[Federal Register Volume 62, Number 196 (Thursday, October 9, 1997)]
[Notices]
[Pages 52798-52801]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-26724]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-39189; File No. SR-CBOE-97-38]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change by the Chicago Board Options Exchange, Relating to Listing and
Trading of IPRs
October 2, 1997.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ notice is hereby given that on August 14, 1997, the
Chicago Board Options Exchange, Incorporated (``CBOE'' or ``Exchange'')
filed with the Securities and Exchange Commission (``SEC'' or
``Commission'') the proposed rule change as described in Items I, II,
and III below, which Items have been prepared by the Exchange. The
Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
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I. Self-Regulatory Organization's Statement of the Terms of
Substance of the Proposed Rule Change
The CBOE proposes to amend its rules to permit the listing and
trading of index portfolio receipts (``IPRs'') \2\ of one of more
series. IPRs of each series represent interests in a unit investment
trust (each a ``Trust'' and collectively the ``Trusts'') operating on
an open-end basis and holding a portfolio of securities that mirrors
the securities in a published index of securities.\3\ Amendments are
proposed to Rules 1.1, 30.10, 30.20, 30.33, 30.36, 31.5 and 31.94.
Also, the Exchange proposes to adopt two new rules--Rule 30.54
applicable only to IPRs, and Rule 30.55 applicable to all securities
governed by the rules of CBOE's Chapter XXX.
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\2\ IPRs have special characteristics, as described in this rule
filing, that distinguish them from unit investment trust interests
that can be listed under Rule 31.5G. Accordingly, CBOE is proposing
separate listing standards for IPRs.
\3\ In connection with its plans to list and trade IPRs, the
CBOE will request exemptive, interpretative or no-action relief from
Rules 10a-1, 10b-7, 10b-10, 10b-13, 10b-17, 11d1-2, 15c1-5, 15c1-6
and Rules 101, 102 and 104 of Regulation M under the Act and Section
16 of the Act.
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The text of the proposed rule change is available at the Office of
the Secretary, CBOE 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 the
Statutory Basis for, the Proposed Rule Change
1. Purpose
The proposed rules \4\ are substantially similar to existing rules
of the American Stock Exchange (``AMEX'') applicable to Portfolio
Depositary Receipts (``PDRs''), which are substantively very similar to
IPRs.\5\ IPRs will be issued by one or more Trusts to be formed by an
entity serving as the sponsor for the Trusts (the ``Sponsor'').\6\ Upon
receipts of securities and cash in payment for a creation order placed
through the Distributor as described below, the Trustee will issue a
specified number of IPRs referred to as a ``Creation Unit.''
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\4\ The Commission notes that CBOE has not identified a
particular trading product that it seeks to list pursuant to the
proposed listing standards. Prior to trading a particular , CBOE may
have to submit an additional Section 19(b) filing that more
specifically addresses potential issues associated with items such
as the composition, calculation and dissemination of the applicable
index. A particular proposal may also involve issues relating to
product disclosure, market impact, and applicable trading rules. The
Commission also notes that approval of the proposed listing
standards would likely provide CBOE with a basis for concluding that
it has rules providing for transactions in products such as AMEX
SPDRs and MidCap SPDRs, thereby satisfying rule 12f-5 of the Act and
allowing CBOE's unlisted trading of such products.
\5\ See File No. SR-AMEX-92-18 (adopting new rules related to
the listing and trading of PDRs); SR-AMEX-95-16 (providing that the
minimum tick applicable to the MidCap SPDR, a PDR product, will be
\1/64\ of $1.00); SR-AMEX-94-52 (listing and trading of MidCap 400
SPDRs under the rules originally adopted to trade PDRs); SR-AMEX-93-
41 (limiting the AMEX's liability in connection with its
administration of proprietary indices and products); and SR-AMEX-92-
45 (providing that the minimum tick applicable to SPDRs will be \1/
32\ of $1.00).
\6\ CBOE anticipates that all of the Trusts will be governed by
a master trust agreement providing for the issuance, in series, of
IPRs based on different underlying indices. The Sponsor will file
(i) a registration statement under the Investment Company Act of
1940 (the ``ICA'') registering the trust (consisting of such series
of Trusts) as an investment company under the ICA, and (ii) a
separate registration statement under the Securities Act of 1933
(the ``Securities Act'') registering the offer and sale of each
series of IPRs. The Sponsor will also file an application under
Section 6(c) of the ICA requesting exemption of the Trusts and the
Sponsor from certain provisions of the ICA and permitting the Trusts
and the Sponsor to engage in certain affiliated transactions
otherwise prohibited by Section 17(d) of the ICA and Rule 17d-1
thereunder.
