[Federal Register Volume 64, Number 188 (Wednesday, September 29, 1999)]
[Notices]
[Pages 52559-52564]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-25281]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-41892; File No. SR-Amex-99-20]
Self-Regulatory Organizations; American Stock Exchange LLC; Order
Approving Proposed Rule Change and Notice of Filing and Order Granting
Accelerated Approval of Amendment No. 1, 2, 3 and 4 Relating to the
Listing and Trading of Trust Issued Receipts
September 21, 1999.
1. Introduction
On May 28, 1999, the American Stock Exchange LLC (``Amex'' or
``Exchange'') filed with 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 establish listing standards
for trust issued receipts, and to trade Internet Holding Company
Depositary Receipts (``Internet HOLDRs''), a type of trust issued
receipt.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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The proposed rule change was published for comment in the Federal
Register on July 9, 1999.\3\ No comments were received on the proposal.
The proposal was amended on September 3, 13, 17 and 21, 1999.\4\ In
this notice and order, the Commission is seeking comment from
interested persons on the amendments, and is approving the proposed
rule change, as amended, including accelerated approval of the
amendments.
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\3\ Securities Exchange Act Release No. 41593 (July 1, 1999), 64
FR 37178.
\4\ See letters from Scott G. Van Hatten, Counsel, Derivative
Securities, Amex to Richard Strasser, Assistant Director, Division
of Market Regulation (``Division''), SEC, dated September 2, 10, 16
and 21, 1999 (``Amendment Nos. 1, 2, 3 and 4,'' respectively). In
Amendment No. 1, Amex revised the proposal to describe the listing
and continued listing criteria in greater detail. The Amex also
supplemented the Exchange listing suspension and removal criteria.
In Amendment No. 2, Amex identified the companies comprising the
Internet HOLDRs. In Amendment No. 3, Amex amended proposed Amex Rule
1201 to more accurately reflect the proposal. In Amendment No. 4,
Amex clarified certain prospectus delivery requirements related to
trust issued receipts.
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II. Description of the Proposal
The Amex proposes: (1) To add new Rules 1200 et seq. to accommodate
the trading of trust issued receipts that are intended to provide
investors with a flexible, cost-effective way of purchasing, holding
and transferring the securities of one or more specified companies,
generally; and (2) to list particular trust issued receipts
representing a selection of companies in the Internet industry, that
are issued by the Internet HOLDRs Trust. The language of the proposal,
as amended, follows. New text is italicized.
* * * * *
TRUST ISSUED RECEIPTS
Rule 1200
(a) Applicability. The Rules in this Chapter (Trading of Trust
Issued Receipts) are applicable only to Trust Issued Receipts.
Except to the extent that specific Rules in this Chapter govern, or
unless the context otherwise requires, the provisions of the
Constitution and all other rules and policies of the Board of
Governors shall be applicable to the trading on the Exchange of such
securities. Pursuant to the provisions of Article 1, Section 3(i) of
the Constitution, Trust Issued Receipts are included within the
definition of ``security'' or ``securities'' as such terms are used
in the Constitution and Rules of the Exchange.
(b) Definitions. The following terms as used in the Rules shall,
unless the context otherwise requires, have the meanings herein
specified:
Trust Issued Receipts. The term ``Trust Issued Receipt'' means a
security (a) that is issued by a trust (``Trust'') which holds
specified securities deposited with the Trust; (b) that, when
aggregated in some specified minimum number, may be surrendered to
the trust by the beneficial owner to receive the securities; and (c)
that pays beneficial owners dividends and other distributions on the
deposited securities, if any are declared and paid to the trustee by
an issuer of the deposited securities.
Commentary
.01 The Exchange requires that members and member organizations
provide to all purchasers of newly issued Trust Issued Receipts a
prospectus for the series of Trust Issued Receipts.
.02 Transactions in Trust Issued Receipts may be effected until
4:00 pm each business day.
