[Federal Register Volume 63, Number 212 (Tuesday, November 3, 1998)]
[Notices]
[Pages 59354-59356]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-29338]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-40603; International Series Release No. 1165; File No.
SR-PCX-98-29]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change by the Pacific Exchange, Inc. Relating to the Listing and
Trading of Investment Company Units, Including World Equity Benchmark
Shares (``WEBS'')
October 26, 1998.
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 June 18, 1998, the Pacific Exchange, Inc. (``Exchange'' or ``PCX'')
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 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).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of
Substance of the Proposed Rule Change
The Exchange seeks to adopt new rules to accommodate the trading,
whether by listing or pursuant to unlisted trading privileges, of
Investment Company Units (``Units''), including World Equity Benchmark
Shares (``WEBS'').
The text of the proposed rule change is available at the Office of
the Secretary, the Exchange, 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 Exchange 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 Exchange 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 Exchange seeks to adopt new rules to accommodate the trading,
whether by listing or pursuant to unlisted trading privileges, of
Units. WEBS are among the Units which the Exchange may seek to
trade.\3\ WEBS are structured as shares of seventeen separate series
(``Index Series''), each of which invests primarily in equity
securities traded in a designated foreign market in an effort to track
the performance of a specified foreign equity market index. The
investment objective of each of the initial seventeen Index Series is
to provide investment results that correspond generally to the price
and yield performance of publicly traded securities in the aggregate in
particular markets, as represented by a particular foreign equity
securities index compiled by Morgan Stanley Capital International
(``MSCI'').
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\3\ The Commission notes that the Exchange intends to clarify
whether: (i) The Exchange seeks solely to establish rules to
accommodate the trading of Units, or (ii) the Exchange, in addition
to establishing such rules, seeks to trade WEBS pursuant to unlisted
trading privileges upon approval of the filing. This information
will be reflected in any final approval order.
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The Exchange notes that the Commission previously approved proposed
rule changes submitted by the American Stock Exchange (``Amex'') and
the Chicago Stock Exchange (``CHX'') to list and/or trade WEBS.\4\
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\4\ See Securities Exchange Act Release Nos. 36947 (Mar. 8,
1996), 61 FR 10606 (Mar. 14, 1996) (approval of the Amex's request
to list and trade Index Fund Shares, including WEBS); and 39117
(Sept. 22, 1997), 62 FR 50973 (Sept. 29, 1997) (approval of the
CHX's request to trade WEBS pursuant to unlisted trading
privileges).
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a. Background & description. WEBS are issued by Foreign Fund, Inc.,
(``Fund'') and are based on seventeen MSCI Indices (collectively ``MSCI
Indices,'' individually ``MSCI Index''). The countries whose exchange
markets are represented by the MSCI Indices are: Australia, Austria,
Belgium, Canada, France, Germany, Hong Kong, Italy, Japan, Malaysia,
Mexico, Netherlands, Singapore, Spain, Sweden, Switzerland, and the
United Kingdom.
The investment objective of each WEBS series is to seek to provide
investment results that generally correspond to the price and yield
performance of public securities traded in the aggregate in particular
foreign markets, as represented by specific MSCI Indices. Each WEBS
series will use a ``passive'' or indexing investment approach which
attempts to
[[Page 59355]]
approximate the investment performance of its benchmark index through
quantitative analytical procedures.
A WEBS series normally will invest at least 95% of its total assets
in stocks that are represented in the relevant MSCI Index and will at
all times invest at least 90% of its total assets in such stocks. A
WEBS series will not hold all of the issues that comprise the subject
MSCI Index, but will attempt to hold a representative sample of the
securities in the MSCI Index in a technique known as ``portfolio
sampling.''
The Fund will issue and redeem WEBS of each Index Series only in
aggregations of shares specified for each Index Series (each
aggregation is a ``Creation Union''). The number of shares per Creation
Unit will range from 40,000 to 600,000.\5\
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\5\ The Exchange notes that in the Amex's filing to list and
trade WEBS, the Amex anticipated that the value at a Creation Unit
at the start of trading would range from $450,000 to $10,000,000 and
the net asset value of an individual WEBS security would range from
$10 to $20. See Securities Exchange Act Release Nos. 36947 (Mar. 8,
1996), 61 FR 10606 (Mar. 14, 1996).
