[Federal Register: January 25, 2006 (Volume 71, Number 16)]
[Notices]
[Page 4180-4187]
[DOCID:fr25ja06-119]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-53142; File No. SR-NASD-2006-001]

Self-Regulatory Organizations; National Association of Securities
Dealers, Inc.; Notice of Filing and Order Granting Accelerated Approval
of a Proposed Rule Change and Amendment No. 1 Thereto To Establish
Generic Listing Standards for Index-Linked Securities

January 19, 2006.
    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 January 3, 2006, the National Association of Securities Dealers,
Inc. (``NASD''), through its subsidiary, The Nasdaq Stock Market, Inc.
(``Nasdaq''), filed with the Securities and Exchange Commission
(``Commission'') the proposed rule change as described in Items I and
II below, which Items have been prepared by the Nasdaq. On January 13,
2006, the Exchange filed Amendment No. 1 to the proposed rule
change.\3\ The Commission is publishing this notice to solicit comments
on the proposed rule change, as amended, from interested persons and to
approve the proposal, as amended, on an accelerated basis.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ In Amendment No. 1 Nasdaq made minor revisions to the
proposed rule text and clarified certain details of its proposal.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change

    Nasdaq proposes to adopt generic listing standards for index-linked
securities (``Index Securities'') pursuant to Rule 19b-4(e) under the
Act.\4\ Nasdaq will implement the proposed rule change immediately upon
approval by the Commission.
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    \4\ 17 CFR 240.19b-4(e).
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    The proposed rule change is available on the NASD's Web site at
http://www.nasd.com, at the principal office of the NASD, and at the

Commission's Public Reference Room. The text of the proposed rule
change is also set forth below. Proposed new language is italicized;
proposed deletions are in [brackets].
* * * * *

4420. Quantitative Designation Criteria

    In order to be designated for the Nasdaq National Market, an issuer
shall be required to substantially meet the criteria set forth in
paragraphs (a), (b), (c), (d), (e), (f), (g), (h), (i), (j), (k), [or]
(l) or (m) below. Initial Public Offerings substantially meeting such
criteria are eligible for immediate inclusion in the Nasdaq National
Market upon prior application and with the written consent of the
managing underwriter that immediate inclusion is desired. All other
qualifying issues, excepting special situations, are included on the
next inclusion date established by Nasdaq.
    (a)-(l) No Change.
    (m) Index-Linked Securities
    Index-linked securities are securities that provide for the payment
at maturity of a cash amount based on the performance of an underlying
index or indexes. Such securities may or may not provide for the
repayment of the original principal investment amount. Nasdaq may
submit a rule filing pursuant to Section 19(b)(2) of the Securities
Exchange Act of 1934 to permit the listing and trading of index-linked
securities that do not otherwise meet the standards set forth below in
paragraphs (1) through (9). Nasdaq will consider for listing and
trading pursuant to Rule 19b-4(e) under the Securities Exchange Act of
1934 index-linked securities, provided:
    (1) Both the issue and the issuer of such security meet the
criteria for other securities set forth in paragraph (f) of this rule,
except that the minimum public distribution of the security shall be
1,000,000 units with a minimum of 400 public holders, unless the
security is traded in $1,000 denominations, in which case there is no
minimum number of holders.
    (2) The issue has a term of not less than one (1) year and not
greater than ten (10) years.
    (3) The issue must be the non-convertible debt of the issuer.
    (4) The payment at maturity may or may not provide for a multiple
of the positive performance of an underlying index or indexes; however,
in no event will payment at maturity be based on a multiple of the
negative performance of an underlying index or indexes.
    (5) The issuer will be expected to have a minimum tangible net
worth in excess of $250,000,000 and to exceed by at least 20% the
earnings requirements set forth in paragraph (a)(1) of this Rule. In
the alternative, the issuer will be expected: (i) To have a minimum
tangible net worth of $150,000,000 and to exceed by at least 20% the
earnings requirement set forth in paragraph (a)(1) of this Rule, and
(ii) not to have issued securities where the original issue price of
all the issuer's other index-linked note offerings (combined with
index-linked note offerings of the issuer's affiliates) listed on a
national securities exchange or traded through the facilities of Nasdaq
exceeds 25% of the issuer's net worth.
    (6) The issuer is in compliance with Rule 10A-3 under the
Securities Exchange Act of 1934.
    (7) Initial Listing Criteria--Each underlying index is required to
have at least ten (10) component securities. In addition, the index or
indexes to which the security is linked shall either (A) have been
reviewed and approved for the trading of options or other derivatives
by the Commission under Section 19(b)(2) of the 1934 Act and rules
thereunder and the conditions set forth in the Commission's approval
order, including comprehensive surveillance sharing agreements for non-
U.S. stocks, continue to be satisfied, or (B) the index or indexes meet
the following criteria:
    (i) Each component security has a minimum market value of at least
$75 million, except that for each of the lowest weighted component
securities in the index that in the aggregate account for no more than
10% of the weight of the index, the market value can be at least $50
million;
    (ii) Each component security shall have trading volume in each of
the last six months of not less than 1,000,000 shares, except that for
each of the lowest weighted component securities in the index that in
the aggregate account for no more than 10% of the weight of the index,
the trading volume shall be at least 500,000 shares in each of the last
six months;
    (iii) In the case of a capitalization-weighted or modified
capitalization-weighted index, the lesser of the five highest weighted
component securities in the index or the highest weighted component
securities in the index that

