[Federal Register Volume 61, Number 50 (Wednesday, March 13, 1996)]
[Notices]
[Pages 10410-10416]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-5913]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-36923; International Series Release No. 946; File No.
SR-NYSE-95-23]
Self-Regulatory Organizations; New York Stock Exchange, Inc.;
Order Approving and Notice of Filing and Order Granting Accelerated
Approval of Amendment Nos. 1 and 2 to a Proposed Rule Change Relating
to the Listing of Investment Company Units
March 5, 1996.
I. Introduction
On June 7, 1995, the New York Stock Exchange, Inc. (``NYSE'' or
``Exchange'') filed with the Securities and Exchange Commission
(``Commission'' or ``SEC''), pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4
thereunder,\2\ a proposed rule change to adopt para. 703.16 of its
Listed Company Manual (``Manual'') and to amend Exchange Rule 460. The
proposed rule change was published for comment and appeared in the
Federal Register on August 8, 1995.\3\ On January 24, 1996, the NYSE
filed Amendment No. 1 to its proposal.\4\ On February 23, 1996, the
NYSE filed Amendment No. 2 to its proposal.\5\ No comments were
received by the Commission. This order approves the proposal, as
amended.
\1\ 15 U.S.C. Sec. 78s(b)(1) (1988).
\2\ 17 CFR 240.19b-4 (1994).
\3\ See Securities Exchange Act Release No. 36032 (July 28,
1995), 60 FR 40403.
\4\ In Amendment No. 1, the Exchange provides additional
information regarding the calculation and dissemination of Index
values and Index component changes. Amendment No. 1 also effects
some minor changes relating to the size and value of the securities
described in the original proposal. Amendment No. 1 specifies that
the investment company described in its original proposal will be an
open-end management investment company. Finally, Amendment No. 1
updates information that was provided in the original proposal.
Letter from James E. Buck, Senior Vice President and Secretary,
NYSE, to Jonathan G. Katz, Secretary, Commission, dated January 23,
1996 (``Amendment No. 1'').
\5\ In Amendment No. 2, the Exchange makes two technical changes
to the language it proposes to add to its Rule 460 concerning
specialist activities. Letter from James E. Buck, Senior Vice
President and Secretary, NYSE, to Michael Walinskas, Branch Chief,
Office of Market Supervision (``OMS''), Division of Market
Regulation (``Division''), Commission, dated February 23, 1996
(``Amendment No. 2'').
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II. Description of the Proposal
A. Introduction
The NYSE proposes to adopt para. 703.16 of its Listed Company
Manual (``Manual''), consisting of listing standards for units of
trading (``Units'' or ``Fund shares'') that represent an interest in a
registered investment company (``Investment Company'') that would be
organized either as an open-end management investment company (``Fund-
only structure''), or as a unit investment trust (``Fund/UIT
structure''). The Investment Company would hold directly securities
comprising, or otherwise based on or representing an investment in, an
index or portfolio of securities (``Fund Basket''). The Investment
Company either could hold the securities directly, or could hold
another security representing the index or portfolio securities (such
as a UIT that holds shares of an open-end investment company). The
Exchange also proposes to amend Exchange Rule 460 to permit specialists
to whom Units have been allocated to purchase and redeem Units through
a distributor from the issuer of such securities.
The Exchange initially seeks to list up to nine series of Units, in
the form of ``CountryBaskets.'' \6\ These CountryBaskets (or ``CBs'')
will be based on the Fund-only structure.\7\ Hence, the CBs will be
structured as a series of an open-end management investment company
investing directly in a portfolio of securities (``Index Securities'')
included in the corresponding Financial Times/Standard & Poor's
Actuaries World Index (``FT/S&P Index'', ``FT/S&P'', or ``Index'').\8\
The nine series of Funds will be based on the following FT/S&P Indices:
Australia; France; Germany; Hong Kong; Italy; Japan; South Africa;
United Kingdom; and the United States.\9\ If, in the future, the
Exchange seeks to list Units with respect to other indices, including
FT/S&P Indices not described herein, it must make an appropriate filing
with the Commission to provide the authorization to effect such
listings.\10\
\6\ ``The CountryBaskets Index Fund'' and ``CountryBaskets'' are
service marks of Deutsche Morgan Grenfell/C.J. Lawrence Inc.
(``DMG''), the investment advisor to the Investment Company. DMG has
filed applications for registration of such service marks with the
U.S. Patent and Trademark Office. Id.
\7\ Id.
\8\ Although the CBs will rely on the Fund-only structure, the
Exchange represents that reliance on a Fund/UIT structure would not
materially alter its proposal.
\9\ The actual components, component capitalization, and
component weightings for each series as of December 29, 1995, were
submitted as part of a Form N-1A registration statement of The
CountryBaskets Index Fund, Inc. under the Securities Act of 1933 and
the Investment Company Act of 1940. Registration Nos. 33-85710; 811-
8734.
\10\ Before the NYSE could trade Units based on indices other
than the nine indices noted above, it would have to file a rule
proposal pursuant to Section 19(b) and Rule 19(b)(4) thereunder.
This filing would be in addition to any other regulatory
requirements under the Investment Company Act of 1940 or the
Securities Act of 1933.
