[Federal Register Volume 63, Number 35 (Monday, February 23, 1998)]
[Notices]
[Pages 9026-9032]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-4403]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-39660; File No. SR-BSE-97-08]
Self-Regulatory Organizations; Notice of Filing and Order
Granting Accelerated Approval of Proposed Rule Change by the Boston
Stock Exchange, Inc. Relating to Listing and Trading Standards for
Portfolio Depositary Receipts
February 12, 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 December 9, 1997,\3\ the Boston Stock Exchange, Inc. (``BSE'' or
``Exchange'') filed with the Securities and Exchange Commission
(``Commission'') the proposed rule change as described in Items I and
II below, which Items have been prepared by the self-regulatory
organization. The Commission is publishing this notice to solicit
comments on the proposed rule change from interested persons. The
Commission is also granting accelerated approval of the proposed rule
change.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ The Exchange filed Amendment No. 1 to the proposed rule
change on December 11, 1997, the substance of which is incorporated
into the notice. See letter from Karen A. Aluise, Vice President,
BSE, to Michael Walinskas, Senior Special Counsel, Market Regulation
Commission, dated December 9, 1997 (``Amendment No. 1'').
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to adopt new listing standards and trading
rules for Portfolio Depositary Receipts (``PDRs''). The text of the
proposed rule change is available at the Office of the Secretary, BSE,
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 III 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
Listing Requirements for PDRs. The Exchange proposes to adopt new
listing and delisting requirements to accommodate the trading of PDRs,
i.e., securities that are interests in a unit investment trust
(``Trust'') holding a portfolio of securities linked to an index. Each
Trust will provide investors with an instrument that (1) closely tracks
the underlying portfolio of securities, (2) trades like a share of
common stock, and (3) pays holders of the instrument periodic dividends
proportionate to those paid with respect to the underlying portfolio of
securities, less certain expenses (as described in the Trust
prospectus).
Under the proposal, the Exchange may list and trade, or trade
pursuant to unlisted trading privileges (``UTP''), PDRs based on one or
more stock indices or securities portfolios. PDRs based on each
particular stock index or portfolio will be designated as a separate
series and identified by a unique symbol. The stocks that are included
in an index or portfolio on which PDRs are based will be selected by
the Exchange, or by another person having a proprietary interest in and
authorized use of such index or portfolio, and may be revised as deemed
necessary or appropriate to maintain the quality and character of the
index or portfolio.
In connection with an initial listing, the Exchange proposes that,
for each Trust of PDRs, the Exchange will establish a minimum number of
PDRs required to be outstanding at the time of commencement of Exchange
trading, and such minimum number will be filed with the Commission in
connection with any required submission under Rule 19b-4 for each
Trust. If the Exchange trades a particular PDR pursuant to unlisted
trading privileges, the Exchange will follow the listing exchange's
determination of the appropriate minimum number.
Because the Trust operates on an open-end type basis, and because
the number of PDR holders is subject to substantial fluctuations
depending on market conditions, the Exchange believes it would be
inappropriate and burdensome on PDR holders to consider suspending
trading in or delisting a series of PDRs, with the consequent
termination of the Trust, unless the number of holders remains severely
depressed during an extended time period. Therefore, twelve months
after
[[Page 9027]]
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:
(i) 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;
(ii) If the index on which the Trust is based is no longer
calculated; or
(iii) If such other event occurs or condition exists which, in the
opinion of the Exchange, makes further dealings in such securities on
the Exchange inadvisable.
A Trust will terminate upon removal from Exchange listing and its
PDRs will be redeemed in accordance with provisions of the Trust
prospectus. A Trust may also terminate under such other conditions as
may be set forth in the Trust prospectus. For example, the sponsor of
the Trust (the ``Sponsor''), following notice to PDR holders, will have
discretion to direct that the Trust be terminated if the value of
securities in such Trust falls below a specified amount.
Trading of PDRs. Dealing in PDRs on the Exchange will be conducted
pursuant to the Exchange's general agency-auction trading rules. The
Exchange's general dealing and settlement rules will apply, including
its rules on clearance and settlement of securities transactions and
its equity margin rules. Other generally applicable Exchange equity
rules and procedures will also apply, including, among others, rules
governing the priority, parity and precedence of orders and the
responsibilities of specialists.\4\
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\4\ Chapter VII, Section 2, will also apply to the trading of
PDRs. That rule provides, in part, that every member and allied-
member is required to use due diligence to learn the essential facts
relative to every customer, including the possible use of a name
other than that of the interested party, and to every order or
account accepted by him, except when acting as agent for another
member.