Designation
Rule 1201
The Exchange may list and trade Trust Issued Receipts based on
one or more securities. The Trust Issued Receipts based on
particular securities shall be designated as a separate series and
shall be identified by a unique symbol. The securities that are
included in a series of Trust Issued Receipts
[[Page 52560]]
shall be selected by the Exchange or its agent, a wholly-owned
subsidiary of the Exchange, or by such other person as shall have a
proprietary interest in such Trust Issued Receipts.
Initial and Continued Listing
Rule 1202
Trust Issued Receipts will be listed and traded on the Exchange
subject to application of the following criteria:
(a) Initial Listing--For each Trust, the Exchange will establish
a minimum number of Trust Issued Receipts required to be outstanding
at the time of commencement of trading on the Exchange.
(b) Continued Listing--Following the initial twelve month period
following formation of a Trust and commencement of trading on the
Exchange, the Exchange will consider the suspension of trading in or
removal from listing of a Trust upon which a series of Trust Issued
Receipts is based under any of the following circumstances:
(i) if the Trust has more than 60 days remaining until
termination and there are fewer than 50 record and/or beneficial
holders of Trust Issued Receipts for 30 or more consecutive trading
days;
(ii) if the Trust has fewer than 50,000 receipts issued and
outstanding;
(iii) if the market value of all receipts issued and outstanding
is less than $1,000,000; or
(iv) if such other event shall occur or condition exists in the
opinion of the Exchange, makes further dealings on the Exchange
inadvisable.
Upon termination of a Trust, the Exchange requires that Trust
Issued Receipts issued in connection with such Trust be removed from
Exchange listing. A Trust may terminate in accordance with the
provision of the Trust prospectus, which may provide for termination
if the value of securities in the Trust falls below a specified
amount.
(c) Term--The stated term of the Trust shall be as stated in the
Trust prospectus. However, a Trust may be terminated under such
earlier circumstances as may be specified in the Trust prospectus.
(d) Trustee--The requirements of paragraph (a) of Section #811
of the Exchange Company Guide apply.
(e) Voting--Voting rights shall be as set forth in the Trust
prospectus.
Specialist Transactions with Public Customers
Rule 190
(a)-(e) No change.
Commentary
.01-.04 No change.
Nothing in paragraph (a) of this rule should be construed to
restrict a specialist registered in a security issued by a trust,
listed pursuant to Rules 1200 et seq., from purchasing and canceling
the listed security or securities included in the portfolio held by
the trust that can be deposited with the trust in connection with
the issuance of the listed security, from the issuer as appropriate
to facilitate the maintenance of a fair and orderly market in the
subject security.
A. Description
Trust issued receipts are negotiable receipts which are issued by a
trust representing securities of issuers that have been deposited and
are held on behalf of the holders of the trust issued receipts. Trust
issued receipts are designed to allow investors to hold securities
investments from a variety of companies throughout a particular
industry in a single, exchange-listed and trade instrument that
represents their beneficial ownership in the deposited securities.
Holders of trust issued receipts maintain beneficial ownership of each
of the deposited securities evidenced by trust issued receipts. Holders
may cancel their trust issued receipts at any time to receive the
deposited securities.
Beneficial owners of the receipts will have the same rights,
privileges and obligations as they would have if they beneficially
owned the deposited securities outside of the trust issued receipt
program. Holders of the receipts have the right to instruct the trustee
to vote the deposited securities evidenced by the receipts, will
receive reports, proxies and other information distributed by the
issuers of the deposited securities to their security holders, and will
receive dividends and other distributions declared and paid by the
issuers of the deposited securities to the trustee.
Trust issued receipts are not leveraged instruments, and therefore
do not possess any of the attributes of stock index options. The
Exchange believes that the level of risk involved in the purchase and
sale of trust issued receipts is almost identical to the risk involved
in the purchase or sale of the common stocks represented by the
receipt. Although the Exchange anticipates listing trust issued
receipts on one or more groups of securities other than those described
herein, it notes that it will be required to submit a proposal,
pursuant to Section 19(b) of the Act, before either listing trust
issued receipts on a new group of securities or listing options on the
trust issued receipts described in this proposal.
