[Federal Register Volume 60, Number 234 (Wednesday, December 6, 1995)]
[Notices]
[Pages 62513-62517]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-29691]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-36527; International Series Release No. 891; File No.
SR-Amex-95-43]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change and Amendment No. 1 thereto by the American Stock Exchange, Inc.
Relating to Index Fund Shares
November 29, 1995.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ notice is hereby given that on October 26, 1995, 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 Amex. On November 14, 1995, the Amex filed
Amendment No. 1 to its proposal.\2\ The Commission is publishing this
notice to solicit comments on the proposed rule change from interested
persons.
\1\15 U.S.C. 78s(b)(1) (1988).
\2\In Amendment No. 1, the Amex states that any broker-dealer
handling transactions for customers in ``World Equity Benchmark
Securities'' (or ``WEBS'') will have an obligation to deliver to
such customers a prospectus regarding WEBS pursuant to the
requirements of the Securities Act of 1933. Amendment No. 1 also
states that prior to listing series of Index Fund Shares for indices
other than those described in the present rule filing, it will make
an appropriate filing pursuant to Rule 19b-4 under the Act. Letter
from James F. Duffy, Executive Vice President and General Counsel,
Legal Chief, Office of Market Supervisor, Division of Market
Regulation, Commission, dated November 14, 1995 (``Amendment No.
1'').
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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 1000A et seq.
Index Fund Shares, which are shares issued by an open-end management
investment company that seeks to provide investment results that
correspond generally to the price and yield performance of a specified
foreign or domestic equity market index.
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.
[[Page 62514]]
(A) Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Introduction
The Amex proposed to list and trade under Rules 1000A et seq. Index
Fund Shares issued by an open-end management investment company
(``Fund'') that seeks to provide investment results that correspond
generally to the price and yield performance of a specified foreign or
domestic equity market index. Index Fund Shares will be issued by an
entity registered with the Commission as an open-end management
investment company, and which may be organized as a series fund
providing for the creation of separate series of securities, each with
a portfolio consisting of some or all of the component securities of a
specified securities index. A Fund may be managed so as to permit the
purchase or sale or certain securities in the underlying portfolio in
an effort to track, to the extent desired, the relevant securities
index. A Fund may establish tracking tolerances which will be disclosed
in the prospectus for a particular Fund or series thereof. Such Fund or
series normally will not replicate exactly a specific index, but
instead will seek to track an index within the tolerances stated in the
prospectus.
Issuances of Index Fund Shares by a Fund will be made only in
minimum Creation Unit size aggregations or multiplies thereof. The size
of the applicable Creation Unit size aggregation will be set forth in
the Fund's prospectus and will vary from one series of Index Fund
Shares to another, but generally will be of substantial size (e.g.,
value in excess of $500,000 per Creation Unit). It is expected that a
Fund will issue and sell Index Fund Shares through a principal
underwriter (``Distributor'') on a continuous basis at the net asset
value per share next determined after an order to purchase Index Fund
Shares in Creation Unit size aggregations is received in proper form.
Following issuance, Index Fund Shares would be traded on the Exchange
like other equity securities by professionals, as well as retail and
institutional investors.
It is expected that Creation Unit size aggregations of Index Fund
Shares generally will be issued in exchange for the ``in kind'' deposit
of a specified portfolio of securities, together with a cash payment
representing, in part, the amount of dividends accrued up to the time
of issuance. It is anticipated that such deposits will be made
primarily by institutional investors, arbitrageurs, and the Exchange
specialist. Redemption of Index Fund Shares generally will be made ``in
kind,'' with a portfolio of securities and cash exchanged for Index
Fund Shares that have been tendered for redemption. Issuance or
redemptions also could occur for cash under specified circumstances
(e.g., if it is not possible to effect delivery of securities
underlying the specific series in a particular foreign country) and at
other times in the discretion of the Fund.