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With respect to trading halts, the trading of PDRs will be halted,
along with trading of all other listed or traded stocks, in the event
the circuit breaker thresholds are reached.\5\ In addition, for PDRs
tied to an index, while the triggering of futures price limits for the
S&P 500 Composite Price Index (``S&P 500 Index''), S&P 100 Composite
Price Stock Index (``S&P 100 Index'') or Major Market Index (``MMI'')
futures contracts will not, in themselves, result in a halt in PDR
trading or a delayed opening, such an event could be considered by the
Exchange, along with other factors, such as a halt in trading in S&P
100 Index Options (``OEX''), S&P 500 Index Options (``SPX''), or Major
Market Index Options (``XMI''), in deciding whether to halt trading in
PDRs.
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\5\ See Securities Exchange Act Release No. 38221 (January 31,
1997) 62 FR 5871 (February 7, 1997) and note 7 therein.
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The Exchange will issue a circular to its members and member
organizations informing them of Exchange policies regarding trading
halts in such securities. For a PDR based on an index, 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, or whether
other unusual conditions or circumstances detrimental to the
maintenance of a fair and orderly market are present.
Disclosure. The proposed rule requires that members and member
organizations provide to all purchasers of each series of PDRs a
written description of the terms, characteristics and risks of such
securities, in a form approved by the Exchange, not later than the time
a confirmation of the first transaction in such series of PDRs is
delivered to such purchaser. In this regard, a member or member
organization carrying an omnibus account for a non-member broker-dealer
will be required to inform such nonmember that execution of an order to
purchase PDRs 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 directly applicable to
members and member organizations. The written description must be
included with any sales material relating to that series of PDRs that a
member provides to customers or the public. Moreover, other written
materials provided by a member or member organization to customers or
the public making specific reference to a series of PDRs as an
investment vehicle must include a statement in substantially the
following form: ``A circular describing the terms and characteristics
of [the series of PDRs] is available from your broker. It is
recommended that you obtain and review such circular before purchasing
[the series of PDRs]. In addition, upon request you may obtain your
broker a prospectus for [the series of PDRs].'' Additionally, as noted
above, the Exchange requires that members and member organizations
provide customers with a copy of the prospectus for a series of PDRs
upon request.
Two existing PDRs, Standard & Poor's Depository Receipt (``SPDRs'')
and Standard & Poor's MidCap 400 Depository Receipts (``MidCap
SPDRs''), are traded on the American Stock Exchange (``Amex'').\6\ The
Exchange is not seeking approval to list SPDRs or MidCap SPDRs at this
time, but rather is requesting approval to trade SPDRs and MidCap SPDRs
pursuant to unlisted trading privileges once the generic listing
standards set forth herein are approved.
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\6\ SPDRs and MidCap SPDRs are defined and discussed more fully
below.
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Pursuant to Rule 12f-5 under the Act, in order to trade a
particular class or type of security pursuant to unlisted trading
privileges, the Exchange must have rules providing for transactions in
such class or type of security. The Amex has enacted listing standards
for PDRs, and the Exchange's proposed rule change is designed to create
similar standards for PDR listing and/or trading on the Exchange. As
stated above, the Exchange proposes to trade only SPDRs and MidCap
SPDRs pursuant to unlisted trading privileges upon approval of this
rule filing.
If at a later time the Exchange and the issuer of the product
desire to list SPDRs and MidCap SPDRs or any other PDRs on the
Exchange, the Exchange will request SEC approval for that listing in a
separate proposed rule change filed pursuant to Section 19(b) of the
Act. Additionally, in the event a new PDR is listed on another exchange
using listing standards that are different than current Exchange
listing standards or the Exchange listing standards proposed in this
filing, the Exchange will file a proposed rule change pursuant to
Section 19(b) of the Act to adopt those listing standards before it
trades that PDR pursuant to unlisted trading privileges.
