe that such firewall procedures are necessary in its 
case. In addition, the Supervisory and Advisory Committees (as 
defined herein) are subject to written policies that acknowledge 
their obligations with respect to material non-public information.
    \7\ Lehman has informed the Exchange that Lehman is not 
affiliated with any of the Sponsors. E-mail from Jeffrey P. Burns, 
Associate General Counsel, Amex, to Edward Y. Cho, Special Counsel, 
Division of Market Regulation, Commission, dated May 14, 2007.
    \8\ Any disseminated Index value after 3 p.m. ET is static due 
to the close of auction trading of various commodities futures 
contracts.
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    The Index is re-weighted and re-balanced each year in January on a 
price-percentage basis. The annual weightings for the Index are 
determined each year in June or July by AIG-FP under the supervision of 
the Index Supervisory Committee,\9\ announced after approval by such 
Committee and implemented the following January.
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    \9\ On February 21, 2007, Dow Jones announced a change to the 
Dow Jones-AIG Commodity Index Oversight Committee structure 
providing for a two-tier committee structure consisting of a 
``Supervisory Committee'' and an ``Advisory Committee.'' The 
Supervisory Committee makes all final decisions relating to the 
Index with the advice and recommendation from the Advisory 
Committee.
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    The Index is designed to track rolling futures positions in a 
diversified basket of 19 exchange-traded futures contracts on physical 
commodities. The 19 physical commodities selected for 2007 are 
aluminum, coffee, copper, corn, cotton, crude oil, gold, heating oil, 
lean hogs, live cattle, natural gas, nickel, silver, soybeans, soybean 
oil, sugar, unleaded gasoline, wheat, and zinc. Unlike equities, which 
typically entitle the holder to a continuing stake in a corporation, 
commodity futures contracts normally specify a certain date for the 
delivery of the underlying physical commodity. The Index tracks what is 
known as a rolling futures position, which is a position where, on a 
periodic basis, futures contracts on physical commodities specifying 
delivery on a nearby date must be sold and futures contracts on 
physical commodities that have not yet reached the delivery period must 
be purchased. An investor with a rolling futures position is able to 
avoid delivering underlying physical commodities while maintaining 
exposure to those commodities. The rollover for each Index component 
occurs over a period of five DJ-AIG Business Days each month according 
to a pre-determined schedule.
    The 19 physical commodities selected for inclusion in the Index for 
2007, and their respective weightings, are as follows:

------------------------------------------------------------------------
                                                             Weighting
                        Commodity                            (percent)
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Crude oil...............................................       12.723561
Natural gas.............................................       12.546191
Soybeans................................................        7.747790
Gold....................................................        6.825901
Aluminum................................................        6.803820
Copper..................................................        6.187758
Live cattle.............................................        6.141286
Corn....................................................        5.627129
Wheat...................................................        4.715495
Unleaded gasoline.......................................        3.940958
Heating oil.............................................        3.789289
Cotton..................................................        3.146094
Sugar...................................................        3.122271
Coffee..................................................        3.021718
Lean hogs...............................................        3.013524
Soybean oil.............................................        2.845646
Zinc....................................................        2.798069
Nickel..................................................        2.715318
Silver..................................................        2.288179
                                                         ---------------

[[Page 29017]]


    Total (rounded).....................................      100.000000
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    Futures contracts on the Index are currently listed for trading on 
the Chicago Board of Trade (``CBOT''). The Index commodities currently 
trade on U.S. exchanges, with the exception of aluminum, nickel and 
zinc, which trade on the London Metal Exchange (``LME'').

Designated Contracts for Each Index Commodity

    A futures contract, known as a ``Designated Contract,'' is selected 
by the Supervisory Committee for each Index commodity.\10\ With the 
exception of several LME contracts, the Supervisory Committee selects 
the futures contract that is traded in the U.S. and denominated in U.S. 
dollars. If more than one of those contracts exists, the Supervisory 
Committee will select the most actively traded contract. Data 
concerning this Designated Contract will be used to calculate the Index 
value. If a Designated Contract is terminated or replaced, a comparable 
futures contract would be selected, if available, to replace that 
Designated Contract.
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    \10\ The Supervisory Committee may exclude any otherwise 
eligible contract from the Index if it determines that it has 
inadequate liquidity. The Index currently includes contracts traded 
on LME, which is located in London. During the hours when the LME is 
closed, Dow Jones uses the last price and the settlement price once 
they are available in order to publish the Index value through the 
end of the trading day. The Index value does not reflect any after-
hours or overnight trading in contracts traded on LME.
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    The Designated Contracts for the Index commodities included in the 
Index for 2007 are traded on LME, CBOT, the New York Board of Trade 
(``NYBOT''),\11\ the Chicago Mercantile Exchange, Inc. (``CME''), and 
the New York Mercantile Exchange (``NYMEX''). The particular 
commodities futures exchanges for each commodity futures contract are 
as follows: (1) Aluminum, nickel, and zinc--LME at http://www.lme.com; (2) 

