[Federal Register Volume 60, Number 62 (Friday, March 31, 1995)]
[Notices]
[Pages 16686-16690]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-7988]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-35534; File No. SR-AMEX-94-52]
Self-Regulatory Organizations; Order Approving Proposed Rule
Change by the American Stock Exchange, Inc. Relating to S&P MidCap 400
Depository Receipts
March 24, 1995.
I. Introduction and Background
On November 22, 1994, the American Stock Exchange, Inc. (``Amex''
or ``Exchange'') submitted to the Securities and Exchange Commission
(``SEC'' or ``Commission''), 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 list and trade Standard &
Poor's (``S&P'') MidCap 400 Depository Receipts. Notice of the proposal
appeared in the Federal Register on December 28, 1994.\3\ No comments
were received on the proposed rule change set forth in the Notice. This
order approves the Exchange's proposal.
\1\15 U.S.C. Sec. 78s(b)(1) (1982).
\2\17 CFR 240.19b-4 (1994).
\3\Securities Exchange Act Release No. 35127, (December 20,
1994), 59 FR 66982.
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II. Description of the Proposal
The Amex proposes to list and trade under Amex Rules 1000 et seq.
S&P MidCap 400 Depositary Receipts. In addition, the Exchange proposes
to amend Amex Rule 1000(b)(1) to include a reference to the alternative
reinvestment of periodic cash payments to holders to reflect the
availability of the DTC Dividend Reinvestment Service (``DRS'') to
holders of Portfolio Depository Receipts (``PDRs''), and to amend the
Amex Rule 1004 disclaimer provision so that it applies to the S&P
MidCap 400 Index.\4\
\4\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 with a 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.
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A. Portfolio Depository Receipts
On December 11, 1992, the Commission approved Amex Rules 1000 et
seq.\5\ to accommodate trading on the Exchange of PDRs, which are
securities that represent interests in a unit investment trust
(``Trust'') operating on an open-end basis and holding a portfolio of
securities. The Trust [[Page 16687]] sponsor (``Sponsor'') of each
series of PDRs is PDR Services Corporation, a wholly-owned subsidiary
of the Amex.\6\ The purpose of each Trust is to allow investors to
purchase PDRs, securities that represent proportionate undivided
interests in a Trust's underlying securities portfolio, that trade like
shares of common stock, and that pay to PDR holders periodic dividends
proportionate to those paid with respect to the underlying portfolio of
securities, less certain expenses, as described in the applicable Trust
prospectus. 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. 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
Standard & Poor's Depository Receipts (``SPDRs''). SPDRs have been
trading on the Exchange since January 29, 1993.
\5\See Securities Exchange Act Release No. 31591 (December 11,
1992), 57 FR 60253.
\6\Portfolio Depository Receipts and PDRs are service marks of
PDR Services Corporation.
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The Exchange now proposes to list and trade under Rules 1000 et
seq. Standard & Poor's MidCap 400 Depositary Receipts (``MidCap
SPDRs'').\7\ The Sponsor will enter into a trust agreement with a
trustee in accordance with Section 26 of the Investment Company Act of
1940. PDR Distributors, Inc. (``Distributor'') will act as underwriter
of MidCap SPDRs on an agency basis. 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. 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.
\7\``Standard & Poor's 500,'' ``Standard & Poor's MidCap 400
Index,'' ``Standard & Poor's Depository Receipts,'' ``SPDRs,''
``Standard & Poor's MidCap 400 Depositary Receipts,'' and ``MidCap
SPDRs' are trademarks of McGraw-Hill, Inc., and are being used by
the Exchange and the Sponsor under license among S&P (a division of
McGraw-Hill, Inc.), the Exchange, and the Sponsor.
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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 Trustee 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 the 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.\8\ The securities and cash accepted by the
Trustee are referred to, in the aggregate, as a ``Portfolio Deposit.''
\8\See ``Distributions,'' infra.
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It is anticipated that the term of the MidCap SPDR Trust will be 25
years.
B. 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.'' The Exchange anticipates that a
Creation Unit will be made up of 25,000 MidCap SPDRs.\9\ 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, arbitragers, and the Exchange specialist.
On November 17, 1994, the value of an individual MidCap SPDR would have
been approximately $34.37.
\9\PDRs may be created in other than Creation Unit size
aggregations in connection with the DTC DRS. See infra note 12 and
accompanying text.
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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.