With respect to the above discussion regarding disclosure issues,
because SPDRs and MidCap SPDRs will be traded pursuant to unlisted
trading privileges and will not be listed on the Exchange at this time,
the Exchange does not intend to create its own product description to
satisfy the requirements of the proposed rule, which requires members
to provide to purchasers a written description of the terms and
characteristics of SPDRs and MidCap SPDRs in a form approved by the
Exchange. Instead, the Exchange will deem a member or member
organization to be in compliance with this requirement if the member
delivers either (i) the current product description produced by the
Amex from time to time, or (ii) the current prospectus for
[[Page 9028]]
the SPDR and MidCap SPDR, as the case may be.\7\ It will be the
member's responsibility to obtain these materials directly from Amex
for forwarding to purchasers in the time frames prescribed by Exchange
and Commission rules. The Exchange will notify members and member
organizations of this requirement in a notice to members.
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\7\ The Exchange plans to notify its members in a regulatory
circular that members must comply with Chapter VII, Section 2 of the
Exchange Rules prior to recommending the purchase of SPDRs or MidCap
SPDRs to customers. The circular will also state that members must
deliver a SPDR or MidCap SPDR product description to all purchasers
of the products and that they must provide the prospectus upon
request.
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The remainder of this section provides background information on
SPDRs and MidCap SPDRs. The information, requested by BSE to have been
copied from SR-AMEX-94-52 and SR-AMEX-92-18, describes the structure
and mechanics of SPDRs and MidCap SPDRs.
SPDRs and MidCap SPDRs Generally.\8\ On December 11, 1992, the
Commission approved Amex Rules 1000 et seq.\9\ to accommodate trading
on the Amex of PDRs generally. The Sponsor of each series of PDRs
traded on the Amex is PDR Services Corporation, a wholly-owned
subsidiary of the Amex. The PDRs are issued by a Trust in a specified
minimum aggregate quantity (``Creation Unit'') in return for a deposit
consisting of specified numbers of shares of stock plus a cash amount.
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\8\ The Commission has recently approved rule change proposals
covering the trading of PDRs on the CHX and the CSE, including SPDRs
and MidCap SPDRs. See Securities Exchange Act Release No. 39076
(September 15, 1997) 62 FR 49270 (September 19, 1997) and Securities
Exchange Act Release No. 39268 (October 22, 1997) 62 FR 56211
(October 29, 1997).
\9\ See Securities Exchange Act Release No. 31591 (December 11,
1992) 57 FR 60253 (December 18, 1992).
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The first Trust to be formed in connection with the issuance of
PDRs was based on the S&P 500 Composite Stock Price Index (``S&P
Index''), known as SPDRs. SPDRs have been trading on the Amex since
January 29, 1993. The second Trust to be formed in connection with the
issuance of PDRs was based on the S&P MidCap 400 Index,\10\ known
MidCap SPDRs.\11\ The sponsor of the two Trusts has entered into trust
agreements with a trustee in accordance with Section 26 of the
Investment Company Act of 1940. PDR Distributors, Inc.
(``Distributor'') acts as underwriter of both SPDRs and MidCap SPDRs on
an agency basis. The Distributor is a registered broker-dealer, a
member of the National Association of Securities Dealers, Inc., and a
wholly-owned subsidiary of Signature Financial Group, Inc.
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\10\ The S&P MidCap 400 Index is a capitalization-weighted index
of 400 actively traded securities that includes issues selected from
a population of 1,700 securities, each year-end market-value
capitalization of between $200 million and $5 billion. The issues
included in the Index cover a broad range of major industry groups,
including industrials, transportation, utilities, and financials.
\11\ See Securities Exchange Act Release No. 35534 (March 24,
1995) 60 FR 16686 (March 31, 1995).
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SPDRs. The Trustee of the SPDR Trust will have the right to vote
any of the voting stocks held by the Trust, and will vote such stocks
of each issuer in the same proportion as all other voting shares of
that issuer voted.\12\ Therefore, SPDR holders will not be able to
directly vote the shares of the issuers underlying the SPDRs.
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\12\ The Trustee will abstain from voting if the stocks held by
the Trust cannot be voted in the same proportion as all other shares
of the securities are voted.