B. Creation of the Trust
Trust issued receipts will be issued by a trust created pursuant to
a depositary trust agreement. After the initial offering, the trust may
issue additional receipts on a continuous basis agreement. After the
initial offering, the trust may issue additional receipts on a
continuous basis when an investor deposits the requisite securities
with the trust. An investor in trust issued receipts will be permitted
to withdraw his or her deposited securities upon delivery to the
trustee of one or more round-lots of 100 trust issued receipts and to
deposit such securities to receive trust issued receipts.
The Internet HOLDRs will be issued by the Internet HOLDRs Trust,
which was created pursuant to a depositary trust agreement dated
September 2, 1999, among The Bank of New York, as trustee, Merrill
Lynch Pierce Fenner & Smith Incorporated, other depositors and the
owners of the Internet HOLDRs. The Exchange anticipates that 150,000
trust issued receipts will be issued in connection with the initial
distribution of the Internet HOLDRs.
The deposited securities underlying the Internet HOLDRs are:
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Initial
Name of company Symbol Share weighting Primary trading
amounts (percent) market
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America Online................................ AOL............... 21 19.60 NYSE.
Yahoo Inc..................................... YHOO.............. 13 19.60 NASDAQ.
Amazon.com Inc................................ AMZN.............. 18 11.44 NASDAQ.
EBay Inc...................................... EBAY.............. 6 7.70 NASDAQ.
At Home Corp.................................. ATHM.............. 17 6.97 NASDAQ.
Priceline.Com.Inc............................. PCLN.............. 7 4.87 NASDAQ.
CMGI Inc...................................... CMGI.............. 5 4.29 NASDAQ.
Inktomi Corporation........................... INKT.............. 3 3.48 NASDAQ.
RealNetworks, Inc............................. RNWK.............. 4 3.34 NASDAQ.
Exodus Corporation, Inc....................... EXDS.............. 4 3.29 NASDAQ.
E*TRADE Group Inc............................. EGRP.............. 12 3.07 NASDAQ.
Double Click Inc.............................. DCLK.............. 2 2.04 NASDAQ.
[[Page 52561]]
Ameritrade Holding Corp....................... AMTD.............. 9 1.87 NASDAQ.
Lycos Inc..................................... LCOS.............. 4 1.66 NASDAQ.
CNET, Inc..................................... CNET.............. 4 1.54 NASDAQ.
PSINet Inc.................................... PSIX.............. 3 1.47 NASDAQ.
Network Associates, Inc....................... NETA.............. 7 1.21 NASDAQ.
Earthlink Network, Inc........................ ELNK.............. 2 1.00 NASDAQ.
MindSpring Enterprises, Inc................... MSPG.............. 3 0.90 NASDAQ.
Go2Net, Inc................................... GNET.............. 1 0.66 NASDAQ.
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C. The Trust Issued Receipts Portfolio
The companies represented by the securities in the portfolio
underlying the trust issued receipts must meet the following minimum
criteria:
(1) The companies' common stock must be registered under Section 12
of the Exchange Act.
(2) The minimum public float of each company included in the
portfolio must be at least $150 million.
(3) Each security must either be listed on a national securities
exchange or be traded through the facilities of Nasdaq and be a
reported national market system security.
(4) The average daily trading volume for each security must be at
least 100,000 shares during the preceding sixty-day trading period.
(5) The average daily dollar value of the shares traded during the
preceding sixty-day trading period must be at least $1 million.
The initial weighting of each security in the portfolio will be
based on its market capitalization, however, if on the date such
weighting is determined, a security would represent more than 20% of
the overall value of the receipt, then the amount of such security will
be reduced to no more than 20% of the receipt value. Once initially
set, the securities represented by a receipt will not change, except in
accordance with the reconstitution events described below.
Each of the companies whose common stock is included in the
portfolio of the Internet HOLDRs Trust also meet the following
criteria:
(1) The market capitalization for each company is equal to or
greater than $1 billion.
(2) The average daily trading volume for each security was at least
1.2 million shares during the sixty-day trading period prior to August
31, 1999.
(3) The average daily dollar value of the shares traded during the
sixty-day trading period prior to August 31, 1999 was at least $60
million.
(4) Each company was traded on a national securities exchange or
Nasdaq/NM for at least ninety days prior to August 31, 1999.