It is expected that a Fund will make available on a daily basis a
list of the names and the required number of shares of each of the
securities to be deposited in connection with issuance of Index Fund
Shares of a particular series in Creation Unit size aggregations, as
well as information relating to the required cash payment representing,
in part, the amount of accrued dividends.
A Fund make periodic distributions of dividends from net investment
income, including net foreign currency gains, if any, in an amount
approximately equal to accumulated dividends on securities held by the
Fund during the applicable period, net of expenses and liabilities for
such period.
Index Fund Shares will be registered in book entry form through The
Depository Trust Company. Trading in Index Fund Shares on the Exchange
may be effected until 4:15 p.m. (New York time) each business day.
Index Fund Shares initially to be listed on the Exchange will be
series (``Index Series'') of World Equity Benchmark Shares issued by
Foreign Fund, Inc., and based on the following Morgan Stanley Capital
International (``MSCI'') Indices (``MSCI Indices'' or ``(Indices'');
MSCI Australia Index; MSCI Belgium Index; MSCI Canada Index; MSCI
France Index; MSCI Germany Index; MSCI Hong Kong Index; MSCI Italy
Index; MSCI Japan Index; MSCI Malaysia Index; MSCI Mexico Index; MSCI
Netherlands Index; MSCI Singapore (Free) Index; MSCI Spain Index; MSCI
Sweden Index; MSCI Switzerland Index; and MSCI United Kingdom Index.\3\
\3\The Exchange has stated that it will make an appropriate
filing pursuant to Rule 19b-4 under the Act prior to listing series
of Index Fund Shares for indices other than those described in the
present proposal. Amendment No. 1, supra note 2.
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Foreign Fund, Inc. will issue and redeem WEBS of each Index Series
only in aggregations of shares specified for each Index Series. The
following table sets forth the number of shares of an Index Series that
it is anticipated will constitute a Creation Unit for such Index
Series:
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Shares
per
Index series creation
unit
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Australia Index Series....................................... 75,000
Austria Index Series......................................... 40,000
Belguim Index Series......................................... 40,000
Canada Index Series.......................................... 75,000
France Index Series.......................................... 75,000
Germany Index Series......................................... 250,000
Hong Kong Index Series....................................... 40,000
Italy Index Series........................................... 40,000
Japan Index Series........................................... 250,000
Malaysia Index Series........................................ 75,000
Mexico Index Series.......................................... 75,000
Neterlands Index Series...................................... 75,000
Singapore (Free) Index Series................................ 75,000
Spain Index Series........................................... 40,000
Sweden Index Series.......................................... 75,000
Switzerland Index Series..................................... 75,000
United Kingdom Index Series.................................. 75,000
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3. The MSCI Indices\4\
\4\The description of the MSCI Indices was prepared by Foreign
Fund, Inc.
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General
The Indices were founded in 1969 by Capital International S.A. as
the first international performance benchmarks constructed to
facilitate accurate comparison of world markets. Morgan Stanley
acquired rights to the Indices in 1986. The MSCI Indices have covered
the world's developed markets since 1969, and in 1988, MSCI commenced
coverage of the emerging markets.
Although local stock exchanges traditionally have calculated their
own indices, these generally are not comparable with one another, due
to differences in the representation of the local market, mathematical
formulas, base dates, and methods of adjusting for capital changes.
MSCI applies the same criteria and calculation methodology across all
markets for all indices, developed and emerging.
MSCI generally seeks to have 60% of the capitalization of a
country's stock market reflected in the MSCI Index for such country.
Thus, the MSCI Indices balance the inclusiveness of an ``all share''
index against the replicability of a ``blue chip'' index.
Weighting
All single-country MSCI Indices are market capitalization weighted,
i.e., companies are included in the indices at their full market value
(total number of shares issued and paid up, multiplied by price). For
countries that restrict foreign ownership, MSCI calculates two indices.
The additional indices are called ``free'' indices, and they exclude
companies and share classes not purchasable by foreigners. Free indices
currently are calculated for Singapore, Mexico, the Philippines, and
Venezuela,
[[Page 62515]]
and for those regional and international indices which include such
markets.