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The Trust will issue SPDRs in exchange for ``Portfolio Deposits''
of all of the S&P 500 Index securities weighted according to their
representation in the Index.\13\ An investor making a Portfolio Deposit
into the Trust will receive a ``Creation Unit'' composed of 50,000
SPDRs.\14\ The price of SPDRs will be based on a current bid/offer
market. The Amex has designated 1/64's as the minimum increment for
trading in SPDRs. The Exchange is proposing this same minimum variation
for the trading of SPDRs on the Exchange. SPDRs will not be redeemable
individually, but may be redeemed in Creation Unit size (i.e., 50,000
SDPRs). Specifically, a Creation Unit may be redeemed for an in-kind
distribution of securities identical to a Portfolio Deposit.\15\
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\13\ A Portfolio Deposit also will include a cash payment equal
to a pro rata portion of the dividends accrued on the Trust's
portfolio securities since the last dividend payment by the Trust,
plus or minus an amount designed to compensate for any difference
between the net asset value of the Portfolio Deposit and the S&P 500
Index caused by, among other things, the fact that a Portfolio
Deposit cannot contain fractional shares.
\14\ The Trust is structured so that the net asset value of an
individual SPDR should equal one-tenth of the value of the S&P 500
Index.
\15\ An investor redeeming a Creation Unit will receive Index
securities and cash identical to the Portfolio Deposit required of
an investor wishing to purchase a Creation Unit on that particular
day. Since the Trust will redeem in kind rather than for cash, the
Trust will not be forced to maintain cash reserves for redemptions.
This should allow the Trust's resources to be committed as fully as
possible to tracking the S&P 500 Index, enabling the Trust to track
the Index more closely than other basket products that must allocate
a portion of their assets for cash redemptions.
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MidCap SPDRs. All orders to create MidCap SPDRs in Creation Unit
size aggregations (which has been set at 25,000) must be placed with
the Distributor, and it will be the responsibility of the Distributor
to transmit such orders to the Trustee. To be eligible to place orders
to create MidCap SPDRs as described below, an entity or person either
must 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 MidCap SPDRs, the Distributor will instruct the Trust
to initiate the book-entry movement of the appropriate number of MidCap
SPDRs to the account of the entity placing the order. MidCap SPDRs will
be maintained in book-entry form at 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 formulated to
mirror, to the extent practicable, the component securities of the
underlying index or portfolio, and (2) a cash payment sufficient to
enable the Trustee to make a distribution to the holders of beneficial
interests in 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. The securities and cash accepted by the Trustee
are referred to, in the aggregate, as a ``Portfolio Deposit.''
Issuance of MidCap SPDRs. 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 MidCap
SPDRs, which aggregate number is referred to as a ``Creation Unit.'' A
Creation Unit is made up of 25,000 MidCap SPDRs.\16\ Individual MidCap
SPDRs can then be traded in the secondary market like other equity
securities. Portfolio Deposits are expected to be made primarily by
institutional investors, arbitrageurs, and Exchange specialists.
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\16\ PDRs may be created in other than Creation Unit size
aggregations in connection with the DTC Dividend Reinvestment
Service (``DRS'').
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The Trustee or Sponsor will make available (1) on a daily basis, a
list of the names and required number of shares for each of the
securities in the current Portfolio Deposit; (2) on a minute-by-minute
basis throughout the day, a number representing the value (on a per
MidCap SPDR basis) of the securities portion of a Portfolio Deposit in
effect on such day; and (3) on a daily basis, the accumulated
dividends, less expenses, per outstanding MidCap SPDR.
[[Page 9029]]
The Amex has set the minimum fractional trading variation for
MidCap SPDRs at 1/64 of $1.00. The Exchange is proposing this same
minimum variation for MidCap SPDRs.
Redemption of MidCap SPDRs. MidCap SPDRs in Creation Unit size
aggregations will be redeemable in kind by tendering them to the
Trustee. While holders may sell MidCap SPDRs in the secondary market at
any time, they must accumulate at least 25,000 (or multiples thereof)
to redeem them through the Trust. MidCap SPDRs will remain outstanding
until redeemed or until the termination of the Trust. Creation Units
will be redeemable on any business day in exchange for a portfolio of
the securities held by the Trust identical in weighting and composition
to the securities portion of a Portfolio Deposit in effect on the date
a request is made for redemption, together with a ``Cash Component''
(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 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 for MidCap SPDRs. The MidCap SPDR Trust will pay
dividends quarterly. The regular quarterly ex-dividend date for MidCap
SPDRs will be the third Friday in March, June, September, and December,
unless that day is a New York Stock Exchange holiday, in which case the
ex-dividend date will be the preceding Thursday. Holders of MidCap
SPDRs 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 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 quarterly dividend period. Dividend payments will be made
through DTC and its participants to all such holders with funds
received from the Trustee.