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Each CountryBasket series represents an interest in an open-end
management investment company (each a ``Fund''),\11\ and is designed to
provide investment results that substantially correspond to the price
and yield performance of the specific FT/S&P Index to which it relates.
Specifically, each series will invest the largest proportion of its net
assets practicable, and in any event at least 95% of its net assets, in
the securities of the corresponding FT/S&P Index, and the weighting of
the portfolio securities of each series will substantially correspond
to their proportional representation in the relevant FT/S&P Index.
\11\ The product sponsors have obtained exemptive relief from
the Commission with respect to issues arising under the Investment
Company Act of 1940 permitting them to adopt the Fund-only
structure. See Investment Company Act Release No. 21802;
International Series Release No. 943, March 5, 1996. The Commission
notes that the manner in which the Units would be listed and traded
on the Exchange would be the same regardless of the structure
chosen.
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B. The FT/S&P Indices
Deutsche Bank Securities Corporation (CountryBaskets advisor and
DMG's predecessor firm), provided the Exchange with the following
description of the FT/S&P Indices: \12\
\12\ The following description reflects organizational ownership
and name changes that have occurred since the Exchange filed its
original proposal. See Amendment No. 1, supra note 4.
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1. Establishing an Index
The FT/S&P Indices are compiled jointly by The Financial Times
Limited (``FT''), Goldman, Sachs & Co.
[[Page 10411]]
(``Goldman''), and S&P in conjunction with the Institute of Actuaries
(together, the ``Consortium'').\13\ The aim of the Consortium is to
create and maintain a series of high quality equity indices for use by
the global investment community. Specifically, the Consortium seeks to
establish and maintain each FT/S&P so that with respect to the market
it is designed to reflect, the FT/S&P is comprehensive, consistent,
flexible, accurate, investible, and representative.
\13\ The Indices are successors to the FT-Actuaries World
Indices, which were founded jointly by FT, Goldman, and NatWest
Securities Limited. In May 1995, S&P joined FT and Goldman as co-
publisher of the predecessor to the Indices. As part of the new
agreement, NatWest withdrew from the management of those Indices.
The Indices are owned jointly by FT, S&P and Goldman. Following a
transition period, FT and S&P jointly will calculate the Indices. In
November 1995, FT transferred its ownership rights in the Indices to
FT-SE International, a new company owned jointly by FT and the
London Stock Exchange. By the end of 1996, it is expected that FT-SE
International will assume responsibility for calculating the
European and Asia-Pacific Indices, and S&P will calculate the United
States Index. Id.
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The World Index Policy Committee (``WIPC'') makes all policy
decisions concerning the FT/S&P Indices, including: objectives;
selection criteria; liquidity requirements; calculation methodologies;
and the timing and disclosure of additions and deletions. The WIPC
makes those decisions in a manner that is consistent with the stated
aims and objectives of the Consortium. In general, the WIPC aims for a
minimum of 70 percent coverage of the aggregate value of all domestic
exchange-listed stocks in every country, region and sector in which it
maintains an FT/S&P.\14\
\14\ The WIPC consists of: one representative of each Consortium
member; one member nominated by each of the parties as representing
an actual or prospective main user group of the World Indices; a
Chairman and additional member who are members of the Institute of
Actuaries or the Facility of Actuaries.
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The following criteria must be met for a market's securities to be
eligible for inclusion in an FT/S&P Index: (1) direct equity investment
by non-nationals must be permitted; (2) accurate and timely data must
be available; (3) no significant exchange controls should exist that
would prevent the timely repatriation of capital or dividends; (4)
significant international investor interest in the local equity market
must have been demonstrated; and (5) adequate liquidity must exist.
Securities in an FT/S&P are subject to the following
``investibility screens'': (1) securities comprising the bottom five
percent of any market's capitalization are excluded; (2) securities
must be eligible to be owned by foreign investors; (3) 25 percent or
more of the full capitalization of eligible securities must be publicly
available for investment and not in the hands of a single party or
parties ``acting in concert''; and (4) securities that fail to trade
for more than 15 business days within each of two consecutive quarters
are excluded.
The WIPC seeks to select constituent stocks that capture 85 percent
of the equity that remains available in any market (known as the
``investible universe'') after applying the investibility screens.
Securities are selected with regard to economic sector and market
capitalization to make the FT/S&P component highly representative of
the overall economic sector make-up and market capitalization
distribution of the investible universe of a market.
2. Maintaining an Index
The WIPC may add securities to an FT/S&P Index for any of the
following reasons: (1) the addition would make the economic sector
make-up and market capitalization distribution of the FT/S&P component
more representative of its investible universe; (2) a non-constituent
security has gained in importance and replaces an existing constituent
security under the rules of review established by the WIPC; (3) the FT/
S&P component represents less than its targeted percentage of the
capitalization of its investible universe (usually in cases where the
investible universe has grown faster than the corresponding FT/S&P
component); (4) a new, eligible security becomes available whose total
capitalization is one percent or more of the current capitalization of
the relevant FT/S&P component; (5) an existing constituent ``spins
off'' a part of its business and issues new equity to the existing
shareholders; or (6) changes in investibility factors lead to a stock
becoming eligible for inclusion and that stock now qualifies on other
grounds.