Transactions in MidCap SPDRs may be effected on the Exchange until
4:15 p.m. New York time each business day. The minimum fractional
change for MidCap SPDRs shall be \1/32\ of $1.00.\10\
\10\PDRs originally traded in minimum fractional changes of \1/
8\ of $1.00, pursuant to Amex Rule 127. See Securities Exchange Act
Release No. 31591, supra note 5. The Commission approved an Exchange
proposal to add Commentary .01 to rule 127 to provide that
securities listed under Rule 1000 et seq. (PDRs) will trade in
minimum fractional changes of \1/32\ of $1.00. See Securities
Exchange Act Release No. 31794 (January 29, 1993), 58 FR 7272.
Subsequently, the Exchange amended Commentary .01 to Rule 127 to
provide that the minimum fractional change for SPDRs is \1/64\ of
$1.00. See Securities Exchange Act Release No. 33900 (April 12,
1994), 59 FR 18585. Nevertheless, the minimum fractional change
applicable to MidCap SPDRs will be \1/32\ of $1.00.
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C. Redemption
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.
D. Distributions
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 [[Page 16688]] 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 through the business day
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. Currently, the DTC DRS is available to holders
of SPDRs. To reflect the availability of the DTC DRS to PDR holders,
the Amex is proposing to amend its Rule 1000(b)(1) definition of PDR to
state that in addition to being made in cash, periodic dividend
payments to PDR holders may be reinvested in additional PDRs.\11\
Because some brokers may choose not to offer the DTC DRS, an interested
investor would have to consult his or her broker to ascertain the
availability of dividend reinvestment through that broker. The Trustee
will use the cash proceeds of MidCap SPDR holders participating in the
reinvestment to obtain the Index securities necessary to create the
requisite number of SPDRs.\12\ Any cash remaining will be distributed
pro rata to participants in the dividend reinvestment.
\11\Telephone conversation between Michael Cavalier, Assistant
General Counsel, Amex, and Francois Mazur, Attorney, Division of
Market Regulation, Commission, on February 24, 1995.
\12\The creation of PDRs in connection with the DTC DRS
represents the only circumstance under which PDRs can be created in
other than Creation Unit size aggregations.
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E. Criteria for Initial and Continued Listing
Because of the open-end nature of the Trust upon which a series of
PDRs is based, the Exchange believes it is necessary to maintain
appropriate flexibility in connection with listing a specific Trust. In
connection with initial listing, the Exchange establishes a minimum
number of PDRs required to be outstanding at the time of commencement
of Exchange trading. With respect to MidCap SPDRs, it is anticipated
that a minimum of 75,000 MidCap SPDRs (i.e., three Creation Units of
25,000 MidCap SPDRs each), will be required to be outstanding when
trading begins.
The MidCap SPDR Trust will be subject to the initial and continued
listing criteria of Rule 1002(b). Rule 1002(b) provides that twelve
months after 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:
(1) 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; or
(2) if the index on which the Trust is based is no longer
calculated; or
(3) if such other event shall occur or condition exist which in the
opinion of the Exchange, makes further dealings on the Exchange
inadvisable.
A Trust shall terminate upon removal from Exchange listing and its
PDRs 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, following
notice to PDR holders, shall have discretion to direct that the Trust
be terminated if the value of securities in such Trust falls below a
specified amount.\13\ The MidCap SPDR Trust will also terminate if the
license agreement with S&P terminates.
\13\With respect to the MidCap SPDR Trust, the Sponsor has the
discretionary right to terminate the Trust if the value of Trust
Securities (as defined in the Trust registration statement) falls
below $25,000,000 at any time after six months following, and prior
to three years following, inception of the Trust. Following such
time, the Sponsor has the discretionary right to terminate if Trust
Securities fall below $100,000,000 in value, adjusted annually for
inflation.
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F. Trading Halts
Prior to commencement of trading in MidCap SPDRs, the Exchange will
issue a circular to members informing them of exchange policies
regarding trading halts in such securities. The circular will make
clear that, in addition to other factors that may be relevant, the
Exchange may consider factors such as those set forth in Rule 819C(b)
in exercising its discretion to halt or suspend trading. These factors
would include whether trading has been halted or suspended in the
primary market(s) for any combination of underlying stocks accounting
for 20% or more of the applicable current index group value;\14\ or
whether other unusual conditions or circumstances detrimental to the
maintenance of a fair and orderly market are present.\15\
\14\Amex Rule 918C(b)(3).