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Each series of IPRs will be based on a published index of
securities. IPRs of each such series are intended to produce investment
results that generally correspond to the price and yield performance of
the component common stocks of the selected index. Each Trust will
provide investors with an interest in a portfolio of securities that is
intended to closely track the value of the index on which it is based.
IPRs will trade like shares of common stock and will pay periodic
dividends proportionate to those paid with respect to the underlying
portfolio of securities, less certain expenses, as described in the
prospectus for each series of IPRs. The Exchange expects that the
Trusts will terminate 125 years from the initial date of deposit of the
trust corpus into each respective Trust or on such earlier date as may
be required in order to permit such Trust to comply with the rule
against perpetuities, in the event that the Trust is governed by the
law of a state in which the rule against perpetuities remains in
effect.\7\
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\7\ Each Trust, however, may be terminated earlier under the
following circumstances: (1) delisting of the IPRs issued by such
Trust by the primary market on which the IPRs are traded; (2)
termination of the license agreement with the owner of the index on
which the Trust is based; or (3) if either the Trustee, Sponsor,
Distributor, Depository Trust Company (``DTC'') or the National
Securities Clearing Corporation (``NSCC'') is unable to perform its
functions or duties with respect to operation of a Trust and a
suitable successor entity is unavailable. In addition, the Sponsor
may also terminate a Trust if, after six months from inception, the
Trust net asset value falls below $150 million or such other amount
as may be specified in the prospectus, or if, after three years from
inception, the Trust net asset value falls below $350 million or
such other amount as may be specified in the prospectus. IPRs cannot
be traded after the termination of a Trust. However, on termination
the Trust will be liquidated, and IPR holders at that time will
receive a distribution equal to their pro rata share of the assets
of the Trust, net of certain fees and expenses.
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The Sponsor will enter into a trust agreement with a trustee in
accordance with Section 26 of the ICA. CBOE will establish a
relationship with an entity
[[Page 52799]]
that will act as the underwriter of IPRs on an agency basis
(``Distributor''). All orders to create IPRs in Creation Units will be
required to be placed with the Distributor, and it will be the
responsibility of the Distributor to transmit such orders to the
Trustee. The Distributor will be a registered broker-dealer and a
member of the National Association of Securities Dealers, Inc.
(``NASD'').
Payment with respect to creation orders for a Trust placed through
the Distributor will be made by (1) the ``in-kind'' deposit with the
Trustee of a specified portfolio of securities that contains
substantially the same securities in substantially the same proportions
or ``weighting'' as the component securities of the index on which the
Trust is based and (2) a cash payment sufficient to enable the Trustee
to make a distribution (``Division Equivalent Payment'') 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, subject to certain specified adjustments
(see ``Distributions'' below) plus or minus a ``Balancing Amount'' to
compensate for any differences between the market value of the
securities paid and the net asset value of a Creation Unit of such
Trust. The Dividend Equivalent Payment and the Balancing Amount are
collectively referred to as the ``Cash Component.'' The portfolio of
securities and the Cash Component accepted by the Trustee are referred
to as the ``Portfolio Deposit.''
Issuance of IPRs
Upon receipt of a Portfolio Deposit for a Trust in payment for a
creation order placed through the Distributor as described above, the
Trustee will issue a specified number of IPRs of that Trust equal to
the Creation Unit. IPRs may be created only in a Creation Unit or
multiples thereof. The Exchange anticipates that a Creation Unit for a
series of IPRs will consist of 50,000 IPRs of such other number as the
Exchange may designate taking into account the value of individual IPRs
of that particular series and such other factors as the Exchange deems
to be relevant. Individual IPRs can then be traded in the secondary
market like any other equity security.\8\ It is expected that Portfolio
Deposits will be made by institutional investors and arbitragers as
well as Market-Makers and Designated Primary Market-Makers as defined
in the CBOE's rules.
