[Federal Register Volume 62, Number 192 (Friday, October 3, 1997)]
[Notices]
[Pages 51917-51920]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-26285]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-39143; File No. SR-Amex-97-29]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change by the American Stock Exchange, Inc. Relating to Listing and
Trading of DIAMONDSSM Trust Units
September 29, 1997.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''), 15 U.S.C. 78s(b)(1), notice is hereby given that on August
11, 1997, the American Stock Exchange, Inc. (``Amex'' or ``Exchange'')
filed with the Securities and Exchange Commission (``Commission'') the
proposed rule change as described in Items I, II, and III below, which
Items have been prepared by the self-regulatory organization. The
Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons.
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Amex proposes to list and trade under Amex Rules 1000 et seq.
DIAMONDSSM, units of beneficial interest in the DIAMONDS
Trust. In addition, the Exchange proposes to adopt Amex Rule 1005,
``Dow Jones Indexes,'' relating to license and warranty issues. The
text of the proposed rule change is available at the
[[Page 51918]]
Office of the Secretary, Amex and at the Commission.
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 self-regulatory organization
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 self-regulatory organization
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
On December 11, 1992,\1\ the Commission approved Amex Rules 1000 et
seq. to accommodate trading on the Exchange of Portfolio Depositary
Receipts (``PDRsSM''), securities which represent interests
in a unit investment trust (``Trust'') operating on an open-end basis
and that hold a portfolio of securities. The Trust sponsor
(``Sponsor'') for each series of PDRs is PDR Services Corporation, a
wholly-owned subsidiary of Amex.\2\ Each Trust is intended to provide
investors with an instrument that closely tracks the underlying
securities portfolio, that trades like a share of common stock, and
that pays to PDR holders periodic dividends proportionate to those paid
with respect to the underlying portfolio of securities, less certain
expenses, as described in the applicable Trust prospectus. The first
Trust to be formed in connection with the issuance of PDRs was based on
the Standard & Poor's 500 Index (``S&P 500 Index''), known as Standard
& Poor's Depositary Receipts (``SPDRs''), which have been
trading on the Exchange since January 29, 1993.\3\ In 1995, the
Commission approved Amex's listing and trading of PDRs based on the
Standard & Poor's MidCap 400 IndexTM (``MidCap SPDRs'').\4\
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\1\ See Securities Exchange Act Release No. 31591 (December 11,
1992), 57 FR 60253 (December 18, 1992) (``SPDRs Order'').
\2\ ``PDRs'' is a service mark of PDR Services Corp.
\3\ See SPDRs Order, supra note 1.
\4\ See Securities Exchange Act Release No. 35534 (March 24,
1995), 60 FR 16686 (March 31, 1995). ``Standard & Poor's 500,''
``Standard & Poor's MidCap 400 Index,'' ``Standard & Poor's
Depositary Receipts,'' ``SPDRs,'' ``Standard &
Poor's MidCap 400 Depositary Receipts'' and ``MidCap SPDRs'' are
trademarks of The McGraw-Hill Companies, Inc. and are being used by
the Exchange and the Sponsor under license among Standard & Poor's,
a division of The McGraw-Hill Companies, Inc., the Exchange and the
Sponsor. ``SPDRs'' and ``MidCap SPDRs'' are not sponsored, endorsed,
sold, or promoted by S&P, and S&P makes no representation regarding
the advisability of investing in SPDRs or MidCap SPDRs.
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The Exchange now proposes to list and trade under Rules 1000 et
seq. DIAMONDSSM, units of beneficial interest in the
DIAMONDS Trust.\5\ The Sponsor will enter into a trust agreement with
the Trustee, State Street Bank and Trust Company, in accordance with
Section 26 of the Investment Company Act of 1940 (``1940 Act''). A
distributor will act as underwriter of DIAMONDS on an agency basis. All
orders to create DIAMONDS in Creation Unit size aggregations must be
placed with the distributor, and it will be the responsibility of the
distributor to transmit such orders to the Trustee. The distributor is
a registered broker-dealer, and a member of the National Association of
Securities Dealers, Inc.
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\5\ ``Dow Jones Industrial AverageSM,''
``DJIASM,'' ``Dow JonesSM'' and ``DIAMONDS''
are each trademarks and service marks of Dow Jones & Company, Inc.
(``Dow Jones'') and have been licensed for use for certain purposes
by the Exchange and the Sponsor. DIAMONDS are not sponsored,
endorsed, sold or promoted by Dow Jones, and Dow Jones makes no
representation regarding the advisability of investing in such
product.