The WIPC may adjust the composition of an FT/S&P for any of the
following reasons: (1) the component comprises too high a percentage of
its representative universe; (2) a review by the WIPC shows that a
constituent security has declined in importance and should be replaced
by a non-constituent security; (3) the deletion of a security that has
declined in importance would make the FT/S&P component more
representative of the economic make-up of its investible universe; (4)
circumstances regarding investibility and free float change, causing
the constituent security to fail the FT/S&P screening criteria; (5) an
existing constituent security is acquired by another entity; or (6) the
stock has been suspended from trading for a period of more than ten
working days. Generally, but not in all cases, changes resulting from
review by the WIPC occur at the end of a calendar quarter. Changes
resulting from merger or ``spin-off'' activity will be effectuated as
soon as practicable.
3. Calculation and Dissemination of an Index
The FT/S&P Indices are calculated through widely accepted
mathematical formulae, with the effect that the indices are weighted
arithmetic averages of the price relatives of the constituents--as
produced solely by changes in the marketplace--adjusted for intervening
capital changes. The FT/S&P Indices are base-weighted aggregates of the
initial market capitalization, the price of each issue being weighted
by the number of shares outstanding, modified to reflect only those
shares outstanding that are eligible to be owned by foreign investors.
For each constituent security, the implied annual dividend is
divided by 260 (an accepted approximation for the number of business
days in a calendar year). This dividend is then reinvested daily
according to standard actuarial calculations. Distributions affect
adjustments to the base capital or the price per share in accordance
with prescribed FT/S&P standards. The Indices' values and related
performance figures for various periods of time are calculated daily by
FT/S&P and are disseminated to the public in the manner as described
below.
The FT/S&P Indices are valued in terms of local currency, U.S.
dollars, and U.K. pounds sterling, thereby allowing the effect of
currency value on the Index value to be measured. The FT/S&P Indices
are calculated once a day on weekdays when one or more of the
constituent markets are open; and also are syndicated and published in
the financial sections of several newspapers worldwide. FT/S&P Indices
data also may be purchased electronically.
DMG has arranged for Telesphere Corporation (formerly Telekurs
(North America) Inc.) (``Telesphere'') to calculate ``indicative
values'' for the nine Indices upon which CountryBaskets are based on a
more frequent basis.\15\ The Exchange will
[[Page 10412]]
disseminate these indicative values in U.S. dollars through the
facilities of the Consolidated Tape Association (``CTA''). In
calculating indicative values, Telesphere will use the most currently-
available stock price information for the constituent stocks in an
Index (based on home currency prices) and disseminate the indicative
values in prevailing U.S. dollars. Telesphere also will use the same
pricing algorithm and methodology used by the FT/S&P calculators in
calculating the indicative values. These values will be disseminated
every 30 seconds during the regular NYSE trading hours of 9:30 a.m. to
4:00 p.m. Eastern time.\16\
\15\ See Amendment No. 1, supra note 4. ``Indicative value'' is
a value calculated by Telesphere, and is not the official value for
the Indices calculated by FT/S&P. This, however, is not meant to
imply it is an estimate or not an accurate reflection of the value
of the Indices. As noted below, Telesphere will use the same pricing
algorithm and methodology as used by FT/S&P to calculate indicative
values, as well as the most currently available stock prices.
Therefore, the indicative value should be an accurate reflection of
the value of the Indices. Id.
\16\ Id. While the indicative values will not be the official
values of the Indices (which will continue to be calculated and
disseminated once each day), the Exchange believes that these values
will provide investors with accurate, timely information on the
values of the Indices. While some market participants may be able to
perform these calculations for their own trading purposes during the
business day, many participants lack sufficient resources to do so.
The Exchange believes that providing standardized information
through CTA facilities will help to ensure that all investors have
equal access to this market information. Id.
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Owning to the differences in trading hours in the markets for the
stocks underlying the Indices, the calculation of the indicative values
will be implemented as follows:
Pacific Rim. Australia, Hong Kong, and Japan. There is
no overlap between the NYSE trading hours and the home-country
trading hours. Thus, the indicative values always will reflect the
closing prices of the underlying securities on the most recently-
completed trading day, but will be updated every 30 seconds to
reflect changes in exchange rates.
Europe. France, Germany, Italy, and the United Kingdom.
There is some overlap between NYSE trading hours and home-country
trading hours. Thus, the 30-second updates for these Indices will
reflect changes in both current stock-price information and currency
exchange rates while the relevant market is open; it will reflect
only changes in exchange rates once the home-market closes.
United States. Each 30-second update will reflect the
current price of U.S. component stocks.
South Africa. During Eastern Standard Time, there is no
overlap between NYSE and South African trading hours. During Eastern
Daylight Time, there is a half-hour overlap. Thus, during Standard
Time, the disseminated Index values will reflect the closing South
African prices. During Eastern Daylight Time, there will be a real-
time feed of stock prices from the Johannesburg Stock Exchange
allowing a real-time calculation of the indicative value of the
Index at 30-second intervals during the half-hour overlap.\17\
\17\Id.