\15\Amex Rule 918C(b)(4).
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G. Terms and Characteristics
Under Amex Rule 1000, Commentary .01, Amex members and member
organizations are required to provide to all purchasers of PDRs,
including MidCap SPDRs, a written description of the terms and
characteristics of such securities, in a form prepared by the Exchange,
not later than the time a confirmation of the first transaction in each
series is delivered to such purchaser. The Exchange also requires that
such a description be included with any sales material on MidCap SPDRs
that is provided to customers or the public. Any other written
materials making reference to a series of PDRs as an investment vehicle
must state that a written description is available from the broker or
the Exchange and that a prospectus may be obtained from the broker.
Similarly, the Exchange requires that members and member organizations
provide customers with the prospectus for MidCap SPDRs upon request.
A member or member organization carrying an omnibus account for a
non-member broker-dealer is required to inform such non-member that
execution of an order to purchase MidCap SPDRs for that omnibus account
will be deemed to constitute agreement by the non-member to make the
written description available to its customers on the same terms as are
directly applicable to members and member organizations.
Prior to commencement of trading of MidCap SPDRs, the Exchange will
distribute to its members and member organizations an Information
Circular calling attention to the characteristics of the MidCap SPDR
Trust and to applicable Exchange rules.
H. Amendments to Rules 1000(b) and 1004
The Exchange proposes to amend the definition of Portfolio
Depositary Receipt in Rule 1000(b) to add a reference to the possible
provision by a PDR Trust of reinvestment of periodic cash proceeds
corresponding to the regular cash dividends or declarations declared
with respect to the underlying stock index securities or portfolio of
securities. Amex rule 1004 is also being amended to refer specifically
to the S&P MidCap 400 Index.
III. Discussion
The Commission finds that the proposed rule change is consistent
with the requirements of the Act and the [[Page 16689]] rules and
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.\16\ Specifically, the
Commission finds that the Exchange's proposal to list and trade S&P
MidCap SPDRs will provide investors with a convenient way of
participating in the securities markets.\17\ In particular, the
Commission believes that the Exchange's proposal 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.\18\
\16\15 U.S.C. 78f(b)(5) (1988).
\17\The Commission approved Amex rules to accommodate trading on
the Exchange of PDRs in Securities Exchange Act Release No. 31591,
supra note 5. Because the analysis contained in that release is
applicable to the Amex's current proposal to list and trade MidCap
SPDRs, the Commission is incorporating it by reference.
\18\In originally approving PDRs, the Commission noted that PDRs
will benefit investors by allowing them to trade securities based on
Trusts in secondary market transactions.
The Commission notes that unlike open-end funds where investors
have the right to redeem their fund shares on a daily basis,
investors could only redeem MidCap SPDRs in 25,000 share units.
Nevertheless, MidCap SPDRs will have the added benefit of liquidity
from the secondary market.
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The Commission believes that listing and trading products, such as
MidCap 400 SPDRs, based on a broad portfolio of stocks may benefit the
securities markets by reducing volatility, such as that experienced
during the October 1987 and 1989 Market Breaks.\19\ Creating a product
where actual portfolios of stocks and instruments representing
portfolios of stock trade at a single location in an auction market
environmental may alter the dynamics of program trading,\20\ because
the availability of such single transaction portfolio trading could
promote more traditional block trading techniques.
\19\See Division of Market Regulation (``Division''), SEC, The
October 1987 Market Break (February, 1988) (``1987 Market Break
Report'') and Division, SEC, Market Analysis of October 13, and 16,
1989 (December 1990).
\20\Program trading is defined as index arbitrage or any trading
strategy involving the related purchase or sale of a ``basket'' or
group of 15 or more stocks having a total market value of $1 million
or more.
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The 1987 Market Break Report noted the potential benefits of
providing institutional investors and member firms with the ability to
trade a portfolio of stocks at posts in a single transaction. The
trading crowd at a single post can allow a single transaction in a
portfolio of securities to take the place of numerous transactions in
individual stocks. Trading MidCap SPDRs should also provide an easy and
inexpensive method to clear and settle a portfolio of stocks.