The MidCap SPDR Trust intends to make the DTC DRS available for use
by MidCap SPDR holders through DTC participant brokers for reinvestment
of their cash proceeds. The DTC DRS is also available to holders of
SPDRs. Because some brokers may choose not to offer the DTC DRS, an
interested investor will have to consult his or her broker to ascertain
the availability of dividend reinvestment through that broker. The
Trustee will use cash proceeds of MidCap SPDR holders participating in
the reinvestment to obtain the Index securities necessary to create the
requisite number of SPDRs.\17\ Any cash remaining will be distributed
pro rata to participants in the dividend reinvestment.
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\17\ The Creation of PDRs in connection with DTC DRS represents
the only circumstances under which PDRs can be created in other than
Creation Unit size aggregations.
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Equity Requirements for PDRs. Because of the potential risk
associated with PDRs, the Exchange is raising the minimum equity for
the trading of PDRs by specialists and competing specialists to
$1,000,000. Corresponding increases are also being made to the Early
Warning Alert and caretaker provisions of the equity rule,\18\ to
$875,000 and $800,000 respectively. In addition, PDRs will not be
eligible for alternate account trading.
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\18\ Chapter XXII, Sections 2(f)(ii), (iii) and (iv).
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The Exchange requests the Commission to find good cause, pursuant
to Section 19(b)(2) of the Act, for approving the proposed rule change
prior to the thirtieth day after publication in the Federal Register.
The Exchange believes that such action is appropriate, in that the
listing standards proposed closely mirror the listing standards of the
primary market for SPDRs MidCap SPDRs, as well as the standards
approved for the regional exchanges currently trading PDRs. In
addition, substantially the same trading rules and procedures exist on
several of the exchanges.
2. Statutory Basis
The Exchange believes that the statutory basis for the proposed
rule change is Section 6(b)(5) of the Act,\19\ in that it is designed
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; to remove impediments to and
perfect the mechanism of a free and open market and a national market
system; and, in general, to protect investors and the public interest;
and is not designed to permit unfair discrimination between customers,
issuers, brokers or dealers. Specifically, the proposed rule change
will increase competition in PDR markets by permitting Exchange members
to compete for PDR order flow. By adopting the proposed rule change,
the Exchange will bring the benefits of competition, including
increased efficiency and price competition, to those markets.
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\19\ 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 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. 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 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-BSE-97-08 and
should be submitted by March 16, 1998.
IV. Commission's Findings and Order Granting Accelerated Approval of
Proposed Rule Change
The Commission finds that the proposed rule change is consistent
with the requirements of the Act and the rules and regulations
thereunder applicable to a national securities exchange, and, in
particular, with the
[[Page 9030]]
requirements of Section 6(b)(5).\20\ The Commission believes that
providing for the exchange-trading on BSE of PDRs, in general, and
SPDRs and MidCap SPDRs, in particular, will offer investors an
efficient way of participating in the securities markets. Specifically,
the Commission believes that the trading on BSE of PDRs, in general,
and SPDRs and MidCap SPDRs pursuant to unlisted trading privileges, in
particular, will provide investors with increased flexibility in
satisfying their investment needs by allowing them to purchase and sell
a low-cost security replicating the performance of a broad portfolio of
stocks at negotiated prices throughout the business day, and by
increasing the availability of SPDRs and MidCap SPDRs as an investment
tool. The Commission also believes that PDRs will benefit investors by
allowing them to trade securities based on unit investment trusts in
secondary market transactions.\21\ Accordingly, as discussed below, the
proposed rule change is consistent with the requirements of Section
6(b)(5) of the Act that Exchange rules facilitate transactions in
securities while continuing to further investor protection and the
public interest.\22\
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\20\ 15 U.S.C. 78f(b)(5).
\21\ The Commission notes, however, that unlike open-end funds
where investors have the right to redeem their fund shares on a
daily basis, investors could only redeem PDRs in creation unit share
sizes. Nevertheless, PDRs would have the added benefit of liquidity
from the secondary market and PDR holders, unlike holders of most
other open-end funds, would be able to dispose of their shares in a
secondary market transaction.
\22\ In approving this rule, the Commission notes that it has
considered the proposed rule's impact on efficiency, competition,
and capital formation. 15 U.S.C. 78c(f).
