[Federal Register Volume 61, Number 143 (Wednesday, July 24, 1996)]
[Notices]
[Pages 38503-38505]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-18714]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37452; International Series Release No. 1006; File No.
SR-PSE-96-15]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change and Amendment No. 1 Thereto by the Pacific Stock Exchange, Inc.
Relating to Investment Company Units
July 17, 1996.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ notice is hereby given that on June 3, 1996, the Pacific
Stock Exchange Incorporated (``PSE'' or ``Exchange'') filed with the
Securities and Exchange Commission (``Commission'') the proposed rule
change as described in Items I, II, and III below, which Items have
been prepared by the self-regulatory organization. On July 2, the PSE
filed Amendment No. 1 to its proposal.\2\ The Commission is publishing
this notice to solicit comments on the proposed rule change from
interested persons.
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\1\ 15 U.S.C. 78s(b)(1) (1988).
\2\ Amendment No. 1 clarifies that the PSE seeks to trade
CountryBaskets pursuant to unlisted trading privileges. Letter from
Michael D. Pierson, Senior Attorney, Regulatory Policy, PSE, to
Francois Mazur, Attorney, Division of Market Regulation, Commission,
dated July 1, 1996 (``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 establish listing standards for Investment
Company Units (``Units''), and to trade Units known as
``CountryBaskets'' (``CBs'') pursuant to unlisted trading privileges
(``UTP'').
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the self-regulatory organization
included statements concerning the purpose of and basis for the
proposed rule change and discussed any comments it received on the
proposed rule change. The text of these statements may be examined at
the places specified in Item IV below. The self-regulatory organization
has prepared summaries, set forth in Sections (A), (B), and (C) below,
of the most significant aspects of such statements.
(A) Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
The Exchange proposes to adopt new rules relating to listing
standards for Units. Units represent an interest in a registered
investment company (``Investment Company'' or ``Fund'') that could be
organized as a unit investment trust (``UIT''), an open-end management
investment company, or a similar entity. Under the proposed rules, the
Investment Company would be required either to: (i) Hold securities
comprising or otherwise based on or representing an interest in an
index or portfolio of securities, or (ii) hold securities in another
registered investment company. The Investment Company would then issue
Units in a specified aggregate number in return for a deposit either
of: (i) Shares of securities comprising or otherwise based on the
relevant index or portfolio, or (ii) shares of a registered investment
company. In addition to or instead of the ``in-kind'' deposit, the
Investment Company might require a cash deposit. Thus, Units could
represent an interest in series of an open-end management investment
company investing in a portfolio of securities (``Fund-only
structure''). Alternatively, Units could represent an interest in UITs
that have as their assets shares of an open-end investment company
holding a portfolio of securities (``Fund/UIT structure''). Unit
holders would receive periodic cash payments corresponding to the
regular cash dividends or distributions declared with respect to the
securities held by the Investment Company (after subtracting applicable
expenses and charges.)
The Exchange also proposes to trade, pursuant to UTP, Units known
as ``CountryBaskets'' or ``CBs.'' These securities were approved
recently for listing on the New York Stock Exchange, Inc.
(``NYSE'').\3\ The nine series of CBs are based on the following
Financial Times/Standard & Poor's Actuaries World (``FT/S&P'') Indices:
Australia; France; Germany; Hong Kong; Italy; Japan; South Africa;
United Kingdom; and the United States. The Exchange notes that pursuant
to Rule 12f-5 under the Act,\4\ prior to trading a particular class or
type of security pursuant to UTP, the Exchange must have listing
standards comparable to those of the primary exchange on which the
security is listed. Hence, the PSE's proposed listing standards for
Units are similar to the listing standards for Units adopted by the
NYSE.\5\
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\3\ See Exchange Act Release No. 36923 (March 5, 1996), 61 FR
10410.
\4\ 17 CFR 240.12f-5.
\5\ Amendment No. 1, supra note 2.