An individual MidCap SPDR recently would have had a value of
approximately $34, which should make it attractive to individual retail
investors who wish to hold a security replicating the performance of a
broad portfolio of medium capitalization stocks. Moreover, the
Commission believes that MidCap SPDRs will provide investors with
several advantages over standard open-end mutual funds specializing in
medium capitalization stocks. In particular, investors will be able to
trade MidCap SPDRs continuously throughout the business day in
secondary market transactions at negotiated prices.\21\ In contrast,
Investment Company Act Rule 22c-1\22\ limits holders and prospective
holders of open-end mutual fund 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,
MidCap SPDRs will allow investors to (1) respond quickly to market
changes; (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.
\21\Because of potential arbitrage opportunities, the Commission
believes that MidCap SPDRs 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 SPDR comparable to its
net asset value, and therefore, arbitrage activity likely will be
minimal. In addition, the Trust will redeem only in-kind, thereby
enabling the Trust to invest virtually all of its assets in
securities comprising the MidCap 400 Index.
\22\17 CFR 270.22c-1 (1994). Investment Company 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 MidCap SPDRs an exemption from
this provision to allow them to trade in the secondary market at
negotiated prices. See Investment Company Act Release No. 20844
(January 18, 1995).
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Although the value of MidCap SPDRs is based on the value of the
securities held in the Trust, MidCap SPDRs are not leveraged
instruments. In essence, MidCap SPDRs are equity securities that are
priced off a portfolio of stocks based on the S&P MidCap 400 Index.\23\
Accordingly, the level of risk involved in the purchase or sale of a
MidCap SPDR is similar to the risk involved in the purchase or sale of
equity securities, except that the value of a MidCap SPDR is based on a
basket of stocks. Nevertheless, the Commission believes that MidCap
SPDRs raise disclosure, market impact, and secondary market trading
issues that must be addressed.
\23\Because SPDRs will trade like equity securities, the margin
requirements for MidCap SPDRs, as with other PDRs, will be 150% of
current market value for short sales, and 50% of current market
value for long positions. These are the usual Regulation T, 12 CFR
220 (1994), requirements for equity margin stocks. Accordingly, the
Exchange has stated its intention to obtain margin offset treatment
with respect to Regulation T customer margin, both for offsetting
positions of MidCap SPDRs and an equivalent amount of their
component securities, and for ``cover'' in accordance with the
provisions contained in Section 220.5(c)(3) governing options. The
Exchange also intend to seek similar margin offset treatment with
respect to market maker charges under Exchange Act Rule 15c3-
1(c)(2)(x), 17 CFR 240.15c3-1(c)(2)(x) (1994). Telephone
Conversation with Michael Cavalier, supra note 11.
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A. Disclosure
Existing Amex rules regarding PDRs are applicable to MidCap SPDRs,
ensuring that investors are aware of the terms, characteristics, and
risks of trading MidCap SPDRs.\24\ Accordingly, Amex members must
provide their customers trading MidCap SPDRs with a written
explanation, prepared by the Amex, describing any special
characteristics and risks attendant to trading MidCap SPDRs.\25\
Members and member organizations also must include this written product
description with any sales material relating to MidCap SPDRs that is
provided to customers or the public. Finally, any other written
materials provided by a member or member organization to customers or
the public that refer to MidCap SPDRs as an investment vehicle must
include a statement, in a form specified by the Amex, that a circular
and prospectus are available from a broker upon request. A member or
member organization carrying an omnibus account for a non-member
broker-dealer is required to inform such non-member that execution of
an order to purchase a series of MidCap SPDRs 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.\26\
\24\See Amex Rule 1000, Commentary .01.
\25\The Amex submitted a MidCap SPDR product description as an
exhibit to its filing. Among other things, the product description
states that MidCap SPDRs possess risks similar to those that exist
when investing in a broadly based portfolio of common stocks,
including the risk that the general level of stock prices may
decline.
\26\See Amex Rule 1000, Commentary .01.
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The Amex's proposal contains no special account opening or customer
suitability rules applicable to the [[Page 16690]] trading of MidCap
SPDRs,\27\ therefore, pursuant to Amex Rule 1000(a), the Amex equity
rules governing account opening and suitability will apply. Rule 411
provides, among other things, that members shall use due diligence to
learn the essential facts relative to every customer, and to every
order or account accepted.\28\
\27\The exemptions granted by the Commission under the
Investment Company Act of 1940 that permit the secondary market
trading of MidCap SPDRs, however, are specifically conditioned upon
the customer disclosure requirements described above. See Investment
Company Act Release No. 20797 (December 23, 1994), 60 FR 163.
\28\See Amex Rule 411.