D. Trading of Trust Issued Receipts
A round-lot of 100 trust issued receipts represents a holder's
individual and undivided beneficial ownership interest in the whole
number of securities represented by the receipt. The amount of
deposited securities for each round-lot of 100 trust issued receipts
will be determined at the beginning of the marketing period and will be
disclosed in the prospectus to investors. Trust issued receipts may be
acquired, held or transferred only in round-lot amounts (or round-lot
multiples) of 100 receipts. Orders for less than a round-lot will be
rejected, while orders for greater than a round-lot, but not a round-
lot multiple will be executed to the extent of the largest round lot
multiple, rejecting the remaining odd-lot (e.g., an order for 50 trust
issued receipts will be rejected, while for an order for 1050 trust
issued receipts, 1000 will be executed and 50 will be rejected). The
initial offering price for a trust issued receipt will be established
on the date the receipts are priced for sale to the public.
Trust issued receipts will be deemed ``Eligible Securities,'' as
defined in Amex rule 230, for purposes of the Intermarket Trading
System Plan and therefore will be subject to the trade through
provisions of Amex Rule 236 which require that Amex members avoid
initiating trade-throughs for ITS securities. Further, specialist
transactions with the trust issued receipts' trust made in connection
with the creation and redemption of trust issued receipts will not be
subject to the prohibitions of Amex rule 190, which prohibits, among
other things, any business transaction between a specialist and the
company in which stock the specialists is registered. Finally,
application for an exemption from the short sale rule, Rule 10a-1 under
the Act,\5\ has been made for trust issued receipts and is currently
pending with the Commission.
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\5\ 17 CFR 240.10a-1.
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Trust issued receipts will trade in minimum fractional increments
pursuant to Amex rule 127. Application of Amex rule 127 will result in
a minimum fractional change of \1/16\th of $1.00 for those trust issued
receipts selling at or above $0.25 and \1/32\nd of $1.00 for those
selling below $0.25.
The Exchange believes that trust issued receipts will not trade at
a material discount or premium to the assets held by the issuing trust.
The exchange represents that the arbitrage process--which provides the
opportunity to profit from differences in prices of the same or similar
securities (e.g., the trust issued receipts and the portfolio of
deposited securities), increases the efficiency of the markets and
serves to prevent potentially manipulative efforts should promote
correlative pricing between the trust issued receipts and the deposited
securities. If the price of the trust issued receipt deviates enough
from the portfolio of deposited securities to create a material
discount or premium, an arbitrage opportunity is created allowing the
arbitrageur to either buy the trust issued receipt at a discount,
immediately cancel them in exchange for the deposited securities and
sell the shares in the cash market at a profit, or sell the trust
issued receipts short at a premium and buy the securities represented
by the receipts to deposit in exchange for the trust issued receipts to
deliver against the short position. In both instances, the arbitrageur
locks in a profit and the markets move back into line.
E. Maintenance of the Trust Issued Receipts Portfolio
Except when a reconstitution event occurs, as described below, the
securities represented by a trust issued receipt will not change.
Notwithstanding, the static nature of the portfolio, the number of each
security represented in a receipt may change due to certain corporate
events such as stock splits or reverse stock splits on the deposited
securities or when a reconstitution event occurs. In addition, the
relative weightings among the deposited securities will change based
[[Page 52562]]
on the current market price of the deposited securities and upon the
reconstitution events discussed below. Under no circumstances will a
new security be added to the list of securities after a particular
receipt program is established, nor will weightings of component
securities be adjusted after they are initially set. If the portfolio
of securities underlying the trust issued receipts drops to fewer than
nine, Amex will consult with the Commission to confirm the
appropriateness of continued listing of such trust issued receipts.
F. Reconstitution Events
The trust agreement provides for the automatic distribution of
specified deposited securities in the trust's portfolio to the
beneficial owner of such receipts in the circumstances referred to in
the prospectus as ``reconstitution events.'' The reconstitution events
occur under the following circumstances:
(1) If the deposited securities of a company evidenced by a trust
issued receipt no longer has a class of common stock registered under
Section 12 of the Act, then those securities will no longer be
considered deposited securities and the trustee will distribute the
securities of that company to the owners of the trust receipts;
(2) If the Commission finds that a company with deposited
securities evidenced by the trust issued receipts is a company that
should be registered as an investment company under the Investment
Company Act of 1940, and the trustee has actual knowledge of the
Commission's finding, then the trustee will distribute the securities
of that company of the owners of the trust issued receipts.