Selection Criteria
The constituents of a country index are selected from the full
range of securities available in the market, excluding issues which are
either small or highly illiquid. Non-domiciled companies and investment
trusts are also excluded from consideration. After the index
constituents are chosen, they are reclassified using MSCI's schema of
38 industries and eight economic sectors to facilitate cross-country
comparisons.
The process of choosing index constituents from the universe of
available securities is consistent among indices. Determining the
constituents of an index is an optimization process which involves
maximizing float and liquidity, reflecting accurately the market's size
and industry profiles, and minimizing cross-ownership.
To reflect accurately country-wide performance, MSCI aims to
capture 60% of total market capitalization at both the country and
industry level. To reflect local market performance, an index should
contain a percentage of the market's overall capitalization sufficient
to achieve a high level of tracking. The greater the coverage, however,
the greater the risk of including securities which are illiquid or have
restricted float. MSCI's 60% coverage target seeks to balance these
considerations.
Within the overall target of 60% market coverage, MSCI aims to
capture 60% of the capitalization of each industry group, as defined by
local practice. MSCI believes this target assures that the index
reflects the industry characteristics of the overall market and permits
the construction of accurate industry indices.
MSCI may exceed the 60% of market capitalization target in the
index for a particular country because, e.g., one or two large
companies dominate an industry. Similarly, MSCI may underweight an
industry in an index if, e.g., the companies in such industry lack good
liquidity and float, or because of extensive cross-ownership.
Liquidity is measured by trading value, as reported by the local
exchanges. Trading value is monitored over time to determine ``normal''
levels exclusive of short-term peaks and troughs. A stock's liquidity
is significant not only in absolute terms (i.e., a determination of the
market's most actively traded stocks), but also relative to its market
capitalization and to average liquidity for the country as a whole.
Float, or the percentage of shares freely tradeable, is one measure
of potential short-term supply. Low float raises the risk of
insufficient liquidity. MSCI monitors float for every security in its
coverage, and low float may exclude a stock from consideration.
However, float can be difficult to determine. In some markets good
sources generally are not available. In other markets, information on
smaller and less prominent issues can be subject to error and time
lags. Government ownership and cross-ownership positions can change
over time, and are not always made public. Float also tends to be
defined differently depending on the source. MSCI seeks to maximize
float. As with liquidity, float is an important determinant, but not a
hard-and-fast screen, for inclusion of a stock in, or exclusion of a
stock from, a particular index.
Cross-ownership occurs when one company has an ownership position
in another. In situations where cross-ownership is substantial,
including both companies in an index can skew industry weights, distort
country-level valuations and overrepresent buyable opportunities. An
integral part of MSCI's country research is identifying cross-
ownerships to avoid or minimize inclusion of both companies in an
index. Cross-ownership cannot always be avoided, especially in markets
where it is prevalent. When MSCI makes exceptions, it seeks to select
situations where the constituents operate in different economic
sectors, or where the subsidiary company makes only a minor
contribution to the parent company's results.
MSCI attempts to meet its 60% coverage target by including a
representative sample of large, medium and small capitalization stocks,
to capture the sometimes disparate performance of these sectors. In the
emerging markets, the liquidity of smaller issues can be a constraint.
At the same time, properly representing the lower capitalization end of
the market risks overwhelming the index with names. Within these
constraints, MSCI strives to include smaller capitalization stocks,
provided they exhibit sufficient liquidity.
Calculation Methodology
All MSCI Indices are calculated daily using Laspeyres' concept of a
weighted arithmetic average together with the concept of ``chain-
linking,'' a classical method of calculating stock market indices. The
Laspeyres method weighs stocks in an 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 currently are calculated in local currency and in U.S. dollars,
without dividends and with gross dividends reinvested (e.g., before
withholding taxes).