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B. Market Impact
The Commission believes that the Amex has adequately addressed the
potential market impact concerns raised by its proposal. The Exchange's
existing trading limit policies regarding PDRs will apply to MidCap
SPDRs. Thus, MidCap SPDR trading will halt if the Amex Rule 117 circuit
breaker parameters are reached.\29\ Similarly, consistent with Amex
Rule 918C(b), the Amex may consider trading halts in the primary
market(s) for any combination of underlying stocks accounting for 20%
or more of the applicable current index group value, as well as the
existence of other unusual conditions.\30\
\29\The circuit breaker rules provide that trading in the stock,
options, and futures markets will halt for one hour if the Dow Jones
Industrial Average (``DJIA'') declines 250 points or more from its
previous day's closing level, and thereafter, trading will halt for
an additional two hours if the DJIA declines 400 points from the
previous day's close. The triggering of futures price limits for the
S&P 500, S&P 100, or Major Market Index futures, however, will not
in themselves result in a halt in MidCap SPDR trading or delayed
openings. Such an event, however, could be considered by the
Exchange, along with other factors, in deciding whether to halt
trading.
\30\See Securities Exchange Act Release No. 31591, supra note 5.
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The Commission believes that the listing and trading of MidCap
SPDRs will not adversely affect U.S. securities markets.\31\ The corpus
of the MidCap SPDR Trust will be a portfolio of stocks replicating the
S&P MidCap 400 Index, a broad-based, capitalization-weighted index
consisting of 400 actively traded and liquid U.S. stocks. As described
above, the Commission believes that MidCap SPDRs may provide
substantial benefits to the marketplace and investors, including
enhancing the stability of the markets for individual stocks.\32\
Finally, the PDR surveillance procedures, that incorporate and rely
upon existing Amex surveillance procedures governing options and
equities, will apply to MidCap SPDRs.
\31\The Commission notes that SPDRs have been trading on the
Amex since January 29, 1993, without incident.
\32\Even though PDR transactions may serve as substitutes for
transactions in the cash market, thereby making 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 process 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, including
MidCap SPDRs, 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 MidCap SPDRs could, in
certain circumstances, have an impact on the cash market, on balance
the Commission believes that the product will be beneficial to the
marketplace and can actually aid in maintaining orderly markets.
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C. Trading Rules
The Commission finds that adequate rules and procedures exist to
govern the trading of MidCap SPDRs. MidCap SPDRs, like other PDRs, are
equity securities that will be subject to Amex rules governing the
trading of equity securities, including, among others, rules governing
the priority, parity, and precedence of orders and the responsibilities
of specialists. In addition, the Amex has developed specific listing
and delisting criteria for MidCap SPDRs. These criteria should help to
ensure that a minimum level of liquidity will exist in MidCap SPDRs to
allow for the maintenance of fair and orderly markets. Accordingly, the
Commission believes that the rules governing the trading of MidCap
SPDRs provide adequate safeguards to prevent manipulative acts and
practices and to protect investors and the public interest.
D. Dividend Reinvestment
The Commission finds that the Exchange's proposal to amend its Rule
1000(b) definition of PDRs is consistent with the Act. Specifically,
the amendment makes clear that the DTC Dividend Reinvestment Service
will be made available for the use of PDR holders through DTC
participant brokers for the re-investment of the cash proceeds of
dividend equivalent payments.\33\ This should provide investors with a
convenient means of re-investing dividend equivalent payments received
from SPDRs.
\33\The product description also will be changed to make it
clear to investors the availability of the Dividend Reinvestment
Service.
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IV. Conclusion
For the reasons set forth above, 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).\34\ As noted above, the trading of MidCap SPDRs on a secondary
market should provide a variety of benefits to the marketplace and
investors trading portfolios of securities. Accordingly, the Commission
believes that MidCap SPDRs will serve to remove impediments to and
perfect the mechanism of a free and open market and a national market
system, and protect investors and the public interest.
\34\15 U.S.C. Sec. 78f(b)(5) (1988).
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It Is Therefore Ordered, pursuant to Section 19(b)(2) of the Act,
that the proposed rule change (SR-AMEX-94-52), as amended, is approved.
For the Commission, by the division of Market Regulation,
pursuant to delegated authority.\35\
\35\17 CFR 200.30-3(a)(12) (1994).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-7988 Filed 3-30-95; 8:45 am]
BILLING CODE 8010-01-M