corn, soybeans, soybean oil, and wheat--CBOT at http://www.cbot.com; (3) live 

cattle and lean hogs--CME at http://www.cme.com; (4) coffee, cotton, and 

sugar--NYBOT at http://www.nybot.com; and (5) copper, crude oil, gold, heating 

oil, natural gas, silver, and unleaded gasoline--NYMEX at 
http://www.nymex.com. In addition, various market data vendors and financial 

news publications publish futures prices and data. The Exchange 
represents that futures quotes and last sale information for the 
commodities underlying the Index are widely disseminated through a 
variety of major market data vendors worldwide, including Bloomberg and 
Reuters.
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    \11\ NYBOT recently was purchased by the Intercontinental 
Exchange (``ICE'') and is now a regulated subsidiary of ICE.
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Determination of Relative Weightings

    The relative weightings of the component commodities included in 
the Index are determined annually according to both liquidity and 
dollar-adjusted production data in 2/3 and 1/3 shares, respectively. 
Each June, for each commodity designated for potential inclusion in the 
Index, liquidity is measured by the commodity liquidity percentage and 
production by the commodity production percentage.\12\
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    \12\ See Notice at 23864 (providing a detailed discussion of how 
the commodity liquidity percentage and the commodity production 
percentage are determined and adjusted).
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    The Index is designed to provide diversified exposure to 
commodities as an asset class. To ensure that no single commodity or 
commodity sector dominates the Index, the following diversification 
rules are applied to the annual re-weighting and re-balancing of the 
Index as of January of the applicable year:
     No related group of commodities designated as a commodity 
group (e.g., energy, precious metals, livestock, or grains) may 
constitute more than 33% of the Index.
     No single commodity may constitute more than 15% of the 
Index.
     No single commodity, together with its derivatives (e.g., 
crude oil, together with heating oil and unleaded gasoline), may 
constitute more than 25% of the Index.
    Following the annual re-weighting and re-balancing of the Index in 
January, the percentage of any single commodity or group of commodities 
at any time prior to the next re-weighting or re-balancing will 
fluctuate and may exceed or be less than the percentages set forth 
above. The Index is then calculated by the Sponsors by applying the 
impact of the changes to the futures prices of commodities included in 
the Index (based on their relative weightings).\13\
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    \13\ See id. (describing the mathematical process for the 
calculation of the Index value).
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Index Calculation Disruption Events

    From time to time, disruptions can occur in trading futures 
contracts on various commodity exchanges. The daily calculation of the 
Index may be adjusted in the event that the Sponsors determine that any 
of the following Index calculation disruption events exists:
     The termination or suspension of, or material limitation 
or disruption in, the trading of any futures contract used in the 
calculation of the Index on that day;
     The settlement price of any futures contract used in the 
calculation of the Index reflects the maximum permitted price change 
from the previous day's settlement price;
     The failure of an exchange to publish settlement prices 
for any futures contract used in the calculation of the Index; or
     With respect to any futures contract used in the 
calculation of the Index that trades on LME, a business day on which 
LME is not open for trading.
    The Exchange submits that for a temporary disruption in the trading 
of a futures contract, AIGI will typically use the prior day's price 
for an Index commodity or commodities. In exceptional cases, AIGI may 
employ a ``fair value'' price. However, the Exchange represents that if 
the use of a prior day's price or ``fair value'' pricing for an Index 
commodity or commodities continues for more than one day, the Exchange 
will commence delisting the Notes.

Exchange Rules Applicable to the Notes

    Amex represents that the Notes will trade on the Exchange subject 
to existing Amex trading rules applicable to the Notes including, among 
others, rules governing priority, parity, and precedence of orders, 
specialist responsibilities, account opening, and customer suitability 
requirements. In addition, the Notes will be subject to the equity 
margin rules of the Exchange.\14\
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    \14\ See Amex Rule 462.
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Criteria for Initial and Continued Listing

    The Exchange represents that it prohibits the initial and/or 
continued listing of any security that is not in compliance with Rule 
10A-3 under the Act.\15\ The Exchange further represents that the Notes 
will meet the listing requirements set forth in Section 107A of the 
Company Guide as well as the continued listing requirements set forth 
in Sections 1001 through 1003 of the Company Guide. The Exchange also 
has a general policy that prohibits the distribution of material, non-
public information by its employees.
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    \15\ See 17 CFR 240.10A-3(c)(1).
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Trading Halts