in the aggregate represent at least 30% of the total number of
component securities in the index, each have an average monthly trading
volume of at least 2,000,000 shares over the previous six months;
    (iv) No underlying component security will represent more than 25%
of the weight of the index, and the five highest weighted component
securities in the index do not in the aggregate account for more than
50% of the weight of the index (60% for an index consisting of fewer
than 25 component securities);
    (v) 90% of the index's numerical value and at least 80% of the
total number of component securities will meet the then current
criteria for standardized option trading on a national securities
exchange or a national securities association;
    (vi) Each component security shall be issued by a 1934 Act
reporting company which is listed on Nasdaq or a national securities
exchange and shall be an ``NMS'' stock as defined in SEC Rule 600 of
Regulation NMS under the 1934 Act; and
    (vii) Foreign country securities or American Depository Receipts
(``ADRs'') that are not subject to comprehensive surveillance
agreements do not in the aggregate represent more than 20% of the
weight of the index.
    (8) Index Methodology and Calculation--(i) Each index will be
calculated based on either a capitalization, modified capitalization,
price, equal-dollar or modified equal-dollar weighting methodology.
(ii) Indexes based upon the equal-dollar or modified equal-dollar
weighting method will be rebalanced at least quarterly. (iii) If the
index is maintained by a broker-dealer, the broker-dealer shall erect a
``firewall'' around the personnel who have access to information
concerning changes and adjustments to the index and the index shall be
calculated by a third party who is not a broker-dealer. (iv) The
current value of an index will be widely disseminated at least every 15
seconds, except as provided in the next clause (v). (v) The values of
the following indexes need not be calculated and widely disseminated at
least every 15 seconds if, after the close of trading, the indicative
value of the index-linked security based on one or more of such indexes
is calculated and disseminated to provide an updated value: CBOE S&P
500 BuyWrite Index(sm), CBOE DJIA BuyWrite Index(sm), CBOE Nasdaq-100
BuyWrite Index(sm). (vi) If the value of an index-linked security is
based on more than one (1) index, then the composite value of such
indexes must be widely disseminated at least every 15 seconds.
    (9) Surveillance Procedures. Nasdaq will implement written
surveillance procedures for index-linked securities, including adequate
comprehensive surveillance sharing agreements for non-U.S. securities,
as applicable.
    (10) Index-linked securities will be treated as equity instruments.
Furthermore, for the purpose of fee determination, index-linked
securities shall be deemed and treated as Other Securities.
* * * * *

4450. Quantitative Maintenance Criteria

    (a) and (b) No change.
    (c) Other Securities Designated Pursuant to Rule 4420(f) and Index-
Linked Securities.
    (1) The aggregate market value or principal amount of publicly-held
units must be at least $1 million.
    (2) Delisting or removal proceedings will be commenced (unless the
Commission has approved the continued trading) with respect to any
index-linked security that was listed pursuant to paragraph (7)(B) of
Rule 4420(m) if any of the standards set forth in paragraph (7)(B) of
such rule are not continuously maintained, except that:
    (i) the criteria that no single component represent more than 25%
of the weight of the index and the five highest weighted components in
the index may not represent more than 50% (or 60% for indexes with less
than 25 components) of the weight of the Index, need only be satisfied
for capitalization weighted and price weighted indexes as of the first
day of January and July in each year;
    (ii) the total number of components in the index may not increase
or decrease by more than 33\1/3\% from the number of components in the
index at the time of its initial listing, and in no event may be less
than ten (10) components;
    (iii) the trading volume of each component security in the index
must be at least 500,000 shares for each of the last six months, except
that for each of the lowest weighted components in the index that in
the aggregate account for no more than 10% of the weight of the index,
trading volume must be at least 400,000 shares for each of the last six
months; and
    (iv) in a capitalization-weighted or modified capitalization-
weighted index, the lesser of the five highest weighted component
securities in the index or the highest weighted component securities in
the index that in the aggregate represent at least 30% of the total
number of stocks in the index have had an average monthly trading
volume of at least 1,000,000 shares over the previous six months.
    (3) With respect to an index-linked security that was listed
pursuant to paragraph (7)(A) of Rule 4420(m), delisting or removal
proceedings will be commenced (unless the Commission has approved the
continued trading of the subject index-linked security) if an
underlying index or indexes fails to satisfy the maintenance standards
or conditions for such index or indexes as set forth by the Commission
in its order under Section 19(b)(2) of the 1934 Act approving the index
or indexes for the trading of options or other derivatives.
    (4) Delisting or removal proceedings will also be commenced with
respect to any index-linked security listed pursuant to Rule 4420(m)
(unless the Commission has approved the continued trading of the
subject index-linked security), under any of the following
circumstances:
    (i) if the aggregate market value or the principal amount of the
securities publicly held is less than $400,000;
    (ii) if the value of the index or composite value of the indexes is
no longer calculated or widely disseminated on at least a 15-second
basis, provided, however, that the values of the following indexes need
not be calculated and disseminated at least every 15 seconds if, after
the close of trading, the indicative value of any index-linked security
linked to one or more of such indexes is calculated and disseminated to
provide an updated value: CBOE S&P 500 BuyWrite Index(sm), CBOE DJIA
BuyWrite Index(sm), CBOE Nasdaq-100 BuyWrite Index(sm); or
    (iii) if such other event shall occur or condition exists which in
the opinion of Nasdaq makes further dealings on Nasdaq inadvisable.
    (d) through (i) No change.
* * * * *

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

    In its filing with the Commission, Nasdaq included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. Nasdaq has prepared summaries, set forth in Sections A,
B, and C below, of the most significant aspects of such statements.