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The Dow Jones Industrial Average: \6\ The Dow Jones Industrial
Average is the oldest continuous barometer of the U.S. stock market,
and the most widely quoted indicator of U.S. stock market activity. The
30 stocks now comprising the DJIA are all leaders in their respective
industries, and their stocks are widely held by individuals and
institutional investors.
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\6\ The description of the DJIA included herein is based on
materials prepared by Dow Jones.
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The DJIA is a price-weighted stock index; that is, the component
stocks are accorded relative importance based on their prices. The DJIA
is called an ``average'' because originally it was calculated by adding
up the component stock prices and then dividing by the number of
stocks. The method remains the same today, but the divisor (the number
that is divided into the total of the stock prices) has been increased
to eight significant digits to minimize distortions due to rounding.
The DJIA divisor is adjusted due to corporate actions that change
the price of any of its component shares. The most frequent reason for
such an adjustment is a stock split. For example, suppose a company in
the DJIA issues one new share for each share outstanding. After this
two-for-one ``split,'' each share of stock is worth half what it was
immediately before, other things being equal. But without an adjustment
in the divisor, this split would produce a distortion in the DJIA. An
adjustment must be made to compensate so that the ``average'' will
remain unchanged. At Dow Jones, this adjustment is handled by changing
the divisor.\7\ The formula used to calculate divisor adjustments is:
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\7\ Currently, the divisor is recalculated after the close of
business on the day prior to the occurrence of the split.
New Divisor = Current Divisor x Adjusted Sum of Prices/Unadjusted Sum
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of Prices
Changes in the composition of the DJIA are made entirely by the
editors of The Wall Street Journal without consultation with the
companies, the respective stock exchange, or any official agency.
Additions or deletions of components may be made to achieve better
representation of the broad market and of American industry.
The DIAMONDS Trust: To be eligible to place orders to create
DIAMONDS as described below, an entity or person must either be a
participant in the Continuous Net Settlement (``CNS'') system of the
National Securities Clearing Corporation (``NSCC'') or a Depository
Trust Company (``DTC'') participant. Upon acceptance of an order to
create DIAMONDS, the distributor will instruct the Trustee to initiate
the book-entry movement of the appropriate number of DIAMONDS to the
account of the entity placing the order. DIAMONDS will be registered in
book entry only, which records will be kept by DTC.
Payment with respect to creation orders placed through the
distributor will be made by (1) the ``in-kind'' deposit with the
Trustee of a specified portfolio of securities that is substantially
similar in composition to the component shares of the underlying index
or portfolio; (2) a cash payment sufficient to enable the Trustee to
make a distribution to the holders of beneficial interests in the Trust
on the next dividend payment date as if all the securities had been
held for the entire accumulation period for the distribution
(``Dividend Equivalent Payment''), subject to certain specified
adjustments; \8\ and (3) a cash payment or adjustment calculated by the
Trustee to enable the securities portfolio portion to equal the net
asset value of the Trust (the ``Balancing Amount''). The Balancing
Amount and the Dividend Equivalent Payment are referred to as the
``Cash Component'' in the case of a creation. The securities and cash
[[Page 51919]]
accepted by the Trustee are referred to, in the aggregate, as a
``Portfolio Deposit.''
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\8\ See ``Distributions'' infra.
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The mandatory termination date of the Trust will be the first to
occur of (i) January 30, 2122 or (ii) the date 20 years after the death
of the last survivor of eleven persons named in the trust agreement
between the Trust Sponsor and the Trustee.
Issuance: Upon receipt of a Portfolio Deposit in payment for a
creation order placed through the distributor as described above, the
Trustee will issue a specified number of DIAMONDS, which aggregate
number is referred to as a ``Creation Unit.'' The Exchange anticipates
that, with respect to DIAMONDS, a Creation Unit will be made up of
50,000 DIAMONDS. Individual DIAMONDS can then be traded in the
secondary market like other equity securities.\9\ It is expected that
Portfolio Deposits will be made primarily by institutional investors,
arbitrageurs, and the Exchange specialist. The DIAMONDS Trust has been
structured to provide for the initial issuance of DIAMONDS at a per
unit price which would approximate 1/100th of the value of the DJIA. As
of August 7, 1997 it is estimated that the value of such an individual
DIAMONDS Unit would be approximately $81.88.