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The Exchange states that if Telesphere no longer were to calculate
the indicative values of the Indices, DMG would seek to find another
entity to provide such values on substantially the same basis as
Telesphere. If this were to occur, the Exchange states that it will
consult with Division of Market Regulation staff to ensure that the
staff finds any proposed new arrangement acceptable. If the staff were
to find the new arrangements unacceptable, the Exchange would take
appropriate action to address the staff's concerns, including the
possibility of delisting the securities.
Changes to an FT/S&P Index made during a calendar quarter are noted
at the foot of the tables containing the Indices that are published
daily in the Financial Times Newspaper (``FT newspaper'') publication.
Consistent with the FT newspaper's publication policy, these changes
also are shown in the FT newspaper prior to the actual date of
implementation (unless for reasons beyond the control of the FT
newspaper this is not possible). Decisions regarding the addition of
new eligible constituent stocks that are unrelated to existing stocks
in an FT/S&P Index, or weighting changes to existing constituent
stocks, are announced in the FT newspaper at least four working days
before they are implemented. Monday editions of the FT newspaper also
show all constituent changes made during the previous week, together
with base values for each Index. Changes to be made in an Index at the
end of a calendar quarter are published as soon as is practicable
following the quarterly meeting of the WIPC, but before the quarter-
end.
C. Creation and Redemption of the Securities
Consistent with the proposed listing standards. Units, including
CBs, will be distributed in transactions with the Fund (``Creation
Transactions''). As noted above, the NYSE proposal sets forth listing
standards applicable to both a Fund-only structure and a Fund/UIT
structure. The nine CB series the NYSE proposes to trade will rely on
the Fund-only structure. To effect a Creation transaction using the
Fund-only structure, a person buys Fund shares from the Fund at their
net asset value (``NAV'') next computed. The sales will be in
``Creation Unit'' size aggregations in exchange for a deposit
(``Deposit'') of Index Securities (a ``Fund Basket'') and a specified
amount of cash sufficient to equal the NAV of Fund shares.\18\ Creation
Unit size holdings then can be disaggregate and sold separately or in
lots on the Exchange.
\18\ Id. If the alternative Fund/UIT structure were used, a
person would effect a Creation Transaction by buying a Fund share
(or fractional share) in exchange for the Deposit. Each UIT would
invest solely in shares of a specified series of the Fund and would
offer one ``redeemable unit of beneficial interest'' (a ``Redeemable
Unit'') in exchange for each Fund share or fractional share. The
Redeemable Unit would be the functional equivalent of the Creation
Unit in the Fund-only structure.
The owner of a Redeemable Unit could separate that unit into a
specific number of identical fractional non-redeemable sub-units
that would constitute the Units traded on the Exchange. These
tradeable Units could be recombined into Redeemable Units and then
redeemed, at NAV, for the appropriate number of Fund shares. In
turn, the Fund shares could be redeemed for the Index Securities and
cash. The tradeable Units would not be redeemable other than in
Creation Unit aggregations.
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Units must be combined into Creation Unit size aggregations in
order to be redeemed at NAV, which generally will be satisfied with an
in-kind distribution of Index Securities comprising the Fund shares,
plus a cash payment. An individual Unit will not be redeemable. For the
Australia, France, Germany, Hong Kong, Italy, South Africa, United
Kingdom, United States CountryBasket series, there will be 100,000 CBs
per Creation Unit. For the Japan series, there will be 250,000 CBs per
Creation Unit. With the exception of the Japan series, a Creation Unit
size aggregation of Fund shares will represent securities with
approximately $2 to $5 million in market value. A Creation Unit size
aggregation of Fund shares for the Japan series will have an
approximate value of $9.5 million.\19\
\19\ Id. According to the Exchange, the large size of round lots
in Japan, and the requirement that all purchases in that market be
in round lots, required that a Creation Unit be structured so that
the Fund Basket consists of round lots of each of the Index
Securities, including the lowest-weighted securities, resulting in
the large size of the Creation Unit. Otherwise, effective arbitrage
between the Japan CountryBasket and the Index Securities might be
impracticable. Id.
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There may be an initial distribution period of Fund shares lasting
from one to a few weeks during which the principal underwriter or
distributor (``Distributor'') directly or through soliciting dealers
will accept subscriptions to purchase Fund shares.\20\ Thereafter, Fund
shares could be purchased throughout the life of the product.
Therefore, the offering will be continuous.
\20\ If the alternate dual Fund/UIT structure were used, orders
also would be accepted to exchange Fund shares for Redeemable Units
and to separate such Units into tradeable Units.
[[Page 10413]]
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D. Exchange Trading of Units
Units, including CBs, are deemed equity securities subject to NYSE
rules applicable to the trading of equity securities. Before commencing
trading in CBs, the Exchange will require that there be at least
300,000 tradeable Units outstanding, representing at least three
Creation Units for each series, except for the Japan series.\21\ The
Exchange will consider the suspension of trading and the delisting of a
series of Units, including CBs, if:
\21\ For the Japan series, 500,000 worth of CBs, representing
two Creation Units, will be required to be outstanding prior to
commencing trading.