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

1. Purpose
    The proposed rule change will establish generic listing standards
to permit the listing and trading of Index Securities pursuant to Rule
19b-4(e) under the Act.\5\ Rule 19b-4(e) under the Act provides that
the listing and trading of a new derivative securities product by a
self-regulatory organization shall not be deemed a proposed rule
change, pursuant to paragraph (c)(1) of Rule 19b-4 under the Act,\6\ if
the Commission has approved, pursuant to Section 19(b) of the Act,\7\
the self-regulatory organization's trading rules, procedures and
listing standards for the product class that would include the new
derivatives securities product, and the self-regulatory organization
has a surveillance program for the product class.\8\ Hence Nasdaq is
proposing to adopt generic listing standards under new NASD Rules
4420(m) and 4450(c) for this product class, pursuant to which it will
be able to trade Index Securities without individual Commission
approval of each product pursuant to Section 19(b)(2) of the Act.\9\
Instead, Nasdaq represents that any securities it lists will satisfy
all of the standards set forth in NASD Rules 4420(m) and 4450(c). The
Exchange states that within five (5) business days of the commencement
of trading of an Index Security in reliance on NASD Rule 4420(m),
Nasdaq will file Form 19b-4(e).\10\
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    \5\ 17 CFR 240.19b-4(e).
    \6\ 17 CFR 240.19b-4(c)(1).
    \7\ 15 U.S.C. 78s(b).
    \8\ See Securities Exchange Act Release No. 40761 (December 8,
1998), 63 FR 70952 (December 22, 1998)(the ``19b-4(e) Order'').
    \9\ 15 U.S.C. 78s(b)(2).
    \10\ 17 CFR 240.19b-4(e)(2)(ii); 17 CFR 249.820.
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a. Generic Listing Standards

    The Commission previously approved the generic listing standards
for Index Securities on the American Stock Exchange LLC (``Amex'').\11\
Nasdaq states that the proposed rule is substantially the same as the
Amex Rule. The Commission has also previously approved the listing on
Nasdaq of multiple Index Securities based on a variety of debt
structures and market indexes.\12\
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    \11\ See Securities Exchange Act Release No. 51563 (April 15,
2005), 70 FR 21257 (April 25, 2005)(the ``Amex Rule''); see also
Securities Exchange Act Release No. 52204 (Aug. 3, 2005), 70 FR
46559 (August 10, 2005) (PCX Exchange rules applicable to the
Archipelago Exchange (``Area Exchange'').
    \12\ See, e.g., Securities Exchange Act Release Nos. 52725
(November 3, 2005), 70 FR 68486 (November 10, 2005)(approving the
listing and trading of 9% Targeted Income Strategic Total Return
Securities Linked to the CBOE Nasdaq-100 BuyWrite Index); 50724
(November 23, 2004), 69 FR 69655 (November 30, 2004)(approving the
listing and trading of Accelerated Return Notes Linked to the
Russell 2000 Index), 49670 (May 7, 2004), 69 FR 27959 (May 17,
2004)(approving the listing and trading of Accelerated Return Notes
Linked to the Nikkei 225 Index).
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    Adopting generic listing standards for these securities and
applying Rule 19b-4(e) under the Act should fulfill the intended
objective of that Rule by allowing those Index Securities that satisfy
the proposed generic listing standards to commence trading, without the
need for the public comment period and Commission approval. This has
the potential to reduce the time frame for bringing Index Securities to
market and thereby reducing the burdens on issuers and other market
participants. The failure of a particular index to comply with the
proposed generic listing standards under Rule 19b-4(e) under the Act,
however, would not preclude a separate filing pursuant to Section
19(b)(2) of the Act, requesting Commission approval to list and trade a
particular index-linked product.

b. Index Securities

    Index Securities are designed for investors who desire to
participate in a specific market segment or combination of market
segments through an identifiable market index or combination of market
indexes (the ``Underlying Index'' or ``Underlying Indexes'').\13\ Index
Securities are the non-convertible debt of an issuer that have a term
of at least one (1) year but not greater than ten years. Each Index
Security is intended to provide investors with exposure to an
identifiable underlying market index. Index Securities may or may not
make interest payments, dividends or other cash distributions paid in
the securities compromising the Underlying Index or Indexes to the
holder during their term.\14\ Despite the fact that Index Securities
are linked to an underlying index, each will trade as a single,
exchange-listed security.
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    \13\ Nasdaq understands that the holder of an Index Security may
or may not be fully exposed to the appreciation and/or depreciation
of the underlying component securities. For example, an Index
Security may be subject to a ``cap'' on the maximum principal amount
to be repaid to holders or a ``floor'' on the minimum principal
amount to be repaid to holders at maturity.
    \14\ Interest payments may be based on a fixed or floating rate.
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    The Exchange states that an Index Security cannot exist and
therefore has no value without reference to the underlying index. In
contrast to a typical corporate security (e.g., a share of common stock
of a corporation), whose value is determined by the interplay of supply
and demand in the marketplace, the fair value of an index-based
security can be determined only by reference to the underlying index
itself, which is a proprietary creation of the particular index
provider. For this reason, the Commission has always required that
markets that list or trade index-based securities continuously monitor
the qualifications of not just the actual securities being traded
(e.g., exchange-traded funds (``ETF''), index options, or Index
Securities), but also of the underlying indexes and of the index
providers.
    Because the value and function of an Index Security are inseparable
from the Underlying Index or Underlying Indexes, such indexes and their
providers must either meet the criteria set forth herein or be indexes
previously approved by the Commission under Section 19(b)(2) of the Act
and rules thereunder for the trading of options or other derivative
securities on a national securities exchange or national securities
association (and be subject to the conditions of such prior approvals).
In all cases, an Underlying Index is required to have a minimum of ten
(10) component securities. Certain specific criteria for each
underlying component security are set forth below.
    A typical Index Security listed and traded on Nasdaq provides for a
payment amount in a multiple greater than one (1) times the positive
index return or performance, subject to a maximum gain or cap. Nasdaq
represents that the proposed generic listing standards will not be
applicable to Index Securities where the payment at maturity may be
based on a multiple of negative performance of an underlying index or
indexes.
    Some Index Securities do not provide for a minimum guaranteed
amount to be repaid, i.e., no ``principal protection.'' Other Index
Securities provide for participation in the positive return or
performance of an index with the added protection of receiving a
payment guarantee of the issuance price or ``principal protection.''
Further iterations may also provide ``contingent'' or partial
protection of the principal amount, whereby the principal protection
may disappear if the Underlying Index at any point in time during the
life of such security reaches a certain pre-determined level. Nasdaq
believes that the flexibility to list a variety of Index Securities
will offer investors the opportunity to more