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\9\ The DIAMONDS Trust, Series I, has filed with the Commission
an application seeking, among other things, an order: (1) Permitting
secondary market transactions in DIAMONDS at negotiated prices,
rather than at a current public offering price described in the
prospectus as required by Section 22(d) of the 1940 Act and Rule
22c-1; and (2) permitting the sale of DIAMONDS to purchasers in the
secondary market unaccompanied by a prospectus, when prospectus
delivery is not required by Section 4(3) of the Securities Act of
1933 but may be required according to Section 24(d) of the 1940 Act
for redeemable securities issued by a Unit Investment Trust. These
exemptions, if granted, will permit individual DIAMONDS to be traded
in secondary market transactions similar to a closed-end investment
company.
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It is expected that the Trustee or Sponsor will make available (a)
on a daily basis a list of the names and required number of shares for
each of the securities in the current Portfolio Deposit; (b) on a
minute-by-minute basis throughout the day, a number representing the
value (on a per DIAMONDS Unit basis) of the securities portion of a
Portfolio Deposit in effect on such day, plus accumulated dividends
less expenses through the previous day's close, and (c) on a daily
basis, the accumulated dividends, less expenses, per outstanding
DIAMONDS Unit.
Transactions in DIAMONDS may be effected on the Exchange until 4:15
p.m. New York time each business day. The minimum fractional change for
DIAMONDS shall be \1/64\ of $1.00.
Redemption: DIAMONDS in Creation Unit size aggregations generally
will be redeemable in kind by tendering them to the Trustee. While
holders may sell DIAMONDS in the secondary market at any time, they
must accumulate at least 50,000 (or multiples thereof) to redeem
through the Trust. DIAMONDS will remain outstanding until redeemed or
until the termination of the Trust. Creation Units generally will be
redeemable on any business day in exchange for a portfolio of the
securities held by the Trust identical in composition to the securities
portion of a Portfolio Deposit in effect on the date request is made
for redemption, together with a ``Cash Redemption Payment'' (as defined
in the Trust prospectus), including accumulated dividends, less
expenses, through the date of redemption. The number of shares of each
of the securities transferred to the redeeming holder generally will be
the number of shares of each of the component stocks in a Portfolio
Deposit on the day a redemption notice is received by the Trustee,
multiplied by the number of Creation Units being redeemed. Nominal
service fees may be charged in connection with the creation and
redemption of Creation Units. The Trustee will cancel all tendered
Creation Units upon redemption.
Distributions: The DIAMONDS Trust will pay monthly dividends. The
first ex-dividend date for DIAMONDS will be the third Friday of the
third full month following the commencement date of the Trust unless
such date is not a Business Day, in which case the ex-dividend date
will be the immediately preceding Business Day (the ``ex-dividend
date''). Holders of DIAMONDS as reflected on the records of the DTC and
the DTC Participants on the second business day following the ex-
dividend date will be entitled to receive an amount representing
dividends accumulated through the monthly dividend period which ends on
the business day preceding such ex-dividend date net of fees and
expenses accrued daily for such period. The payment of dividends will
be made on the first business day coincident with or following the
Monday preceding the third Friday in the calendar month following the
ex-dividend date (the ``Dividend Payment Date''). On the Dividend
Payment Date, dividends payable for those securities with ex-dividend
dates falling within the period from the ex-dividend date most recently
preceding the current ex-dividend date will be distributed. The Trustee
will compute on a daily basis the dividends accumulated within each
monthly dividend period. Dividend payments will be made through DTC and
its participants to all such holders with funds received from the
Trustee. The DIAMONDS Trust intends to make the DTC Dividend
Reinvestment Service available for use by DIAMONDS holders through DTC
Participant brokers for reinvestment of their cash proceeds. An
interested investor would have to consult his or her broker to
ascertain the availability of dividend reinvestment through such
broker.
Criteria for Initial and Continued Listing: Because of the open-end
nature of the Trust upon which a series of PDRs is based, the Exchange
believes it is necessary to maintain appropriate flexibility in
connection with listing a specific Trust. In connection with initial
listing, the Exchange will establish a minimum number of PDRs required
to be outstanding at the time of commencement of Exchange trading. For
DIAMONDS, it is anticipated that a minimum of 150,000 DIAMONDS (i.e.,
three Creation Units of 50,000 DIAMONDS each), will be required to be
outstanding when trading begins.
The DIAMONDS Trust will be subject to the initial and continued
listing criteria of Rule 1002(b). Rule 1002(b) provides that, following
twelve months from the formation of a Trust and commencement of
Exchange trading, the Exchange will consider suspension of trading in,
or removal from listing of a Trust when, in its opinion, further
dealing in such securities appears unwarranted under the following
circumstances:
(a) If the Trust on which the PDRs are based has more than 60 days
remaining until termination and there have been fewer than 50 record
and/or beneficial holders of the PDRs for 30 or more consecutive
trading days; or
(b) If the index on which the Trust is based is no longer
calculated; or
(c) If such other event shall occur or condition exists which, in
the opinion of the Exchange, makes further dealings on the Exchange
inadvisable.