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after the first year of trading, there are fewer than
50 record or beneficial holders of the Units for 30 or more
consecutive trading days;
the value of the underlying index or portfolio of
securities is no longer calculated or available; or
there occurs another event that makes further dealings
in the Units on the Exchange inadvisable.\22\
\22\ The Commission notes that the requirements that the fund
must invest at least 95% of its net assets in the securities of the
appropriate Index and that the weighting of the portfolio securities
of each series will substantially correspond to their proportional
representation in each Index, helps to reduce concerns that the CBs
could become a surrogate for trading in a single or a few
unregistered stocks. In the unlikely event, however, that this were
to occur, the Commission would expect the NYSE to delist the
securities to ensure compliance with the Act.
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Dealing in Units on the Exchange will be conducted pursuant to the
Exchange's general agency-auction trading rules.\23\ The Exchange's
general dealings and settlements rules will apply.\24\ Other Exchange
equity rules and procedures, such as the Exchange's equity margin
rules, would apply.\25\ Unless the prospectus for a specific Investment
Company states otherwise, the Units trading on the Exchange will have
one vote per share; however, as with other securities issued by
registered investment companies, there will not be a ``pass-through''
of the voting rights on the actual index securities held directly by a
fund or indirectly by a trust.
\23\ E.g., Rule 51--Hours for Business (9:30 a.m.-4:00 p.m.) and
Rule 62--Variations (one-eighth variations).
\24\ See NYSE Rules 45 to 296.
\25\ With respect to margin, the Exchange is requesting that the
Commission's Division of Market Regulation grant ``no action''
relief with respect to Section 11(d)(1) of the Act, as amended, and
Rules 11d1-1 and 11d1-2 thereunder, with respect to the extension of
credit to customers on a security that is part of a new issue.
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While equity securities traded on the Exchange must be
certificated, the Exchange proposes that Units trade either in
certificated form or solely through the use of a global certificate.
The use of a global certificate would have to be consistent with para.
501.02(B) of the Manual, which imposes conditions on the use of global
certificates for bonds. Permitting the use of global certificates would
be consistent with expediting the processing of transactions in Units
and would minimize the costs of engaging in transactions in these
securities.
E. Specialists
With respect to specialist dealings, Exchange Rule 460 precludes
certain business relationships between an issuer and the specialist in
the issuer's securities. This could be interpreted to prevent a
specialist from entering into Creation Transactions or redeeming Units
from the issuer. Therefore, the Exchange proposes to amend its Rule 460
to permit specialists to engage in these types of transactions if such
transactions would facilitate the maintenance of a fair and orderly
market in the Units. Any Creation Transactions in which the specialist
engages, however, will have to be effected through the Distributor, and
not directly with the issuer. The Exchange believes that this
requirement will make clear that the specialist is purchasing Units in
Creation Unit size aggregations only to facilitate normal specialist
trading activity. Finally, the specialist only will be able to purchase
and redeem Units on the same terms and conditions as any other
investor, and only at NAV.
F. Disclosure
With respect to investor disclosure, the Exchange notes that,
pursuant to the requirements of the Securities Act of 1933, as amended
(``1933 Act''), all investors in Units, including CountryBaskets, will
receive a prospectus. Because the Units will be continuous
distribution, the prospectus delivery requirements of the 1933 Act will
apply to all investors in Units, including secondary market purchases
on the NYSE in CBs. The prospectus and all marketing material will
refer to CBs by using the term ``investment company.'' The term
``mutual fund'' will not be used at any time. The term ``open-end
investment company'' will be used in the prospectus only to the extent
required by Item 4 of Investment Company Act Form N-1A. In addition,
the cover page of the prospectus will include a distinct paragraph
stating that CBs will not be individually redeemable.\26\
\26\ See Form N-1A, supra note 9.
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Upon the initial listing of any class of Units, including CBs, the
Exchange also will issue a circular to its membership explaining the
unique characteristics and risks of this type of security. That
circular, among other things, will inform member organizations of their
responsibilities under Exchange Rule 405 (``know your customer rule'')
with respect to transactions in such Units. The circular also will
inform member organizations of their responsibility to deliver a
prospectus to investors.
G. Trading Halts
Trading of Units would be halted, along with the trading of all
other listed stocks, in the event the ``circuit breaker'' thresholds of
Exchange Rule 80B were reached. In addition, the Exchange will consider
halting the trading in any series of Units if necessary to maintain a
fair and orderly market in that series of Units. For example, the
Exchange would consider halting the trading in a series of Units if
trading has been halted or suspended in the primary market for stocks
representing a significant percentage (such as 20 percent) of the value
of the underlying stock index or portfolio.
III. Discussion
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, the requirements of Section 6(b)(5) of the Act.\27\ The
Commission believes that the Exchange's proposal to list and trade
Units, and specifically CB securities, will provide investors with a
convenient way of participating in domestic and foreign securities
markets. The Exchange's proposal should help to provide investors with
increased flexibility in satisfying their investment needs by allowing
them to purchase and sell at negotiated prices throughout the business
day securities that replicate the performance of several portfolios of
stocks.\28\ Accordingly, the Commission finds that the Exchange's
proposal will facilitate transactions in securities, remove impediments
to and perfect the mechanism of a free and open market and a national
market system, and, in general, protect investors and the public
interest, and is not designed to permit unfair discrimination between
customers, issuers, brokers, or dealers.\29\
\27\ 15 U.S.C. 78f(b)(5) (1988).