precisely focus their specific investment strategies.
    The original public offering price of Index Securities may vary
with the most common offering price expected to be $10 or $1,000 per
unit. As discussed above, Index Securities entitle the owner at
maturity to receive a cash amount based upon the performance of a
particular market index or combination of indexes. The structure of an
Index Security may provide ``principal protection'' or provide that the
principal amount is fully exposed to the performance of a market index.
The Index Securities 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
Underlying Index. Because an index-linked security has no value without
reference to the Underlying Index, the current value of an Underlying
Index or composite value of the Underlying Indexes will be widely
disseminated at least every 15 seconds during the trading day.\15\
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    \15\ The values of CBOE S&P 500 BuyWrite Index(sm), CBOE DJIA
BuyWrite Index(sm), and CBOE Nasdaq-100 BuyWrite Index(sm) do not
need to be so disseminated if, after the close of trading, the
indicative value of any index-linked security linked to these
indexes is disseminated.
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    Index Securities may (but do not need to) be structured with
accelerated returns, upside or downside, based on the performance of
the Underlying Index.\16\ For example, an Index Security may provide
for an accelerated return of 3-to-1 if the Underlying Index achieves a
positive return at maturity. Index Securities are ``hybrid'' securities
whose rates of return are largely the result of the performance of an
Underlying Index or Indexes comprised of component securities. In
connection with the listing and trading of Index Securities, Nasdaq
will issue an information circular to members detailing the special
risks and characteristics of the securities. Accordingly, the
particular structure and corresponding risk of any Index Security
traded on Nasdaq will be highlighted and disclosed.
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    \16\ See, e.g., Securities Exchange Act Release No. 48280
(August 1, 2003), 68 FR 47121 (August 7, 2003). As stated, however,
the proposed generic listing standards will not be applicable to
Index Securities that are structured with ``downside'' accelerated
returns.
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    The initial offering price for an Index Security is established on
the date the security is priced for sale to the public. The final value
of an Index Security is determined on the valuation date at or near
maturity consistent with the mechanics detailed in the prospectus for
such Index Security.

c. Eligibility Standards for Issuers

    The following standards are proposed for each issuer of Index
Securities:
    (A) Assets/Equity--The issuer shall have assets in excess of $100
million and stockholders' equity of at least $10 million. In the case
of an issuer which is unable to satisfy the income criteria set forth
in NASD Rule 4420(a)(1), Nasdaq generally will require the issuer to
have the following: (i) Assets in excess of $200 million and
stockholders equity of at least $10 million; or (ii) assets in excess
of $100 million and stockholders equity of at least $20 million.\17\
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    \17\ Telephone conversation between Alex Kogan, Associate
General Counsel, Nasdaq, and Florence E. Harmon, Senior Special
Counsel, Division, Commission, on January 11, 2006.
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    (B) Distribution--Minimum public distribution of 1,000,000 notes
with a minimum of 400 public shareholders, except, if traded in
thousand dollar denominations, then no minimum number of holders.
    (C) Principal Amount/Aggregate Market Value--Not less than $4
million.
    (D) Term--The Index Security must have a term of at least one (1)
year but not longer than ten (10) years.
    (E) Tangible Net Worth--The issuer will be expected to have a
minimum tangible net worth\18\ in excess of $250,000,000 and to exceed
by at least 20% the earnings requirements set forth in NASD Rule
4420(a)(1). In the alternative, the issuer will be expected: (i) To
have a minimum tangible net worth of $150,000,000 and to exceed by at
least 20% the earnings requirement set forth in NASD Rule 4420(a)(1);
and (ii) not to have issued securities where the original issue price
of all the issuer's other index-linked note offerings (combined with
index-linked note offerings of the issuer's affiliates) listed on a
national securities exchange (or on Nasdaq) exceeds 25% of the issuer's
net worth.
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    \18\ ``Tangible net worth'' is defined as total assets less
intangible assets and total liabilities. Intangibles include non-
material benefits such as goodwill, patents, copyrights and
trademarks.
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d. Description of Underlying Indexes

    Each Underlying Index will either be: (i) An index meeting the
specific criteria set forth below: or (ii) an index approved by the
Commission under Section 19(b)(2) of the Act and rules thereunder for
the trading of options or other derivatives securities. However, in all
cases, an Underlying Index must contain at least ten (10) component
securities.
    Examples of Underlying Indexes intended to be covered under the
proposed generic listing standards include the Standard & Poor's 500
(``S&P 500''), the Nasdaq-100, the Dow Jones Industrial Average
(``DJIA''), Nikkei 225, the Dow Jones EuroSTOXX 50, the Global Titans
50, the Amex Biotechnology Index, the Russell 2000 Index, the CBOE S&P
500 BuyWrite Index, the CBOE DJIA BuyWrite Index, the CBOE Nasdaq-100
BuyWrite Index, and certain other indexes that represent various
industry and/or market segments.\19\ An Index Security would lose its
eligibility for continued Nasdaq listing if a change to the Underlying
Index, including the deletion and addition of underlying component
securities, index rebalancings and changes to the calculation of the
index, resulted in this Underlying Index no longer satisfying the
criteria for indexes that are either set forth below as part of the
continued listing standards for Index Securities or contained in a
Commission's Section 19(b)(2) order that approved the similar
derivative product containing the Underlying Index.
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    \19\ See note 12 supra.
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    In order to satisfy the proposed generic listing standards, the
Underlying Index will typically be calculated based on a market
capitalization,\20\ modified market capitalization,\21\ price,\22\
equal-dollar,\23\ or modified equal-dollar \24\ weighting