In respect of developed markets, MSCI Indices with dividends
reinvested constitute an estimate of total return arrived at by
reinvesting one-twelfth of the month end yield at every month end.
In respect of emerging markets, MSCI has constructed its indices
with dividends reinvested as follows:
In the period between the ex-date and the date of dividend
reinvestment, a dividend receivable is a component of the index return.
Dividends are deemed received on the payment date.
To determine the payment date, a fixed time lag is assumed to
exist between the ex-date and the payment date. This time lag varies by
country, and is determined in accordance with general practices within
that market.
Reinvestment of dividends occurs at the end of the month in
which the payment date falls.
Price and Exchange Rates
Prices used to calculate the MSCI Indices are the official exchange
closing prices. All prices are taken from the dominant exchange in each
market. In countries where there are foreign ownership limits, MSCI
uses the price quoted on the official exchange, regardless of whether
the limit has been reached.
MSCI uses WM/Reuters Closing Spot Rates for all developed and
emerging markets except those in Latin America. The WM/Reuters Closing
Spot Rates were established by a committee of investment managers and
data providers, including MSCI, whose object was to standardize
exchange rates used by the investment community. Exchange rates are
taken daily at 4 p.m. London time by the WM Company and are sourced
whenever possible from multi-contributor quotes on Reuters.
Representative rates are selected for each currency based on a number
of ``snapshots'' of the latest contributed quotations taken from the
Reuters service at short intervals around 4 p.m. WM/Reuters provides
closing bid and offer rates. MSCI uses these to calculate the mid-point
to 5 decimal places.
MSCI continues to monitor exchange rates independently and may,
under exceptional circumstances, elect to use an alternative exchange
rate if the WM/Reuters rate is believed not to be representative for a
given currency on a
[[Page 62516]]
particular day. Because of the high volatility of currencies in some
Latin American countries, MSCI continues to use its own timing and
sources for these markets.
Changes to the Indices
In changing the constituents of the indices, MSCI attempts to
balance representativeness versus undue turnover. An index must
represent the current state of an evolving marketplace, yet minimize
turnover, which is costly as well as inconvenient for managers.
There are two broad categories of changes to the MSCI Indices. The
first consists of market-driven changes such as mergers, acquisitions,
bankruptcies, etc. These are announced and implemented as they occur.
The second category consists of structural changes to reflect the
evolution of a market, including changes in industry composition or
regulations. In the emerging markets, index restructurings generally
take place every 12 to 18 months. Structural changes may occur only on
four dates during the year: the first business days of March, June,
September and December. They are preannounced at least two weeks in
advance.
Restructuring an index involves a balancing of additions and
deletions. To maintain continuity and minimize turnover, MSCI is
reluctant to delete index constituents, and its approach to additions
is correspondingly stringent. As markets grow because of
privatizations, investor interest, or the relaxation of regulations,
index additions (with or without corresponding deletions) may be needed
to bring industry representations up to the 60% target. Companies are
considered not only with respect to their broad industry, but also with
respect to their subsector, so as to reflect if possible a broader
range of economic activity. Beyond industry representativeness, new
constituents are selected based on the criteria discussed above, i.e.
float, liquidity, cross-ownership, etc.
In general, new issues are not eligible for immediate inclusion in
the MSCI Indices because their liquidity remains unproven. Usually, new
issues undergo a ``seasoning'' period of one year to 18 months between
index restructurings until a trading pattern and volume are
established. After that time, they are eligible for inclusion, subject
to the criteria discussed above.
In the emerging markets, however, it is not uncommon that a large
new issue, usually a privatization, comes to market and substantially
changes the country's industry profile. In exceptional circumstances,
where an issue's size, visibility and investor interest assure high
liquidity, and where excluding it would distort the characteristics of
the market, MSCI may decide to include it immediately in an Index. In
other cases, MSCI may decide not to include a large new issue even in
the normal process of restructuring, and in spite of substantial size
and liquidity.