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b. The MSCI Indices. MSCI generally seeks to have 60% of the
capitalization of a country's stock market index reflected in the MSCI
Index for such country. Thus, the MSCI Indices seek to balance the
inclusiveness of an ``all share'' index against the replicability of a
``blue chip'' index. MSCI applies the same criteria and calculation
methodology across all markets for all indices, developed and emerging.
All single-country MSCI Indices are market capitalization weighted.
For countries that restrict foreign ownership, MSCI calculates two
types of indices: the MSCI Indices and additional indices called ``Free
Indices.'' The Free Indices exclude companies and share classes that
may not be purchased by foreigners. MSCI currently calculates Free
Indices for Singapore and Mexico, and for those regional and
international indices which include such markets. The Mexico and
Singapore WEBS series will be based on the Free Indices for those
countries.
All MSCI Indices are calculated daily. The calculation method
weights stocks in an MSCI Index by their beginning-of-period market
capitalization. Share prices are ``swept clean'' daily and adjusted for
any rights issues, stock dividends or splits. The MSCI Indices
presently are calculated in local currency and in U.S. dollars, without
dividends and with gross dividends reinvested.
Prices used to calculate the MSCI Indices are official exchange
closing prices. All prices are taken from the predominant exchange in
each market. To calculate the applicable foreign currency exchange
rate, MSCI uses WM/Reuters Closing Spot Rates for all developed and
emerging markets except those in Latin America. Because of the high
volatility of currencies in some Latin American countries. MSCI
continues to calculate its own rates for those countries. Under
exceptional circumstances MSCI may elect to use an alternative exchange
rate for any country if the WM/Ruters rate is believed not to be
representative for a given currency on a particular day.
Each MSCI Index underlying a WEBS series is calculated by MSCI for
each trading day in the applicable foreign exchange market based on
official closing prices in such exchange market. For each trading day,
MSCI publicly disseminates each MSCI Index value for the previous day's
close. MSCI Indices are reported periodically in major financial
publications and also are available through vendors of financial
information.
The Fund will cause to be made available daily the names and
required number of shares of each of the securities to be deposited in
connection with the issuance of WEBS in Creation Unit size aggregations
for each WEBS series, as well as information relating to the required
cash payment representing, in part, the amount of accrued dividends
applicable to such WEBS series. This information will be made available
by the Fund Advisor to any National Securities Clearing Corporation
(``NSCC'') participant requesting such information. In addition, other
investors can request such information directly from the Fund
distributor. The net asset value (``NAV'') for each WEBS series will be
calculated directly by the Fund administrator, PFPC, Inc. The NAVs will
be made available to the public from the Fund distributor by means of a
toll-free number, and also will be available to NSCC participants
through data made available from NSCC.\6\
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\6\ The Exchange notes that in the Amex's WEBS filing, the Amex
anticipated that it would provide current WEBS pricing information
by disseminating through the facilities of the Consolidated Tape
Association an indicative optimized portfolio value (``Value'') for
each WEBS series as calculated by Bloomberg, L.P. The Value was to
be disseminated on a per WEBS basis every fifteen seconds during
regular Amex trading hours of 9:30 A.M. to 4:00 P.M. Eastern
Standard Time. Id.
The Exchange believes such Value is unlikely to reflect the
value of all securities included in the applicable benchmark MSCI
Index. In addition, the Exchange believes the Value would not
necessarily reflect the precise composition of the current portfolio
of securities held by the Fund for each WEBS series disseminated
during Amex trading hours should not be viewed as a real-time
update, of the NAV of the Fund, which is calculated only once a day.
The Exchange recognizes, however, that during the trading day the
Value will closely approximate the value, per WEBS share, of the
portfolio of securities for each WEBS series, except under unusual
circumstances.