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1. 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 PSE proposal sets forth listing
standards applicable both to a Fund-only structure and a Fund/UIT
structure. The nine CB series the PSE proposes to trade 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. Sales occur in ``Creation United''
size aggregations in exchange for a deposit (``Deposit'') of a basket
of securities reflecting the securities underlying the Fund (``Index
Securities'') and a specified amount of cash sufficient to equal the
NAV of Fund shares.\6\ Creation Unit size
[[Page 38504]]
holdings then can be disaggregated into tradeable Units and sold
separately or in lots on the Exchange.
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\6\ 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 could be recombined into ``Redeemable Units,'' equivalent in
size to Creation Units and redeemed at NAV, generally for the Index
Securities represented by the Redeemable Unit, plus a cash payment. An
individual Unit will not be redeemable. For the Australia, France,
Germany, Hong Kong, Italy, South Africa, United Kingdom, Germany, Hong
Kong, Italy, South Africa, United Kingdom, and United States
CountryBasket series, there are 100,000 CBs per Creation Unit. For the
Japan series, there are 250,000 CBs per Creation Unit. With the
exception of the Japan series, a Creation Unit size aggregation of Fund
shares represents securities with approximately $2 to $5 million in
market value. A Creation Unit size aggregation of Fund shares for the
Japan series has an approximate value of $9.5 million.\7\
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\7\ Id. The large size of round lots in Japan, and the
requirement that all purchases in that market be in round lots,
requires that a Creation Unit be structured so that the Index
Securities consist 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.\8\ Thereafter, Fund
shares could be purchased throughout the life of the product.
Therefore, the offering will be continuous.
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\8\ 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.
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2. Exchange Trading of Units
Units, including CBs, are deemed equity securities subject to PSE
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, for which
500,000 tradeable Units, representing two Creation Units, will be
required to be outstanding prior to commencing trading. The Exchange
will consider the suspension of trading and the delisting of a series
of Units, including CBs, if:
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.
Dealing in Units on the Exchange will be conducted pursuant to the
Exchange's general agency-auction trading rules.\9\ The Exchange's
general dealings and settlements rulers will apply.\10\ Other Exchange
equity rules and procedures, such as the Exchange's equity margin
rules, also will apply.\11\ 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.
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\9\ See PSE Rule 5 (Equities).
\10\ Id.
\11\ See Rules 2.16(a) et seq.
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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.
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.
3. Specialists
Any Creation Transactions in which the specialist engages will have
to be effected through the Distributor, and not directly with the
issuer. 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.
4. Disclosure
With respect to investor disclosure, the Exchange notes that,
pursuant to the requirements of the Securities Act of 1933 (``1933
Act''), all investors in Units, including CountryBaskets, will receive
a prospectus. Because the Units will be in continuous distribution, the
prospectus delivery requirements of the 1933 Act will apply to all
investors in Units, including those engaging in secondary market
purchases on the PSE in CBs. The prospectus and all marketing material
will refer to Units 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.
Upon the 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 9.1(a) (``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.
5. Trading Halts
Trading of Units would be halted, along with the trading of all
other listed stocks, in the event the ``circuit breaker'' thresholds
were reached.\12\ 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 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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\12\ The Exchange's ``circuit breaker'' policies were approved
in Exchange Act Release No. 26268 (December 16, 1988), 53 FR 51942.
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The Exchange believes that its proposal is consistent with Section
6(b) of the Act, in general, and Section 6(b)(5), in particular, in
that it 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.
(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 that is not necessary or appropriate
in furtherance of the purposes of the Act.
[[Page 38505]]
(C) Self-Regulatory Organization's Statement on Comments on the
Proposed Rule Change Received From Members, Participants, or Others
Written comments on the proposed rule change were neither solicited
nor received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 35 days of the date of publication of this notice in the
Federal Register or within such longer period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
(a) By order approve such proposed rule change, or
(b) Institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing. Persons making written submissions
should file six copies thereof with the Secretary, Securities and
Exchange Commission, 450 Fifth Street NW., Washington, 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 in the
Commission's Public Reference Section, 450 Fifth Street NW.,
Washington, D.C. Copies of such filing will also be available for
inspection and copying at the principal office of the above-mentioned
self-regulatory organization. All submissions should refer to File No.
SR-PSE-96-15 and should be submitted by August 14, 1996.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\13\
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\13\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-18714 Filed 7-23-96; 8:45 am]
BILLING CODE 8010-01-M