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As the Commission noted in the orders approving SPDRs, and MidCap
SPDRs for listing and trading on Amex,\23\ the Commission believes that
the trading on BSE of a security like PDRs in general, and SPDRs and
MidCap SPDRs in particular, which replicate the performance of a broad
portfolio of stocks, could benefit the securities markets by, among
other things, helping to ameliorate the volatility occasionally
experienced in these markets. The Commission believes that the creation
of one or more products where actual portfolios of stocks or
instruments representing a portfolio of stocks, such as PDRs, can trade
at a single location in an auction market environment could alter the
dynamics of program trading, because the availability of such single
transaction portfolio trading could, in effect, restore the execution
of program trades to more traditional block trading techniques.\24\
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\23\ See supra notes 8 and 10.
\24\ Program trading is defined as index arbitrage or any
trading strategy involving the related purchase or sale of a
``basket'' or group of fifteen or more stocks having a total market
value of $1 million or more.
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An individual SPDR has a value approximately equal to one-tenth of
the value of the S&P 500 Index, and an individual MidCap SPDR has a
value of approximately one-fifth of the value of the S&P MidCap 400
Index, making them more available and useful to individual retail
investors desiring to hold a security replicating the performance of a
broad portfolio of stocks. Accordingly, the Commission believes that
trading of SPDRs and MidCap SPDRs on BSE will provide retail investors
with a cost efficient means to make investment decisions based on the
direction of the market as a whole and may provide market participants
several advantages over existing methods of effecting program trades
involving stocks.
The Commission also believes that PDRs, in general, and SPDRs and
MidCap SPDRs, in particular, will provide investors with several
advantages over standard open-end S&P 500 Index and S&P MidCap 400
Index mutual fund shares. In particular, investors will have the
ability to trade PDRs continuously throughout the business day in
secondary market transactions at negotiated prices.\25\ In contrast,
pursuant to Investment Company Act Rule 22c-1,\26\ holders and
prospective holders of open-end mutual fund shares are limited to
purchasing or redeeming securities of the fund based on the net asset
value of the securities held by the fund as designated by the board of
directors.\27\ Accordingly, PDRs in general, and SPDRs and MidCap SPDRs
in particular, will allow investors to (1) Respond quickly to changes
in the market; (2) trade at a known price; (3) engage in hedging
strategies not currently available to retail investors; and (4) reduce
transaction costs for trading a portfolio of securities.
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\25\ Because of potential arbitrage opportunities, the
Commission believes that PDRs will not trade at a material discount
or premium in relation to their net asset value. The mere potential
for arbitrage should keep the market price of a PDR comparable to
its net asset value, and therefore, arbitrage activity likely will
be minimal. In addition, the Commission believes the Trust will
tract the underlying index more closely than an open-end index fund
because the Trust will accept only in-kind deposits, and, therefore,
will not incur brokerage expenses in assembling its portfolio. In
addition, the Trust will redeem in kind, thereby enabling the Trust
to invest virtually all of its assets in securities comprising the
underlying index.
\26\ Investment Company Act Rule 22c-1 generally requires that a
registered investment company issuing a redeemable security, its
principal underwriter, and dealers in that security, may sell,
redeem, or repurchase the security only at a price based on the net
asset value next computed after receipt of an investor's request to
purchase, redeem, or resell. The net asset value of a mutual fund
generally is computed once daily Monday through Friday as designated
by the investment company's board of directors. The Commission
granted SPDRs and MidCap SPDRs an exemption from this provision in
order to allow them to trade at negotiated prices in the secondary
market. The Commission notes that BSE would need to apply for a
similar exemption in the instance that it wishes to list and trade a
new PDR because the exemptions are specific to SPDRs and MidCap
SPDRs.
\27\ Id.
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Although PDRs in general, and SPDRs and MidCap SPDRs in particular,
are not leveraged instruments, and, therefore, do not possess any of
the attributes of stock index options, their prices will still be
derived and based upon the securities held in their respective Trusts.
In essence, SPDRs are equity securities that are priced off a portfolio
of stocks based on the S&P 500 Index and MidCap SPDRs are equity
securities that are price off a portfolio of stocks based on the S&P
MidCap 400 Index. Accordingly, the level of risk involved in the
purchase or sale of a SPDR or MidCap SPDR (or a PDR in general) is
similar to the risk involved in the purchase or sale of traditional
common stock, with the exception that the pricing mechanism for SPDRs
and MidCap SPDRs (and PDRs in general) is based on a basket of stocks.