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The Exchange will distribute an information circular to its members
in connection with the trading of WEBS. The circular will discuss the
special characteristics and risks of trading this type of security. The
following are among the items to be discussed in the circular: what
WEBS are, how WEBS are created and redeemed, the requirement that
members and member firms deliver a WEBS prospectus to investors
purchasing WEBS prior to or concurrently with the confirmation of a
WEBS transaction, applicable Exchange rules, dissemination information,
trading information, and the applicability of suitability rules. The
Exchange also intends to utilize its existing surveillance procedures
to surveillance trading in WEBS, including surveilling specialist
compliance with Exchange Rule 5.33(a), which contemplates specialists
engaging in transactions with the issuer of WEBS under certain
circumstances.
c. Proposed rule. The Exchange seeks to adopt new rules to
accommodate the trading, whether by listing or pursuant to unlisted
trading privileges, of Units that meet certain criteria. A Unit is a
security that represents an interest in a registered investment company
(``Investment Company'') which Investment Company could be organized as
a unit investment trust, an open-end management investment company, or
similar entity.
The Exchange proposes that the Investment Company must hold
securities comprising, or otherwise based on or representing an
interest in an index or portfolio or securities; or hold securities in
another registered investment company that holds securities based on or
representing an interest in an index or portfolio of securities. An
index or portfolio may be revised as necessary or appropriate to
maintain the quality and character of the index or portfolio.
Under the proposed rule change, the Investment Company must also
issue Units in a specified aggregate number in return for a deposit
(``Deposit'') consisting of either a specified number of shares of
securities that comprise the index or portfolio, or are otherwise based
on or represent an investment in securities comprising such index or
portfolio, and/or a cash amount; or shares of a registered investment
company based on or representing an interest in, an index or portfolio
or
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securities, and/or a cash amount. Units must be redeemable, directly or
indirectly, from the Investment Company for securities and/or cash then
comprising the Deposit. Units must pay holders periodic cash payments
corresponding to the regular cash dividends or distributions declared
with respect to the securities held by the Investment Company, less
applicable expenses and charges, and there must be at least 300,000
Units outstanding prior to the commencement of trading of a series of
Units on the Exchange.
The proposed rule change would allow the Exchange to trade, whether
by listing or pursuant to unlisted trading privileges, specified series
of Units, with each series based on a specified index or portfolio of
securities. The value of the index or portfolio must be calculated and
disseminated to the public at least once per business day; provided
that, if the securities representing at least half the value of the
index or portfolio are securities of a single country other than the
United States, then the value of the index or portfolio may be
calculated and disseminated to the public at least once per day in that
country. Units may be either certified or issued in the form of a
single global certificate.
Under the proposal, the Exchange may consider suspending trading
and delisting (if applicable) a series of Units if after the initial
twelve-month period beginning upon the commencement of trading of a
series of Units: (i) there are fewer than 50 record and/or beneficial
holders of Units for 30 or more consecutive trading days; (ii) the
value of the index or portfolio of securities on which the series is
based is no longer calculated or available; or (iii) such other event
occurs or condition exists that, in the opinion of the Exchange, makes
further dealings on the Exchange inadvisable. In addition, the Exchange
will remove Units from trading and listing (if applicable) upon
termination of the issuing Investment Company or upon the termination
of listing of the Units on their primary market, if the primary market
is not the Exchange.
2. Statutory Basis
The Exchange believes the proposed rule change is consistent with
Section 6(b) of the Act,\7\ in general, and with Section 6(b)(5),\8\ in
particular, in that it is designed to promote just and equitable
principles of trade; foster cooperation and coordination with persons
engaged in regulating, clearing, settling, processing information with
respect to, and facilitating transactions in securities; and protect
investors and the public interest.
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\7\ 15 U.S.C. 78f(b).
\8\ 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 the proposed rule change will impose
any burden on competition that is not necessary or appropriate in
furtherance of the purposes of the Act.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
The Exchange did not solicit or receive written comments 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 the Exchange 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, including whether the proposed rule
change is consistent with the Act. 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 submissions, 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 persons, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C.. 552 will be available for inspection and copying in the
Commission's Public Reference Room, 450 Fifth Street, N.W., Washington,
D.C. 20549. 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-PCX-98-29 and should be submitted by
November 24, 1998.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\9\
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\9\ 17 CFR 200.30-3(a)(12).
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Jonathan G. Katz,
Secretary.
[FR Doc. 98-29338 Filed 11-2-98; 8:45 am]
BILLING CODE 8010-01-M