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\8\ At such time as the Exchange seeks to list series of IPRs,
the Sponsor and the Trusts will file with the Commission an
application seeking, among other things, an order: (1) permitting
secondary market transactions in IPRs at negotiated prices, rather
than at a current public offering price described in the prospectus
for the applicable series of IPRs as required by Section 22(d) of
the ICA and Rule 22c-1 thereunder; and (2) permitting the sale of
IPRs to purchasers in the secondary market unaccompanied by a
prospectus, when prospectus delivery is not required by Section 4(3)
of the Securities Act but may be required according to Section 24(d)
of the ICA for redeemable securities issued by a unit investment
trust. These exemptions, if granted, will permit IPRs to be traded
in secondary market transactions just as interests in a closed-end
investment company are traded.
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To maintain the correlation between the portfolio of securities
held in a Trust and that of the underlying index, the Trustee will
adjust the composition of the Portfolio Deposits from time to time to
conform to changes to the index made by the organization that compiles
and maintains such index. The Trustee will aggregate certain of these
adjustments and make periodic conforming changes to the Trust
portfolio.
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 then current Portfolio Deposit for each
of the Trusts; (b) on at least a minute-by-minute basis throughout the
day, a number representing the value (on a per IPR basis) of the
securities portion of each Portfolio Deposit; and (c) on a daily basis,
the accumulated dividends, less expenses, per each outstanding IPR
unit.
Transactions in IPRs may be effected on the Exchange until 3:15
p.m. Chicago time each business day.\9\ IPRs will trade in round lots
of 100.
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\9\ See CBOE Rule 30.4(c) which provides that the ``hours during
which transactions in . . . UIT interest may be made on the Exchange
shall be as provided in Rule 24.6 in respect of index options.''
Rule 24.6 provides a 3:15 p.m. closing time.
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Redemption
IPRs will be redeemable in kind by tendering them to the Trustee,
but only in Creation Unit aggregations. While holders may sell any
number of IPRs in the secondary market at any time, they must
accumulate a minimum number of IPRs equal to a Creation Unit in order
to redeem through a Trust. IPRs will remain outstanding until redeemed
or until termination of the Trust by which they were issued. Creation
Units of a Trust will be redeemable on any business day in exchange for
a portfolio of the securities held by the Trust substantially identical
in weighting and composition to the securities portion of the Portfolio
Deposit for such Trust in effect on the date request is made for
redemption, together with the Cash Component. The number of shares of
each of the securities transferred to the redeeming holder will be the
number of shares of each of the component stocks in such a Portfolio
Deposit on the day the redemption notice is received by the Trustee,
multiplied by the number of Creation Units being redeemed. Nominal
service fees will be charged in connection with the creation and
redemption of Creations Units. The Trustee will cancel all tendered
Creation Units upon redemption.
Distributions
The Trust will pay dividends quarterly. It is expected that the
regular quarterly ex-dividend dates for an underlying index of
securities traded on the New York Stock Exchange, Inc. (``NYSE'') will
be the third Friday in March, June, September and December, unless such
day is an NYSE holiday, in which case the ex-dividend date will be the
preceding Thursday. Holders of IPRs on the business day preceding the
ex-dividend date will be entitled to receive an amount representing
dividends accumulated through the quarterly dividend period preceding
such ex-dividend date net of fees and expenses for such period. The
payment of dividends will be made on the last Exchange business day in
the calendar month following the ex-dividend date (``Dividend Payment
Date''). On the Dividend Payment Date, dividends payable will be
distributed for those securities with ex-dividend dates falling within
the period from the ex-dividend date most recently preceding the
current ex-dividend date through the business day preceding the current
ex-dividend date.\10\ The Trustee will compute on a daily basis the
dividends accumulated for each Trust within each quarterly dividend
period. Dividend payments will be made through DTC and its participants
to all such holders with funds received from the Trustee. IPRs will be
registered in book entry form only, which records will be kept by DTC.
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\10\ Because the Trusts intend to qualify for and elect tax
treatment as regulated investment companies under the Internal
Revenue Code, the Trustee will also be required to make additional
distributions to the minimum extent necessary (i) to distribute the
entire annual taxable income of each Trust, including any net
capital gains from sales of securities in connection with
adjustments to the portfolio of securities held by such Trust, or to
generate cash for distributions, and (ii) to avoid imposition of the
excise tax imposed by section 4982 of the Internal Revenue Code.
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Criteria for Initial and Continued Listing
CBOE's proposed standards for listing and delisting of IPRs allow
some flexibility in listing each series of IPRs.