methodology. If a broker-dealer is responsible for maintaining (or has
a role in maintaining) the Underlying Index, such broker-dealer is
required to erect and maintain a ``firewall,'' in a form satisfactory
to Nasdaq, to prevent the flow of information regarding the Underlying
Index from the index production personnel to the sales and trading
personnel.\25\ In addition, an Underlying Index that is maintained by a
broker-dealer is also required to be calculated by an independent third
party that is not a broker-dealer.
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    \20\ A ``market capitalization'' index is the most common type
of stock index. The components are weighted according to the total
market value of the outstanding shares, i.e., share price times the
number of shares outstanding. This type of index will fluctuate in
line with the price moves of the component stocks.
    \21\ A ``modified market capitalization'' index is similar to
the market capitalization index, except that an adjustment to the
weights of one or more of the components occurs. This is typically
done to avoid having an index that has one or a few stocks
representing a disproportionate amount of the index value.
    \22\ A ``price weighted'' index is an index in which the
component stocks are weighted by their share price. The most common
example is the DJIA.
    \23\ An ``equal dollar weighted'' index is an index structured
so that share quantities for each of the component stocks in the
index are determined as if one were buying an equal dollar amount of
each stock in the index. Equal dollar weighted indexes are usually
rebalanced to equal weightings either quarterly, semiannually, or
annually.
    \24\ A ``modified equal-dollar weighted'' index is designed to
be a fair measurement of the particular industry or sector
represented by the index, without assigning an excessive weight to
one or more index components that have a large market capitalization
relative to the other index components. In this type of index, each
component is assigned a weight that takes into account the relative
market capitalization of the securities comprising the index. The
index is subsequently rebalanced to maintain these pre-established
weighting levels. Like equal-dollar weighted indexes, the value of a
modified equal-dollar weighted index will equal the current combined
market value of the assigned number of shares of each of the
underlying components divided by the appropriate index divisor. A
modified equal-dollar weighted index will typically be re-balanced
quarterly.
    \25\ For certain indexes, an index provider, such as Dow Jones,
may select the components and calculate the index, but overseas
broker-dealer affiliates of U.S. registered broker-dealers may sit
on an ``advisory'' committee that recommends component selections to
the index provider. In such case, appropriate information barriers
and insider trading policies should exist for this advisory
committee. See Securities Exchange Act Release No. 50501 (October 7,
2004), 69 FR 61533 (October 19, 2004) (approving SR-NASD-2004-138,
pertaining to index-linked notes on the Dow Jones Euro Stoxx 50
Index).
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e. Eligibility Standards for Underlying Securities

    Index Securities will be subject to both initial and continued
listing criteria. For an Underlying Index to be appropriate for the
initial listing of an Index Security, such Index must either have been
previously approved for the trading (on a national securities exchange
or national securities association) of options or other derivative
securities by the Commission under Section 19(b)(2) of the Act and
rules thereunder, or meet the following requirements:
     A minimum market value of at least $75 million, except
that for each of the lowest weighted Underlying Securities in the index
that in the aggregate account for no more than 10% of the weight of the
index, the market value can be at least $50 million;
     Trading volume in each of the last six months of not less
than 1,000,000 shares, except that for each of the lowest weighted
Underlying Securities in the index that in the aggregate account for no
more than 10% of the weight of the index, the trading volume shall be
at least 500,000 shares in each of the last six months;
     In the case of a capitalization-weighted index or modified
capitalization weighted index, the lesser of the five highest weight
Underlying Securities in the index or the highest weighted Underlying
Securities in the index that in the aggregate represent at least 30% of
the total number of Underlying Securities in the index, each have an
average monthly trading volume of at least 2,000,000 shares over the
previous six months;
     No component security will represent more than 25% of the
weight of the index, and the five highest weighted component securities
in the index will not in the aggregate account for more than 50% of the
weight of the index (60% for an index consisting of fewer than 25
Underlying Securities);
     90% of the index's numerical index value and at least 80%
of the total number of component securities will meet the then current
criteria for standardized options trading on a national securities
exchange or a national securities association;
     Each component security shall be issued by an Act
reporting company under the Act, shall be listed on Nasdaq or a
national securities exchange and be subject to last sale reporting as a
``NMS'' stock; and
     Foreign country securities or American Depository Receipts
(``ADRs'') that are not subject to comprehensive surveillance
agreements do not in the aggregate represent more than 20% of the
weight of the index.
    As stated above, under Description of Underlying Indexes, all
Underlying Indexes are required to have at least ten (10) component
securities.
    For Index Securities listed under NASD Rule 4420(m)(7)(B),\26\
Nasdaq will commence delisting or removal proceedings (unless the
Commission has approved the continued trading of the Index Security) if
the applicable standard for Underlying Indexes under which the
particular security's initial eligibility was determined is not being
continuously met, except that:
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    \26\ The Commission expects Nasdaq to continuously monitor these
continued listing criteria, unless the particular standard sets
forth the particular dates on which such standard should be
satisfied. Telephone conversation between Alex Kogan, Associate
General Counsel, Nasdaq, and Florence E. Harmon, Senior Special
Counsel, Division, Commission, on January 18, 2006.
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     The criteria that no single component represent more than
25% of the weight of the index and the five highest weighted components
in the index can not represent more than 50% (or 60% for indexes with
less than 25 components) of the weight of the Index, need only be
satisfied for capitalization weighted and price weighted indexes as of
the first day of January and July in each year;
     The total number of components in the index may not
increase or decrease by more than 33\1/3\% from the number of
components in the index at the time of its initial listing, and in no
event may be less than ten (10) components;
     The trading volume of each component security in the index
must be at least 500,000 shares for each of the last six months, except
that for each of the lowest weighted components in the index that in
the aggregate account for no more than 10% of the weight of the index,
trading volume must be at least 400,000 shares for each of the last six
months; and
     In a capitalization-weighted index or modified
capitalization weighted index, the lesser of the five highest weighted
component securities in the index or the highest weighted component
securities in the index that in the aggregate represent at least 30% of
the total number of stocks in the index have had an average monthly
trading volume of at least 1,000,000 shares over the previous six
months.
    In the case of an Index Security that is listed pursuant to NASD
Rule 4420(m)(7)(A) (previously approved index), Nasdaq will commence
delisting or removal proceedings (unless the Commission has approved
the continued trading of the Index Security) if an underlying index or
indexes fails to satisfy the maintenance standards or conditions for
such index or indexes as set forth by the Commission in its order under
Section 19(b)(2) of the Act approving the index or indexes for the
trading of options or other derivatives.
    Finally, as set forth in proposed rule, Nasdaq will commence
delisting or removal proceedings with respect to an Index Security
(unless the Commission has approved the continued trading of the Index
Security), under any of the following circumstances:
     If the aggregate market value or the principal amount of
the securities publicly held is less than $400,000;
     With a minor exception referenced below, if the value of
the Underlying Index or composite value of the Underlying Indexes is no
longer calculated and widely disseminated on at least a 15-second basis
(because an index-linked security has no value without reference to the
underlying index); or
     If such other event shall occur or condition exists which
is the opinion of the Nasdaq makes further dealings on Nasdaq
inadvisable.
    The requirement that the value of the index be calculated and
widely disseminated every 15 seconds does not apply to the following
indexes: the CBOE S&P 500 BuyWrite Index, the CBOE DJIA BuyWrite Index,
and the CBOE Nasdaq-100 BuyWrite Index.\27\