Nonetheless, the Commission has several specific concerns regarding the
trading of these securities. In particular, PDRs raise disclosure,
market impact, and secondary market trading issues that must be
addressed adequately. As discussed in more detail below, and in the
Amex Approval Order,\28\ the Commission believes BSE adequately
addresses these concerns.
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\28\ See supra note 8.
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The Commission believes that the BSE proposal contains several
provisions that will ensure that investors are adequately apprised of
the terms, characteristics, and risks of trading PDRs. As noted above,
the proposal contains four aspects addressing disclosure concerns.
First, BSE members must provide their customers trading PDRs with a
written explanation of any special characteristics and risks attendant
to trading such PDR securities (such as SPDRs or MidCap SPDRs), in a
form approved by BSE. As discussed above, BSE's filing states that
SPDRs and MidCap SPDRs product descriptions should be obtained from
Amex.\29\ The
[[Page 9031]]
Commission beleives that it is reasonable under the Act to allow BSE to
require its members to obtain the product description for SPDRs and
MidCap SPDRs from Amex.\30\ Amex might decide to impose a reasonable
charge for this service.\31\
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\29\ The Commission notes that, in the context of a proposed
rule change by CHX to add rules for listing and trading of PDRs in
general, and to trade SPDRs and MidCap SPDRs pursuant to UTP, Amex
commented on CHX's proposed method regarding the delivery of the
SPDR and MidCap SPDR product descriptions, and reserved the right to
charge CHX members for supplying the product description should the
task become burdensome to Amex. Amex did not object to the
underlying policy of CHX members obtaining the product description
from Amex. See CHX Approval Order, supra note 7.
\30\ The Commission notes that the exemptions granted by the
Commission under the Investment Company Act that permit the
secondary market trading of SPDRs an Mid Cap SPDRs are specifically
conditioned upon the customer disclosure requirements described
above. Accordingly, BSE rules adequately ensure its members must
deliver the current product description to all investors in SPDRs
and MidCap SPDRs.
\31\ The Commission notes that Amex would need to file a
proposed rule change under Section 19(b) of the Act in the event it
decides to charge a fee for supplying the SPDR or MidCap SPDR
product descriptions. The Commission notes that reasonable fees
would have to be imposed on the member firms rather than the
customers entitled to receive the propsectus or the product
description.
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Second, BSE members must include this written product description
with any sales material relating to the series of PDRs that is provided
to customers or the public. Third, any other written materials provided
by a member or member organization to customers or the public
referencing PDRs as an investment vehicle must include a statement, in
a form specified by BSE, that a circular and prospectus are available
from a broker upon request. Fourth, a BSE member carrying an omnibus
account for a non-member broker-dealer is required to inform such non-
member that execution of an order to purchase a series of PDRs for such
omnibus account will be deemed to constitute agreement by the non-
member to make the written product description available to its
customers on the same terms as member firms. Accordingly, the
Commission believes that investors in PDR securities, in general, and
SPDRs and MidCap SPDRs, in particular, will be provided with adequate
disclosure of the unique characteristics of the PDR instruments and
other relevant information pertaining to the instruments. Finally,
BSE's Chapter VII, Section 2, Investigation of Accounts, will apply to
the trading of PDRs, including transactions in SPDRs and MidCap SPDRs.
The Commission believes BSE has adequately addressed the potential
market impact concerns raised by the proposal. First, BSE's proposal
permits listing and trading of specific PDRs only after review by the
Commission. Second, BSE has developed policies regarding trading halts
in PDRs. Specifically, the Exchange would halt PDR trading if the
circuit breaker parameters under BSE Chapter II, Section 34A were
reached.\32\ In addition, in deciding whether to halt trading or
conduct a delayed opening in PDRs, in general, and SPDRs and MidCap
SPDRs, in particular, BSE represents that it will be guided by, but not
necessarily bound to, 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
or whether other unusual conditions or circumstances detrimental to the
maintenance of a fair and orderly market are present.