MSCI's primary concern when considering deletions is the continuity
of the Indices. Of secondary concern are the turnover costs associated
with deletions. The Indices must represent the full investment cycle,
including bear as well as bull markets. Out-of-favor stocks may exhibit
declining price, market capitalization or liquidity, and yet continue
to be good representatives of their industry.
Companies may be deleted because they have diversified away from
their industry classification, because the industry has evolved in a
different direction from the company's thrust, or because a better
industry representative exists (either a new issue or an existing
company). In addition, in order not to exceed the 60% target coverage
of industries and countries, adding new index companies may entail
corresponding deletions. Usually such deletions take place within the
same industry, but there are occasional exceptions.
3. Criteria for Initial and Continued Listing
Because of the open-end nature of Funds issuing Index Fund Shares,
the Exchange believes it is necessary to maintain appropriate
flexibility in connection with the listing of Index Fund Shares of a
particular Fund or series thereof. In connection with initial listing,
the Exchange will establish a minimum number of Index Shares required
to be outstanding at the time of commencement of Exchange trading. For
each series of Index Fund Shares, it is anticipated that a minimum of
the equivalent of three Creation Units will be required to be
outstanding when trading begins.
Each series of Index Fund Shares will be subject to the initial and
continued listing criteria of Rule 1002A(b) which provides that
following the initial twelve month period following commencement of
Exchange trading of a series of Index Fund Shares, the Exchange will
consider suspension of trading in, or removal from listing of, such
series under any of the following circumstances:
(a) if there are fewer than 50 beneficial holders of the series of
Index Fund Shares for 30 or more consecutive trading days; or
(b) if the value of the index or portfolio of securities on which
the series of Index Fund Shares is based is no longer calculated or
available; 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.
The Exchange will require the Index Fund Shares be removed from
listing upon termination of the Fund that issued such shares.
4. Trading Halts
Prior to commencement of trading in Index Fund Shares, 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 for in Rule 918C(b) in
exercising its discretion to halt or suspend trading. These factors
would include: (1) for Index Fund Shares based on a domestic stock
index, 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; (2) for Index Fund
Shares based on a foreign stock index, whether trading has been halted
or suspended market-wide in the applicable foreign market; or (3)
whether other unusual conditions or circumstances detrimental to the
maintenance of a fair and orderly market are present.
5. Terms and Characteristics
Prior to commencement of trading of a series of Index Fund Shares,
the Exchange will distribute to Exchange members and member
organizations an Information Circular calling attention to
characteristics of the specific series and to applicable Exchange
rules. The circular also will inform member organizations regarding any
applicable requirements for delivery of a prospectus to investors. The
Amex has stated that any broker-dealer handling transactions for
customers in WEBS will have an obligation to deliver to such customers
a prospectus regarding WEBS pursuant to the requirements of the
Securities Act of 1933.\5\
\5\Amendment No. 1, supra note 2. The Amex also states that in
the event that it obtains an exemption from the prospectus delivery
requirements in the future with respect to WEBS or to the other
series of Index Fund Shares listed on the Exchange, the Exchange
will consult with Commission staff and will file any necessary rule
changes. Id.
[[Page 62517]]
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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) in particular in that it is designed to prevent
fraudulent and manipulative acts and practices, 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 transaction in
securities, and, in general protect investors and the public interest.
(B) Self-Regulatory Organization's Statement on Burden on Competition
The Amex believes that the proposed rule change will not impose any
burden on competition.
(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 were neither solicited
nor received.
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 self-regulatory organization 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 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, 450 Fifth Street NW.,
Washington, DC. Copies of such filing will also be available for
inspection and copying at the principal office of the above-mentioned
self-regulatory organization. All submissions should refer to File No.
SR-Amex-95-43 and should be submitted by December 27, 1995.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority\6\
\6\17 CFR 200.30-3(a)(12) (1994).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-29691 Filed 12-5-95; 8:45 am]
BILLING CODE 8010-01-M