\28\ The Commission notes that unlike typical open-end
investment companies, where investors have the right to redeem their
fund shares on a daily basis, investors in Units only could redeem
Units, including CBs, in Creation Unit size aggregations.
\29\ Pursuant to Section 6(b)(5) of the Act, the Commission must
predicate approval of exchange trading for new products upon a
finding that the introduction of the product is in the public
interest. Such a finding would be difficult with respect to a
product that served no investment, hedging or other economic
function, because any benefits that might be derived by market
participants would likely be outweighed by the potential for
manipulation, diminished public confidence in the integrity of the
markets, and other valid regulatory concerns.
[[Page 10414]]
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The estimated cost of an individual CB security, approximately $20
to $50, should make it attractive to individual retail investors who
wish to hold a security replicating the performance of a portfolio of
foreign or domestic stocks. Moreover, the Commission believes that CBs
will provide investors with several advantages over standard open-end
investment companies specializing in such stocks. In particular,
investors will be able to trade CBs continuously throughout the
business day in secondary market transactions at negotiated prices.\30\
In contrast, Investment Company Act Rule 22c-1 \31\ limits holders and
prospective holders of open-end investment company shares 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.
Accordingly, CBs should allow investors to: (1) respond quickly to
market changes through intra-day trading opportunities; (2) engage in
hedging strategies not currently available to retail investors; and (3)
reduce transaction costs for trading a portfolio of securities.
\30\ Because of potential arbitrage opportunities, the
Commission believes that CBs 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 CBs comparable to
their net asset values; therefore, arbitrage activity likely will
not be significant. In addition, the Fund will redeem in-kind,
thereby enabling the Fund to invest virtually all of its assets in
securities comprising the FT/S&P Indices.
\31\ 17 CFR 270.22c-1 (1994). Investment Company Act Rule 22c-1
generally provides 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 an open-end investment company generally is computed once
daily Monday through Friday as designated by the investment
company's board of directors. The Commission granted CBs an
exemption from this provision to allow them to trade in the
secondary market at negotiated prices. See Investment Company Act
Release No. 21802; International Series Release No. 943, March 5,
1996.
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Although the value of CBs will be based on the value of the
securities and cash held in the Fund, CBs are not leveraged
instruments.\32\ In essence, CBs are equity securities that represent
an interest in a portfolio of stocks designed to reflect substantially
the applicable FT/S&P Index. Accordingly, it is appropriate to regulate
CBs in a manner similar to other equity securities. Nevertheless, the
Commission believes that the unique nature of CBs raise certain product
design, disclosure, trading, and other issues that must be addressed.
\32\ In contrast, proposals to list exchange-traded derivative
products that contain a built-in leverage feature or component raise
additional regulatory issues, including heightened concerns
regarding manipulation, market impact, and customer suitability. See
e.g., Securities Exchange Act Release No. 36165 (August 29, 1995),
60 FR 46653 (relating to the establishment of uniform listing and
trading guidelines for stock index, currency, and currency index
warrants).
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A. CountryBaskets Generally
The Commission believes that the proposed CBs are reasonably
designed to provide investors with an investment vehicle that
substantially reflects in value the Index it is designed upon, and, in
turn, the performance of the specified U.S. or foreign market. In this
regard, the Commission notes that the WIPC imposes specific criteria in
its selection of index countries and components. For a market to be
eligible for inclusion in an FT/S&P Index, it must allow direct equity
investment by non-nationals, make timely and accurate data available,
impose no significant exchange controls, demonstrate significant
international investment interest, and be sufficiently liquid. For a
security to be included in a given index, it may not be in the bottom
5% of a market's capitalization, it must be eligible to be owned by
foreigners, 25% of its full capitalization must be publicly available
for investment, and it may not fail to trade for more than 15 business
days within each of two consecutive quarters. The aim of component
selection is to make Index components highly representative of the
over-all economic sector make-up and market capitalization of a given
market. The Commission believes that these criteria should serve to
ensure that the underlying securities of these indices are well
capitalized and actively traded.
The Commission also notes that the CB series' investment policies
require that at least 95% of a CB series' investments be in the equity
securities that are the constituent securities of the relevant FT/S&P
Index. In addition, the weighting of the portfolio securities of each
series will substantially correspond to their proportional
representation in the corresponding FT/S&P Index.\33\ This will help to
ensure that an investment in CBs will be substantially similar to an
investment in the securities comprising the related FT/S&P Index.
\33\ See Form N-1A, supra note 9.
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B. Disclosure
The Commission believes that the NYSE proposal should ensure that
investors have information that will allow them to be adequately
apprised of the terms, characteristics, and risks of trading Units,
including CBs.\34\ As noted above, all Unit investors, including
investors in CBs, will receive a prospectus regarding the product.
Because Units, including CBs, will be in continuous distribution, the
prospectus delivery requirements of the Securities Act of 1933 will
apply both to initial investors, and to all investors purchasing such
securities in the secondary market at the NYSE. The prospectus will
address the special characteristics of a popular Unit, including a
statement regarding that Unit's redeemability, and method of creation.
With respect to CBs, the prospectus will state specifically that CBs
individually are not redeemable.