(3) If the deposited securities of a company evidenced by a trust
issued receipt are no longer outstanding because the securities were
acquired by another company, the trustee will distribute the
consideration paid by and received from the acquiring company to the
beneficial owners of trust issued receipts, unless the consideration is
additional deposited securities (i.e., the acquiring company's
securities are already included in the trust issued receipt as
deposited securities), in which case such additional securities will be
deposited into the trust; and
(4) If an underlying issuer's deposited securities are delisted
from trading on their primary exchange or market and are not listed for
trading on another national securities exchange or through Nasdaq
within five business days from the date the deposited securities are
delisted.\6\
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\6\ This provision is designed for the purpose of permitting a
deposited security to move its listing between, e.g., the Amex and
Nasdaq without requiring the automatic distribution of the deposited
security to beneficial owners of the receipts. Should deposited
securities be moved to a market other than a national securities
exchange or Nasdaq, (e.g., the OTC Bulletin Board) such securities
will be automatically distributed to the beneficial owners of the
receipts.
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If the trustee removes a deposited security from the trust due to
the occurrence of one of the reconstitution events described above, the
trustee, in accordance with the depositary trust agreement, will
deliver the deposited security to the investor as promptly as
practicable after the date that the trustee has knowledge of the
occurrence of a reconstitution event.
G. Issuance and Cancellation of Trust Issued Receipts
The trust will issue and cancel, and an investor may obtain, hold,
trade or surrender, receipts only in a round-lot of 100 trust issued
receipts and round-lot multiples. While investors will be able to
acquire, hold, transfer and surrender a round-lot of 100 trust issued
receipts, the bid and asked prices will be quoted on a per receipt
basis.\7\ The trust will issue additional receipts on a continuous
basis when an investor deposits the required securities with the trust.
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\7\ The per receipt amount will be disseminated by the Amex
every 15 seconds over the Consolidated Tape Association's Network B.
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A holder may obtain trust issued receipts by either purchasing them
on the Exchange or by delivering to the trust during its normal
business hours the requisite securities evidencing a round-lot of trust
issued receipts. The trustee will charge an issuance fee of up to
$10.00 per 100 trust issued receipts. If a holder wants to cancel trust
issued receipts and withdraw the deposited securities the holder may do
so by surrendering the receipts to the trust during normal business
hours. The trustee will charge a cancellation fee of up to $10.00 per
100 trust issued receipts. Lower charges may be assigned for bulk
issuances and cancellations. The holder will receive the deposited
securities no later than the business day after the trustee receives
the request.
H. Termination of the Trust
The trust shall terminate upon the earlier of: (i) The removal of
the receipts from Amex listing if they are not listed for trading on
another national securities exchange or through the facilities of
Nasdaq within five business days from the date the receipts are
delisted; (ii) the trustee resigns and no successor trustee is
appointed within sixty days from the date the trustee provides notice
to the initial depositor of its intent to resign; (iii) seventy-five
percent of beneficial owners of outstanding trust issued receipts vote
to dissolve and liquidate the trust; or (iv) December 31, 2039. If a
termination event occurs, the trustee will distribute the underlying
securities to the beneficial owners as promptly as practicable after
the termination event.
I. Criteria for Initial and Continued Listing
Because of the continuous issuance and cancellation of trust issued
receipts, the Exchange believes it is necessary to maintain appropriate
flexibility in connection with listing a specific trust. In connection
with initial listing, the Exchange will establish a minimum number of
receipts that must be outstanding at commencement of Exchange trading,
and such minimum number will be included in any required submission
under Rule 19b-4. The Exchange anticipates requiring a minimum of
150,000 outstanding receipts before trading can commence.