    The Exchange states that it will halt trading in the Notes if the 
circuit breaker parameters of Amex Rule 117 have been reached. In 
exercising its discretion to halt or suspend trading in

[[Page 29018]]

the Notes, the Exchange may consider factors such as those set forth in 
Amex Rule 918C(b), in addition to other factors that may be relevant. 
In particular, if the Index value is not being disseminated as 
required, the Exchange may halt trading during the day in which the 
interruption to the dissemination of the Index value occurs. If the 
interruption to the dissemination of the Index value persists past the 
trading day on which it occurred, the Exchange will halt trading no 
later than the beginning of the trading day following the interruption.

Surveillance

    The Exchange represents that its surveillance procedures are 
adequate to properly monitor the trading of the Notes. Specifically, 
Amex will rely on its existing surveillance procedures governing index-
linked securities which are similar to its surveillance procedures 
governing exchange-traded funds and trust-issued receipts. With regard 
to the Index components, the Exchange currently has in place a 
comprehensive surveillance sharing arrangement with ICE, LME, and 
NYMEX, for the purpose of providing information in connection with 
trading in or related to futures contracts comprising the Index and 
traded on their respective exchanges. The Exchange also notes that 
CBOT, CME, and NYBOT are members of the Intermarket Surveillance Group 
(``ISG''). As a result, the Exchange asserts that it can obtain all 
necessary market surveillance information, including customer identity 
information, from CBOT, CME, ICE, LME, NYBOT, and NYMEX, if necessary, 
due to regulatory concerns that may arise in connection with the 
commodity futures contracts underlying the Index.

Information Circular

    The Exchange will, prior to trading the Notes, distribute an 
Information Circular to its membership providing guidance with regard 
to member firm compliance responsibilities (including suitability 
recommendations) \16\ when handling transactions in the Notes and 
highlighting the special risks and characteristics of the Notes. In 
addition, the Circular will identify and disclose the applicable 
trading rules governing the trading of the Notes on the Exchange and 
that Lehman will deliver a prospectus in connection with the initial 
sales of the Notes and will reference that the Commission has no 
jurisdiction over the trading of the physical commodities or the 
futures contracts or on the commodities upon which the value of the 
Notes is based. The Exchange submits that it recently received approval 
to list and trade notes linked to the performance of the Dow Jones-AIG 
ExEnergy Sub-Index, which is a subset of the Index.\17\
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    \16\ With respect to suitability recommendations and risks, the 
Exchange will require members, member organizations, and employees 
thereof recommending a transaction in the Notes: (1) to determine 
that such transaction is suitable for the customer, and (2) to have 
a reasonable basis for believing that the customer can evaluate the 
special characteristics of, and is able to bear the financial risks 
of, such transaction.
    \17\ See Securities Exchange Act Release No. 54790 (November 20, 
2006), 71 FR 68645 (November 27, 2006) (SR-Amex-2006-01).
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III. Discussion and Commission's Findings