\34\ The Exchange states that it may, in the future, seek to
obtain an exemption from the prospectus delivery requirement, either
with respect to CBs or other Units listed on the Exchange. In the
event it obtains such an exemption, the Exchange will discuss with
Commission staff the appropriate level of disclosure that should be
required with respect to the Units being listed, and will file any
necessary rule change to provide for such disclosure.
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The Commission also notes that upon the initial listing of any
class of Units, including CBs, the Exchange will issue a circular to
its members explaining the unique characteristics and risks of this
type of security. The circular also will note Exchange members'
responsibilities under Exchange Rule 405 (``know your customer rule'')
regarding transactions in such Units. Exchange Rule 405 generally
requires that members use due diligence to learn the essential facts
relative to every customer, every order, and every cash or margin
account accepted or carried by members.\35\ The circular also will
address members' responsibility to deliver a prospectus to all
investors as well as highlight the characteristics of purchases in
Units, including CBs, including that they only are redeemable in
Creation Unit size aggregations.
\35\ NYSE Rule 405(1).
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C. Trading of CBs
The Commission finds that adequate rules and procedures exist to
govern the trading of Units, including CBs. In this regard, the
Commission notes that Units are deemed equity securities subject to
NYSE rules applicable to the trading of equity securities. Accordingly,
the Exchange's existing general Dealings and Settlements Rules that
currently
[[Page 10415]]
apply to the trading of equity securities also will apply to Units,
including CBs. These rules include those governing: the auction market
(including trading halt provisions pursuant to Rule 80B); priority,
parity and precedence of orders; members dealing for their own
accounts; specialist, odd-lot broker, and registered trader
responsibilities; handling of orders and reports; publications of
transactions and changes; comparisons and exchange of contracts;
marking to the market; settlement of contracts; dividends, interests,
and rights; reclamations; closing contracts; and liquidation of
securities loans and borrowings.\36\ The NYSE also will consider
halting trading in any series of Units if it deems doing so necessary
to maintain a fair and orderly market in that series of Units.\37\
\36\ NYSE Rules 45-298.
\37\ For example, the NYSE has stated that it would consider
halting the trading in a series of Units if trading has been halted
or suspended in the primary market for stocks representing a
significant percentage (such as 20 percent) of the value of the
underlying stock index or portfolio.
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In addition, the NYSE has developed specific listing and delisting
criteria for Units. These criteria should help to ensure that a minimum
level of liquidity will exist in each series of Units to allow for the
maintenance of fair and orderly markets. The delisting criteria also
allows the Exchange to consider the suspension of trading and the
delisting of a series of Units, including CBs, if an event were to
occur that made further dealings in the securities inadvisable. This
will give the Exchange flexibility to delist Units, including CBs, if
circumstances warrant such action. For example, as noted above,
delisting of CBs might be appropriate if Telesphere no longer were able
to calculate indicative values, and no acceptable alternative
arrangements could be found. In addition, as noted above, in the
unlikely event that CBs become a surrogate for trading a single or few
securities, such an event could raise issues pursuant to the Act that
would require delisting of CBs so as to ensure compliance with the
Act.\38\ Accordingly, the Commission believes that the rules governing
the trading of Units provide adequate safeguards to prevent
manipulative acts and practices and to protect investors and the public
interest.
\38\ See note 22, supra.
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D. Indicative Indices
The Commission believes that the indicative values the Exchange
proposes to have disseminated for the nine Indices upon which CBs are
based will provide investors with timely and accurate information
concerning the value of the FT/S&P. The Exchange represents that the
information will be disseminated through the facilities of the CTA and
will reflect currently-available stock price information. Moreover, it
will be calculated based upon the same pricing algorithm and
methodology used by the FT/S&P calculators and will be disseminated
every 30 seconds during the regular NYSE trading day.\39\ In addition,
since it is expected that the market value of the CBs will closely
track the performance of the applicable FT Index,\40\ the Commission
believes that the indicative values will provide investors with
adequate information to determine the intra-day value of a given CB
series.\41\
\39\ Amendment No. 1, supra note. 4.
\40\ See Form N-1A, supra note 9. Each CB series will be
required to invest the largest proportion of its assets as is
practicable, and in any event at least 95% of its net assets, in the
securities of the corresponding FT/S&P Index, and the weighting of
the portfolio securities of each CB series will substantially
correspond to their proportional representation in the relevant FT/
S&P Index.
\41\ In addition, each series will calculate its NAV per share
at the close of the regular trading session for the NYSE on each day
that the Exchange is open for business. NAV generally will be based
on the last quoted sales price on the securities exchange or
national securities market on which a given series' component
securities are quoted. Id.
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E. Specialists
The Commission finds that it is consistent with the Act to allow a
specialist registered in a security issued by an Investment Company to
purchase or redeem the listed security from the issuer as appropriate
to facilitate the maintenance of a fair and orderly market in that
security. The Commission believes that such market activities should
enhance liquidity in such securities and facilitate a specialist's
market-making responsibilities. In addition, because the specialist
only will be able to purchase and redeem Units on the same terms and
conditions as any other investor (and only at NAV), and Creation
Transactions must occur through the distributor and not directly with
the issuer, the Commission believes that concerns regarding potential
abuse are minimized. As noted below, the Exchange's existing
surveillance procedures also should ensure that such purchases are only
for the purpose of maintaining fair and orderly markets, and not for
any other improper or speculative purposes. Finally, the Commission
notes that its approval of this aspect of the NYSE's rule proposal does
not address any other requirements or obligations under the federal
securities laws that may be applicable.\42\
\42\ Broker dealers and other persons will be cautioned in the
prospectus and/or the Fund's statement of additional information
that some activities on their part may, depending on the
circumstances, result in their being deemed statutory underwriters
and subject them to the prospectus delivery and liability provisions
of the Securities Act of 1933.