[[Page 52800]]
With respect to initial listing, the Exchange proposes that, for each
series, the Exchange will establish a minimum number of IPRs required
to be outstanding at the time of commencement of Exchange trading. For
IPRs having a Creation Unit size of 50,000 IPRs, a minimum of 150,000
IPRs of each such series (i.e., three Creation Units) will be required
to be outstanding when trading in such series of IPRs begins.
Because the Trusts operate on an open-end basis, and because the
number of holders of IPRs of each Trust is subject to substantial
fluctuation depending on market conditions, the Exchange believes it
would be inappropriate and burdensome on IPR holders to consider
suspending trading in or delisting a series of IPRs, with the
consequent termination of the Trust by which they were issued, unless
the number of holders remains severely depressed during an extended
time period. Therefore, 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, IPRs of any
series when, in its opinion, further dealing in such securities appears
unwarranted under the following circumstances:
(a) the Trust by which IPRs of such series are issued has more than
60 days remaining until termination and there have been fewer than 50
record and/or beneficial holders of IPRs of such series for 30 or more
consecutive trading days; or
(b) the index on which the Trust is based is no longer calculated
or available; or
(c) such other event shall occur or condition exist which, in the
opinion of the Exchange, makes further dealings on the Exchange
inadvisable.
A Trust shall terminate upon removal from Exchange listing, and the
series of IPRs representing interests in such Trust will be redeemed as
described in the prospectus for such series. A Trust may also terminate
under such other conditions as may be described in the prospectus for
such series. For example, the Sponsor, following notice to IPR holders,
will have discretion to direct that a Trust be terminated if the value
of securities held by such Trust falls below a specified amount. A
Trust based on an index licensed to the Exchange by a third party will
also terminate if the required license terminates.\11\
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\11\ See supra note 7.
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Trading Halts
Prior to commencement of trading in IPRs, 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 forth in Exchange Rule 24.7 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 value of the applicable current index group or
whether other unusual conditions or circumstances detrimental to the
maintenance of a fair and orderly market are present. Also, IPR trading
would be halted (along with trading in other securities on the
Exchange) if the circuit breaker parameters under Exchange Rule 6.3B
are reached.
Terms and Characteristics
The Exchange proposes to require that members and member
organizations provide to all purchasers of each series of IPRs 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 proposes to require that such
description be included with any sales material on that series of IPRs
that is provided to customers or the public. In addition, the Exchange
proposes to require that any other written materials provided by a
member or member organization to customers or the public making
reference to a specific series of IPRs as an investment vehicle must
include a statement in substantially the following form: ``A circular
describing the terms and characteristics of [the series of IPRs] is
available from your broker or the Exchange. It is recommended that you
obtain and review such circular before purchasing [the series of IPRs].
In addition, upon request you may obtain from your broker a prospectus
for [the series of IPRs].'' Finally, as noted above, the Exchange
requires that members and member organizations provide the prospectus
for a series of IPRs to customers 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 IPRs for such omnibus account will be
deemed to constitute an agreement by the non-member to make such
written description available to its customers on the same terms as are
applicable to members and member organizations.
2. Statutory Basis
The proposed rule change is consistent with Section 6(b) of the Act
\12\ in general and furthers the objectives of Section 6(b)(5) \13\ in
particular in that the rules that are proposed to apply to the trading
of IPRs are designed to prevent fraudulent and manipulative acts and
practices, promote just and equitable principles of trade, 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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\12\ 15 U.S.C. 78f(b).
\13\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition
CBOE does not believe that the proposed rule change will impose any
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 solicited or received with respect to the
proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing
for Commission Action
Within 35 days of the date of publication of this notice in the
Federal Register or within such longer period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding or (ii) as to
which CBOE consents, the Commission will:
A. by order approve such 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, NW., Washington, DC 20549.
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule
[[Page 52801]]
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. Sec. 552, will
be available for inspection and copying in the Commission's Public
Reference Section, 450 Fifth Street, NW., Washington, DC. Copies of
such filing will also be available for inspection and copying at the
principal office of the CBOE. All submissions should refer to File No.
SR-CBOE-97-38 and should be submitted by October 30, 1997.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\14\
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\14\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-26724 Filed 10-8-97; 8:45 am]
BILLING CODE 8010-01-M