The Commission has previously approved for listing and trading several
Index Securities linked to these three indexes,\28\ and the exception
for the first two of them is already incorporated in the Amex Rule. The
Commission did not require dissemination of the BuyWrite index values
every 15 seconds during trading hours because the value of these
indexes is readily approximated from observable market prices from the
current price of the relevant securities indexes and the nearest-to-
expiration call and put options on these securities indexes.\29\
Consistent with the Amex Rule, indicative values of Index Securities
based on one of these three indexes must be calculated and disseminated
after the close of trading to provide an updated value.
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    \27\ 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
under perform stocks in a rising market.
    \28\ See, e.g., Securities Exchange Act Release Nos. 52756
(November 9, 2005), 70 FR 70006 (November 18, 2005) (approving the
listing and trading of Index Securities linked to the CBOE Nasdaq-
100 Buy Write Index); 52725 (November 3, 2005), 70 FR 68486
(November 10, 2005) (approving the listing and trading of Index
Securities linked to the CBOE Nasdaq-100 BuyWrite Index); 51840
(June 14, 2005), 70 FR 35468 (June 20, 2005) (approving the listing
and trading of Index Securities linked to the CBOE DJIA BuyWrite
Index); and 51634 (April 29, 2005), 70 FR 24138 (May 6, 2005)
(approving the listing and trading of Index Securities linked to the
CBOE S&P 500 BuyWrite Index).
    \29\ Telephone conversation between Alex Kogan, Associate
General Counsel, Nasdaq, and Florence E. Harmon, Senior Special
Counsel, Commission, Division on January 11, 2006.
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    The issuers of the Index Securities listed on Nasdaq will be
required to comply with Rule 10A-3 under the Act, but not the Index
Securities themselves.\30\
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    \30\ See Rule 10A-3(c)(7) under the Act, 17 CFR 240.10A-3(c)(7)
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f. Nasdaq Rules Applicable to Index Securities

    Index Securities will be treated as equity instruments and will be
subject to all Nasdaq rules governing the trading of equity securities,
including trading halt rules. Index Securities will be subject to the
same fee schedule as Other Securities listed under Rule 4420(f). The
applicable fee schedule is currently codified as Rule 4530.

g. Information Circular

    In addition, Nasdaq will evaluate the nature and complexity of each
Index Security and, if appropriate, distribute a circular to the
membership, prior to the commencement of trading, providing guidance
with respect to, among other things, member firm compliance
responsibilities when handling transactions in Index Securities and
highlighting the special risks and characteristics. Specifically, the
circular, among other things, will discuss and emphasize the structure
and operation of the Index Security, the requirement under the
Securities Act of 1933 (``1933 Act'') \31\ that members and member
firms deliver a prospectus to investors purchasing an Index Security in
the initial distribution prior to or concurrently with the confirmation
of a transaction, applicable Nasdaq rules, dissemination information
regarding the Underlying Index, trading information and applicable
suitability rules.\32\
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    \31\ 15 U.S.C. 77e(b)(2).
    \32\ Members conducting a public securities business are subject
to the rules and regulations of the NASD, including NASD Rule
2310(a) and (b). Accordingly, NASD Notice to Members 03-71 regarding
nonconventional investments or ``NCIs'' applies to members
recommending/selling index-linked securities to public customers.
This Notice specifically reminds members in connection with NCIs
(such as index-lined securities) of their obligations to: (1)
Conduct adequate due diligence to understand the features of the
product; (2) perform a reasonable-basis suitability analysis; (3)
perform customer-specific suitability analysis in connection with
any recommended transactions; (4) provide a balanced disclosure of
both the risks and rewards associated with the particular product,
especially when selling to retail investors; (5) implement
appropriate internal controls; and (6) train registered persons
regarding the features, risk and suitability of the products.
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h. Surveillance