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F. Surveillance
The Commission believes that the NYSE's existing surveillance
procedures should be adequate to address any concerns associated with
specialists purchasing and redeeming Creation Units. The Exchange has
represented that its existing surveillance procedures should allow it
to identify situations where specialists purchase or redeem Creation
Units to ensure compliance with the rule.\43\
\43\ Letter from Robert J. McSweeney, Senior Vice President,
Market Surveillance, NYSE, to Sharon Lawson, Assistant Director,
OMS, Division, Commission, dated January 22, 1996.
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The Commission also notes that certain concerns are raised when a
broker-dealer, such as Goldman, is involved in the development and
maintenance of a stock index upon which a product such as Units, in
this case CBs, is based.\44\ The Commission believes that adequate
safeguards exist to address this concern. All stock additions and
deletions, whether by vote of the WIPC or according to the rules
governing day-to-day index maintenance, are announced in the FT
newspaper. No information about changes may be discussed outside the
WIPC or the staff responsible for maintaining the Indices at Goldman
until such a public announcement is made. Following the announcement,
Goldman may forward information about changes to other areas of the
firm and to its clients. In addition, this restriction is enforced
internally
[[Page 10416]]
through Goldman's policies and procedures that prevent employees either
from using proprietary information (such as non-public information
involving changes to the Indices) for personal benefit or to share it
with others.\45\ The Commission believes that these provisions should
help to address concerns raised by Goldman's involvement in the
management of the Indices.
\44\ Letter from Paul A. Merolla, Associate General Counsel,
Goldman, to Francois Mazur, Attorney, OMS, Division, Commission,
dated February 15, 1996 (``Goldman Letter''). Currently, the FT/S&P
Indices are jointly compiled by FT-SE International and Goldman in
conjunction with the Institute of Actuaries and the Faculty of
Actuaries. FT-SE International and Goldman each has primary
responsibility for data collection and calculation of one-half of
the markets in the Indices. With respect to the nine Indices upon
which CBs are based, Goldman has primary responsibility for the
U.S., France and South Africa Indices, while FT-SE International has
primary responsibility for the Australia, Germany, Hong Kong, Italy,
Japan, and United Kingdom Indices. By mid-1996, Goldman expects that
primary responsibility for the U.S. series will shift to S&P, while
primary responsibility for the remaining Indices will shift to FT-SE
International. Id.
Goldman is, and expects to remain, a member of the WIPC. The
WIPC is responsible for making policy decisions concerning the
Indices, including construction techniques and changes to the
constituent securities of the Indices. Id.
\45\ Id.
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G. Scope of the Commission's Order
The Commission is approving in general the Exchange's proposed
listing standards for Units representing an interest in an Investment
Company that would hold a Fund Basket, and specifically the nine series
of CountryBaskets described herein. Other similarly structured
products, including CBs based on FT/S&P Indices not described herein,
would require review by the Commission pursuant to Section 19(b) of the
Act prior to being traded on the Exchange.
The Commission finds good cause for approving Amendment Nos. 1 and
2 prior to the thirtieth day after the date of publication of notice of
filing thereof in the Federal Register. Amendment No. 1 details the
calculation and dissemination of Index changes and Index component
changes. In addition, Amendment No. 1 describes certain minor
modifications to the Exchange's proposal since it originally was
published for comment. Amendment No. 2 effects two minor word changes
to the proposal's amending of NYSE Rule 460.
The Commission believes that Amendment Nos. 1 and 2 effect only
technical changes that do not materially affect the character and scope
of the Exchange's original proposal. Accordingly, the Commission
believes that Amendment Nos. 1 and 2 raise no new or unique regulatory
issues. Therefore, the Commission believes it is consistent with
Sections 6(b)(5) and 19(b)(2) of the Act \46\ to approve Amendment Nos.
1 and 2 to the proposal on an accelerated basis.
\46\ 15 U.S.C. Secs. 78f(b)(5) and 78s(b)(2) (1988).
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IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning Amendment Nos. 1 and 2. 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. Sec. 552, will be available for inspection and
copying in the Commission's Public Reference Section, 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
NYSE. All submissions should refer to File No. SR-NYSE-95-23 and should
be submitted by April 3, 1996.
V. Conclusion
For the reasons discussed above, the Commission finds that the
proposal, as amended, is consistent with the Act, and, in particular,
Section 6 of the Act.
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\47\ that the proposed rule change (File No. SR-NYSE-95-23), as
amended, is approved.
\47\ 15 U.S.C. Sec. 78s(b)(2) (1988).
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For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\48\
\48\ 17 CFR 200.30-3(a)(12) (1994).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-5913 Filed 3-12-96; 8:45 am]
BILLING CODE 8010-01-M