    After careful consideration, the Commission finds that the proposed 
rule change, as amended, is consistent with the requirements of the Act 
and the rules and regulations thereunder applicable to a national 
securities exchange.\18\ In particular, the Commission finds that the 
proposal is consistent with the requirements of Section 6(b)(5) of the 
Act,\19\ which requires, among other things, that the Exchange's rules 
be designed to promote just and equitable principles of trade, to 
remove impediments to and perfect the mechanism of a free and open 
market and a national market system, and, in general, to protect 
investors and the public interest. The Commission notes that the Notes 
are substantially similar to other notes, the listing and trading of 
which have previously been approved by the Commission.\20\ The 
Commission also notes that it has approved indexes comprised of similar 
commodity pools underlying other derivative products that are currently 
listed and traded on the Exchange.\21\
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    \18\ In approving this proposed rule change, the Commission 
notes that it has considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
    \19\ 15 U.S.C. 78f(b)(5).
    \20\ See, e.g., 71 FR 68645, supra note 17 (approving the 
listing and trading of principal protected notes linked to the Dow 
Jones-AIG ExEnergy Sub-Index, which is comprised of components that 
make up a subset of the Index); Securities Exchange Act Release No. 
53876 (May 25, 2006), 71 FR 32158 (June 2, 2006) (SR-NYSE-2006-16) 
(approving the listing and trading of index-linked securities of 
Barclays Bank PLC linked to the performance of the Index).
    \21\ See e.g., Securities Exchange Act Release No. 55029 
(December 29, 2006), 72 FR 806 (January 8, 2007) (SR-Amex-2006-76) 
(DB Multi-Sector Commodity Trust); Securities Exchange Act Release 
No. 53105 (January 11, 2006), 71 FR 3129 (January 19, 2006) (SR-
Amex-2005-059) (DB Commodity Index Tracking Fund).
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    The Commission further believes that the proposal is consistent 
with Section 11A(a)(1)(C)(iii) of the Exchange Act,\22\ which sets 
forth Congress' finding that it is in the public interest and 
appropriate for the protection of investors and the maintenance of fair 
and orderly markets to assure the availability to brokers, dealers, and 
investors of information with respect to quotations for and 
transactions in securities. Dow Jones will disseminate the Index value 
at least every 15 seconds from 8 a.m. to 3 p.m. ET and publish a daily 
Index level at approximately 4 p.m. ET on each DJ-AIG Business Day on 
its Internet Web site and on Bloomberg's Web site. In addition, daily 
settlement prices, futures quotes, and last-sale information for the 
designated contracts on the commodities underlying the Index are 
available through a variety of major market data vendors and financial 
news publications, including Bloomberg and Reuters.
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    \22\ 15 U.S.C. 78k-1(a)(1)(C)(iii).
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    In support of this proposal, the Exchange has made the following 
representations:
    (1) Amex would rely on its existing surveillance procedures, which 
are adequate to properly monitor the trading of the Notes. 
Specifically, the Exchange will rely on its surveillance procedures 
applicable to index-linked securities, which are similar to the 
surveillance procedures governing exchange-traded funds and trust-
issued receipts. With regard to the Index components, Amex has in place 
a comprehensive surveillance sharing agreement with ICE, LME, and 
NYMEX, for the purpose of providing and obtaining information due to 
regulatory concerns that may arise in connection with the trading of 
the futures contracts underlying the Index. In addition, Amex states 
that is able to obtain all such necessary market surveillance 
information from CBOT, CME, and NYBOT, which are members of ISG. As a 
result, the Exchange can obtain all necessary market surveillance 
information due to regulatory concerns that may arise in connection 
with the commodity futures contracts underlying the Index.
    (2) AIG-FP has in place procedures reasonably designed to prevent 
the improper sharing, use, and dissemination by relevant employees of 
AIG-FP of material non-public information relating to changes in the 
composition or method of computation or calculation of the Index and 
agrees to periodically check the application of such procedures as they 
relate to personnel of AIG-FP responsible for such changes. In 
addition, the Supervisory and Advisory Committees are subject to 
written policies that acknowledge their obligations with

[[Page 29019]]

respect to such material non-public information.
    (3) The Exchange will halt trading in the Notes if the circuit 
breaker parameters of Amex Rule 117 have been reached and, in 
exercising its discretion to halt or suspend trading in the Notes, the 
Exchange may consider factors such as those set forth in Amex Rule 
918C(b), in addition to other factors that may be relevant. In 
particular, if the Index value is not being disseminated as required, 
the Exchange may halt trading during the day in which the interruption 
to the dissemination of the Index value occurs. If the interruption to 
the dissemination of the Index value persists past the trading day on 
which it occurred, the Exchange will halt trading no later than the 
beginning of the trading day following the interruption.
    (4) Amex will distribute an Information Circular to its members 
providing guidance with regard to the special characteristics and risks 
of trading this type of security, member firm compliance 
responsibilities, including suitability recommendations, the specific 
Amex trading rules governing transactions in the Notes, and the 
prospectus delivery requirements applicable to the Notes.
    This Order is conditioned on Amex's adherence to the foregoing 
representations.
    The Commission finds good cause to approve the proposed rule 
change, as modified by Amendment No. 1 thereto, prior to the thirtieth 
day after publication for comment in the Federal Register pursuant to 
Section 19(b)(2) of the Act.\23\ As noted earlier, the Notes are 
substantially similar to other notes, the listing and trading of which 
have previously been approved by the Commission, and do not appear to 
present any new regulatory concerns.\24\ In addition, the Commission 
notes that the same Index currently underlies other products previously 
approved for listing and trading.\25\ Accelerating approval of this 
proposed rule change would allow the Notes to trade on Amex without 
undue delay and should generate additional competition in the market 
for such products.
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    \23\ 15 U.S.C. 78s(b)(2).
    \24\ See supra note 20.
    \25\ See id.
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IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\26\ that the proposed rule change (SR-Amex-2007-29), as modified 
by Amendment No. 1, be, and it hereby is, approved on an accelerated 
basis.
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    \26\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\27\
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    \27\ 17 CFR 200.30-3(a)(12).
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J. Lynn Taylor,
Assistant Secretary.
 [FR Doc. E7-9854 Filed 5-22-07; 8:45 am]

BILLING CODE 8010-01-P