    The NASD will monitor activity in Index Securities to identify and
discipline any improper trading activity in Index Securities.\33\ For
this purpose, the NASD will rely on its existing surveillance
procedures applicable to equities, including derivative products. The
NASD will maintain such procedures in writing. The NASD will also be
developing, for future implementation, procedures for monitoring
activity in the Index Security and in related Underlying Indexes and
their underlying securities, which will enhance the NASD's ability to
identify improper trading activity. Overall, while the NASD's existing
surveillance procedures are adequate to properly monitor the trading of
Index Securities, the NASD is expecting to begin phasing in significant
enhancements to such procedures in 2006.
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    \33\ The Nasdaq Market Watch Department also performs certain
day-to-day surveillance activities that will be applicable to the
trading of the Index Securities. Telephone conversation between Alex
Kogan, Associate General Counsel, Nasdaq, and Florence E. Harmon,
Senior Special Counsel, Commission, division on January 18, 2006.
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    Nasdaq has a general policy prohibiting the distribution of
material, non-public information by its employees. As detailed above in
the description of the generic standards, if the issuer or a broker-
dealer is responsible for maintaining (or has a role in maintaining)
the Underlying Index, such issuer or broker-dealer is required to erect
and maintain a ``firewall'' in a form satisfactory to Nasdaq, in order
to prevent the flow of information regarding the Underlying Index from
the index production personnel to sales and trading personnel. In
addition, Nasdaq will require that calculation of Underlying Indexes be
performed by an independent third party that is not a broker-dealer.
2. Statutory Basis
    Nasdaq believes that the proposed rule change, as amended, is
consistent with the provisions of Section 15A of the Act,\34\ in
general, and with Section 15A(b)(6) of the Act,\35\ in particular, in
that it is designed to prevent fraudulent and manipulative acts and
practices, to promote just and equitable principles of trade, remove
impediments to a free and open market and a national market system,
and, in general, to protect investors and the public interest.
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    \34\ 15 U.S.C. 78o-3.
    \35\ 15 U.S.C. 78o-3(b)(6).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    Nasdaq does not believe that the proposed rule change, as amended,
will result in any burden on competition that is not necessary or
appropriate in furtherance of the purposes of the Act, as amended.

C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others

    Written comments on the proposed rule change, as amended, 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 (http://www.sec.gov/rules/sro.shtml.
); or     Send an e-mail to<EMAIL_ADDRESS>Please include

File Number SR-NASD-2006-001 on the subject line.

Paper Comments

     Send paper comments in triplicate to Nancy M. Morris,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-9303.

    All submissions should refer to File Number SR-NASD-2006-001. 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 (http://www.sec.gov/rules/sro.shtml
). Copies of the submission, all subsequent amendments,

all written statements with respect to the proposed rule change that
are filed with the Commission, and all written communications relating
to the proposed rule change between the 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 Section. Copies of the
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-2006-001 and should be submitted on or before
February 15, 2006.

IV. 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 association.\36\ In particular, the Commission believes that
the proposed rule change is consistent with Section 15A(b)(6) of the
Act \37\ in that it is designed to prevent fraudulent and manipulative
acts and practices, to promote just and equitable principles of trade,
to foster cooperation and coordination with persons engaged in
facilitating transactions in securities, and to remove impediments to
and perfect the mechanism of a free and open market and a national
market system and, in general, to protect investors and the public
interest.
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    \36\ In approving this proposed rule change, the Commission has
considered the proposed rule's impact on efficiency, competition,
and capital formation. See 15 U.S.C. 78c(f).
    \37\ 15 U.S.C. 78o-3(b)(6).
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    The Commission has previously approved the listing and trading of
several Index Securities based on a variety of debt structures and
market indexes.\38\ The Commission has also approved, pursuant to Rule
19b-4(e) under the Act,\39\ generic listing standards for these
securities proposed by the Amex that, in all material respects, are
identical to those listing standards proposed by Nasdaq.
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    \38\ See Securities Exchange Act Release Nos. 41091 (February
23, 1999), 64 FR 10515 (March 4, 1999) (Narrow-Based Index Options);
42787 (May 15, 2000), 65 FR 33598 (May 24, 2000) (ETFs); and 43396
(September 29, 2000), 65 FR 60230 (October 10, 2000) (TIRs).
    \39\ 17 CFR 240.19b-4(e).
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    Consistent with its previous orders, the Commission believes that
generic listing standards proposed by Nasdaq for Index Securities
should fulfill the intended objective of Rule 19b-4(e) under the Act by
allowing those Index Securities that satisfy the generic listing
standards to commence trading without public comment and Commission
approval.\40\ This has the potential to reduce the time frame for
bringing Index Securities to market and thereby reduce the burdens on
issuers and other market participants and thus enhances investors'
opportunities.
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    \40\ The Commission notes that the failure of a particular index
to comply with the proposed generic listing standards under Rule
19b-4(e) under the Act, however, would not preclude Nasdaq from
submitting a separate filing pursuant to Section 19(b)(2) of the
Act, requesting Commission approval to list and trade a particular
index-linked product.
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A. Trading of Index Securities