A Trust shall terminate upon removal from Exchange listing and its
PDRs redeemed in accordance with provisions of the Trust prospectus. A
Trust may also terminate under such other conditions as may be set
further in the Trust prospectus. For example, the Sponsor, following
notice to PDRs holders, shall have discretion to direct that the Trust
be terminated if the value of securities in such Trust falls below a
[[Page 51920]]
specified amount.\10\ The DIAMONDS Trust may also terminate if the
license agreement with Dow Jones terminates.
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\10\ With respect to the DIAMONDS Trust, the Sponsor has the
discretionary right to terminate the Trust if the value of Trust
Securities (as defined in the Trust registration statement) falls
below $150,000,000 at any time after six months following, and prior
to three years following, inception of the Trust. Following such
time, the Sponsor has the discretionary right to terminate if Trust
Securities fall below $350,000,000 in value, adjusted annually for
inflation.
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Trading Halts: Prior to commencement of trading in DIAMONDS, the
Exchange will issue a circular to members informing them of Exchange
policies regarding trading halts in such securities. The circular will
make clear that, in addition to other factors that may be relevant, the
Exchange may consider factors such as those set further in Rule 918C(b)
in exercising its discretion to halt or suspend trading. These factors
would include whether trading has been halted or suspended in the
primary market(s) for any combination of underlying stocks accounting
for 20% or more of the applicable current index group value \11\; or
whether other unusual conditions or circumstances detrimental to the
maintenance of a fair and orderly market are present.\12\
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\11\ Amex Rule 918C(b)(3).
\12\ Amex Rule 918C(b)(4).
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Terms and Characteristics: Under Amex Rule 1000, Commentary .01,
Amex members and member organizations are required to provide to all
purchasers of DIAMONDS a written description of the terms and
characteristics of such securities, in a form prepared by the Exchange,
not later than the time a confirmation of the first transaction in each
series is delivered to such purchaser. The Exchange also requires that
such description be included with any sales material on DIAMONDS that
is provided to customers or the public. In addition, the Exchange
requires that members and member organizations provide customers the
prospectus for DIAMONDS upon request.
A member or member organization carrying an omnibus account for a
non-member broker-dealer is required to inform such non-member that
execution of an order to purchase DIAMONDS for such omnibus account
will be deemed to constitute agreement by the non-member to make such
written description available to its customers on the terms as are
directly applicable to members and member organizations.
Prior to commencement of trading of DIAMONDS, the Exchange will
distribute to Exchange members and member organizations an Information
Circular calling attention to characteristics of the DIAMONDS Trust and
to applicable Exchange rules.
Adoption of Rule 1005: The Exchange proposes to adopt Rule 1005
(``Dow Jones Indexes'') stating that Dow Jones has licensed the
Exchange to use certain Dow Jones indexes for purposes of the listing
and trading of particular series of Portfolio Depositary Receipts on
the Exchange, and stating, among other things, that Dow Jones and the
Exchange make no warranty, express or implied, as to results to be
obtained by any person or entity from the use of the Indexes or any
data included therein.
2. Statutory Basis
The Exchange believes that the proposed rule change is consistent
with Section 6(b) of the Act in general and furthers the objectives of
Section 6(b)(5) \13\ in particular 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 regulating, clearing, settling, processing
information with respect to, and facilitating transactions in
securities, and, in general, to protect investors and the public
interest. The Exchange believes that Portfolio Depositary Receipts,
generally, and DIAMONDS specifically, have the potential to benefit the
markets by providing an alternate trading instrument, such as those
encouraged by the Division of Market Regulation in its report, ``The
October 1987 Market Break,'' that may help temper market volatility and
reduce stress on individual index component stocks during unusual
market conditions.
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\13\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any inappropriate burden on competition.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
No written comments were either solicited or received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 35 days of the 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 the proposed rule change, or
(B) Institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing. Persons making written submissions
should file six copies thereof with the Secretary, Securities and
Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549.
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 at the
Commission's Public Reference Room. Copies of such filing will also be
available for inspection and copying at the principal office of the
Exchange. All submissions should refer to File No. SR-Amex-97-29 and
should be submitted by October 24, 1997.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-26285 Filed 10-2-97; 8:45 am]
BILLING CODE 8010-01-M