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\32\ In addition, for PDRs tied to an index, the triggering of
futures price limits for the S&P 500 Index, S&P 100 Index, or MMI
futures contracts will not, in itself, result in a halt in PDR
trading or a delayed opening. However, the Exchange could consider
such an event; along with other factors, such as a halt in trading
in OEX, SPX, or MMI options, in deciding whether to halt trading in
PDRs.
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The Commission believes that the trading of PDRs in general on BSE
should not adversely impact U.S. securities markets. As to the trading
of SPDRs and MidCap SPDRs pursuant to UTP, the Commission notes that
the corpus of the SPDR Trust is a portfolio of stocks replicating the
S&P 500 Index, a broad-based capitalization-weighted index consisting
of 500 of the most actively-traded and liquid stocks in the U.S. The
corpus of the MidCap SPDR Trust is a portfolio of stocks replicating
the S&P MidCap 400 Index, also a broad-based, capitalization-weighted
index consisting of 400 actively traded and liquid U.S. stocks. In
fact, as described above, the Commission believes SPDRs and MidCap
SPDRs may provide substantial benefits to the marketplace and
investors, including, among others, enhancing the stability of the
markets for individual stocks.\33\ Accordingly, the Commission believes
that SPDRs and MidCap SPDRs do not contain features that will make them
likely to impact adversely the U.S. securities markets, and that the
addition of their trading on BSE pursuant to UTP could produce added
benefits to investors through the increased competition between other
market centers trading the product.
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\33\ Even though PDR transactions may serve as substitutes for
transactions in the cash market, and possibly make the order flow in
individual stocks smaller than would otherwise be the case, the
Commission acknowledges that during turbulent market conditions the
ability of large institutions to redeem or create PDRs could
conceivably have an impact on price levels in the cash market. In
particular, if a PDR is redeemed, the resulting long stock position
could be sold into the market, thereby depressing stock prices
further. The Commission notes, however, that the redemption or
creation of PDRs likely will not exacerbate a price movement because
PDRs will be subject to the equity margin requirements of 50% and
PDRs are non-leveraged instruments. In addition, as noted above,
during turbulent market conditions, the Commission believes PDRs and
SPDRs and MidCap SPDRs, in particular, will serve as a vehicle to
accommodate and ``bundle'' order flow that otherwise would flow to
the cash market, thereby allowing such order flow to be handled more
efficiently and effectively. Accordingly, although PDRs and SPDRs
and MidCap SPDRs could, in certain circumstances, have an impact on
the cash market, on balance we believe the product will be
beneficial to the marketplace and can actually aid in maintaining
orderly markets.
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Finally, the Commission notes that BSE has submitted surveillance
procedures for the trading of PDRs, specifically SPDRs and MidCap
SPDRs, and believes that those procedures, which incorporate and rely
upon existing BSE surveillance procedures governing equities, are
adequate under the Act.
The Commission finds that BSE's proposal contains adequate rules
and procedures to govern the trading of PDR securities, including
trading SPDRs and MidCap SPDRs pursuant to UTP. Specifically, PDRs are
equity securities that will be subject to the full panoply of BSE rules
governing the trading of equity securities on BSE, including, among
others, rules governing the priority, parity and precedence of orders
and the responsibilities of specialists. In addition, BSE has developed
specific listing and delisting criteria for PDRs that will help to
ensure that the markets for PDRs will be deep and liquid. As noted
above, BSE's proposal provides for trading halt procedures governing
PDRs. Finally, the Commission notes that BSE has stated that Chapter
VII, Section 2, Investigation of Accounts, will apply to the trading of
PDRs in general, and SPDRs and MidCap SPDRs, in particular.
The Commission finds good cause for approving the proposed rule
change prior the thirtieth day after the date of publication of notice
of filing thereof in the Federal Register. The Commission believes that
accelerated approval of the proposal is appropriate because it is very
similar to CHX's and CSE's previously approved proposals covering the
listing and trading of PDRs in general, and SPDRs and MidCap SPDRs, in
particular.\34\ As such, the Commission believes that the proposed rule
change does not raise any new regulatory concerns or issues.
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\34\ See supra note 7.
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[[Page 9032]]
It is therefore ordered, pursuant to Section 19(b)(2) \35\ that the
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proposed rule change is hereby approved on an accelerated basis.
\35\ 15 U.S.C. 78s(b)(2).
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For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\36\
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\36\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-4403 Filed 2-20-98; 8:45 am]
BILLING CODE 8010-01-M