    Taken together, the Commission finds that Nasdaq's proposal
contains adequate rules and procedures to govern the trading of Index
Securities listed pursuant to Rule 19b-4(e) on Nasdaq. All Index
Security products listed under the standards will be subject to the
full panoply of Nasdaq rules and procedures that now govern the trading
of Index Securities and the trading of equity securities on Nasdaq.
    Nasdaq has proposed asset/equity requirements and tangible net
worth for each Index Security issuer, as well as minimum distribution,
principal/market value, and term thresholds for each issuance of Index
Securities. As set forth more fully above, Nasdaq's proposed listing
criteria include minimum market capitalization, monthly trading volume,
and relative weighting requirements for the Index Securities. These
requirements are designed to ensure that the trading markets for index
components underlying Index Securities are adequately capitalized and
sufficiently liquid, and that no one stock dominates the index. The
Commission believes that these requirements should significantly
minimize the potential for of manipulation. The Commission also finds
that the requirement that each component security underlying an Index
Security be listed on a national securities exchange or traded through
the facilities of a national securities system and subject to last sale
reporting will contribute significantly to the transparency of the
market for Index Securities. Alternatively, if the index component
securities are foreign securities that are not reporting companies, the
generic listing standards permit listing of an Index Security if the
Commission previously approved the underlying index for trading in
connection with another derivative product and if certain surveillance
sharing arrangements exist with foreign markets. The Commission
believes that if it has previously determined that such index and its
components were sufficiently transparent, then Nasdaq may rely on this
finding, provided it has comparable surveillance sharing arrangements
with the foreign market that the Commission relied on in approving the
previous product.
    The Commission believes that by requiring pricing information for
both the relevant underlying index or indexes and the Index Security to
be readily available and disseminated, the proposed listing standards
should help ensure a fair and orderly market for Index Securities
approved pursuant to such proposed listing standards.
    The Commission also believes that the requirement that at least 90
percent of the component securities, by weight, and 80 percent of the
total number of Underlying Securities, be eligible individually for
options trading will prevent an Index Security from being a vehicle for
trading options on a security not otherwise options eligible.
    Nasdaq has also developed delisting criteria that will permit
Nasdaq to suspend trading of an Index Security in case of circumstances
that make further dealings in the product inadvisable. The Commission
believes that the delisting criteria will help ensure a minimum level
of liquidity exists for each Index Security to allow for the
maintenance of fair and orderly markets. Also, Nasdaq will commence
delisting proceedings in the event that the value of the underlying
index or index is no longer calculated and widely disseminated on at
least a 15-second basis.\41\
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    \41\ In the case of the BuyWrite Index Securities, CBOE
disseminates a daily index value. Additionally, a daily indicative
value for the product is also disseminated.

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

B. Surveillance

    Nasdaq must have surveillance procedures to monitor trading in any
products listed under the generic listing standards. An Index Security,
just like an ETF, derives its value by reference to the underlying
index. For this reason, the Commission has required that markets that
list index based securities monitor the qualifications of not just the
actual security (e.g., the ETF, index option, or Index Securities), but
also of the underlying indexes (and of the index providers). In this
regard, the Commission believes that a surveillance sharing agreement
between a self-regulatory organization proposing to list a stock index
derivative product and the self-regulatory organization trading the
stocks underlying the derivative product is an important measure for
surveillance of the derivative and underlying securities markets. When
a new derivative securities product based upon domestic securities is
listed and traded on an exchange or national securities association
pursuant to Rule 19b-4(e) under the Act, the self-regulatory
organization should determine that the markets upon which all of the
U.S. component securities trade are members of the Intermarket
Surveillance Group (``ISG''), which provides information relevant to
the surveillance of the trading of securities on other market
centers.\42\ For derivative securities products based on previously
approved indexes that contain securities from one or more foreign
markets, the self-regulatory organization should have a comprehensive
Intermarket Surveillance Agreement, as prescribed in the prior
Commission order, which covers the securities underlying the new
securities product.\43\ With respect to indexes not previously approved
by the Commission, the Commission finds that Nasdaq's commitment to
implement comprehensive surveillance sharing agreements,\44\ as
necessary, and the definitive requirements that: (i) Each component
security shall be a registered reporting company under the Act; and
(ii) no more than 20 percent of the weight of the Underlying Index or
Underlying Indexes may be comprised of foreign country securities or
ADRs not subject to a comprehensive surveillance sharing agreement,\45\
will make possible adequate surveillance of trading of Index Securities
listed pursuant to the proposed generic listing standards.
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    \42\ See Securities Exchange Act Release No. 40761 (December 8,
1998), 63 FR 70952 (December 22, 1998) (File No. S7-13-98). ISG was
formed on July 14, 1983, to, among other things, coordinate more
effectively surveillance and investigative information sharing
arrangements in the stock and options markets. The Commission notes
that all of the registered national securities exchanges, including
the ISE, as well as the NASD, are members of the ISG.
    \43\ Id.
    \44\ Proposed NASD Rule 4420(m)(9).
    \45\ Proposed NASD Rules 4420(m)(7)(vi)-(vii).
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    With regard to actual oversight, Nasdaq represents that its
surveillance procedures are sufficient to detect fraudulent trading
among members in the trading of Index Securities pursuant to the
proposed generic listing standards.

C. Acceleration

    The Commission finds good cause for approving proposed rule change,
as amended, prior to the 30th day after the date of publication of
notice of filing thereof in the Federal Register. The proposal
implements generic listing standards substantially identical to those
already approved for the Amex. The Commission does not believe that
Nasdaq's proposal raises any novel regulatory issues. The proposed
generic listing criteria should enable more expeditious review and
listing of Index Securities by Nasdaq, thereby reducing administrative
burdens and benefiting the investing public. Thus, the Commission finds
good cause to accelerate approval of the proposed rule change, as
amended.

V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\46\ that the proposed rule change, as amended (SR-NASD-2006-001),
is hereby approved on an accelerated basis.
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    \46\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\47\
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    \47\ 17 CFR 200.30-3(a)(12).
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Nancy M. Morris,
Secretary.
[FR Doc. E6-864 Filed 1-24-06; 8:45 am]

BILLING CODE 8010-01-P