In connection with continued listing, and because the number of
holders can be subject to substantial fluctuations depending on market
conditions, the Exchange believes it would be inappropriate and
burdensome on trust issued receipt holders if the Exchange considers
suspending trading in or delisting a series of receipts with the
consequent termination of the trust, unless the number of holders
remains severely depressed over an extended time period. Therefore, the
Exchange will consider suspending or delisting a trust from trading
when, in its opinion, further dealing in such securities appears
unwarranted under the following circumstances:
(a) If the trust has more than sixty days remaining until
termination and there have been fewer than fifty record and/or
beneficial holders of the trust issued receipts for the previous thirty
or more consecutive trading days;
(b) If the aggregate number of trust issued receipts outstanding is
less than 50,000; \8\
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\8\ See supra note 4.
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(c) If the aggregate market value of trust issued receipts publicly
held is less than $1 million; \9\ or
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\9\ Id.
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(d) If such other event occurs or condition exists which, in the
opinion of the Exchange, makes further dealings on the Exchange
inadvisable.
[[Page 52563]]
The Exchange will not, however, be required to suspend or delist
from trading, based on the above factors, any trust issued receipts for
a period of one year after the initial listing of such trust issued
receipts for trading on the Exchange. In addition, if the number of
companies represented by the deposited securities drops to less than
nine, and such time thereafter the number of companies is reduced, the
Exchange will consult with the Commission to confirm the
appropriateness of continued listing of the trust issued receipts.
J. Exchange Rules Applicable to Trading of Trust Issued Receipts
Trust issued receipts will be deemed equity securities subject to
all Amex rules governing the trading of equity securities, including,
among others, rules governing priority, parity and precedence of
orders, responsibilities of the specialist, account opening and
customer suitability (Amex Rule 411) and the election, with the prior
approval of a floor official, of a stop or limit order by a quotation
(Amex Rule 154, Commentary .04(c)). Equity margin requirements of fifty
percent and the regular equity trading hours of 9:30 a.m. to 4:00 p.m.
will apply to transactions in trust issued receipts. However, trading
rules pertaining to the availability of odd-lot trading in Amex
equities will not apply to the trading of trust issued receipts, since
they can only be traded in round-lots. Application for exemption from
the short sale rule, Rule 10a-1 under the Act, has been made and is
currently pending with the Commission. If granted, the Exchange will
issue a notice to its members detailing the terms of the exemption.
Amex's surveillance procedures for trust issued receipts will be
similar to those used for portfolio depositary receipts and will
incorporate and rely upon existing Amex surveillance procedures
governing options and equities.
K. Disclosure
With respect to investor disclosure, the Exchange notes that all
investors in trust issued receipts who purchase in the initial offering
will receive a prospectus. In addition, anyone purchasing a trust
issued receipt directly from the trust (by delivering the underlying
securities to the trust) will also receive a prospectus. Finally, all
Amex members purchasing trust issued receipts from the trust for resale
to customers will deliver a prospectus to such customers.
Prior to the commencement of trading in trust issued receipts, the
Exchange will issue a circular to members highlighting the
characteristics of purchases in trust issued receipts including that
trust issued receipts are not individually redeemable. In addition, the
circular will inform members of Exchange policies about trading halts
in such securities. First, the circular will advise that trading will
be halted in the event the market volatility trading halt parameters
set forth in Amex Rule 117 have been reached. Second, the circular will
advise that, in addition to other factors that may be relevant, the
Exchange may consider factors such as the extent to which trading is
not occurring in a deposited security(s) and whether other unusual
conditions or circumstances detrimental to the maintenance of a fair
and orderly market are present.
III. Discussion
A. Generally
The Commission finds that the proposed rule change is consistent
with the requirements of the Act and the rules and regulations
thereunder applicable to a national securities exchange, and in
particular, with the requirements of Section 6(b)(5).\10\ Specifically,
the Commission finds that the proposal to list and trade trust issued
receipts will provide investors with a convenient and less expensive
way of participating in the securities markets. The Exchange's proposal
should advance the public interest by providing investors with
increased flexibility in satisfying their investment needs by allowing
them to purchase and sell a single security replicating the performance
of a broad portfolio of stocks at negotiated prices throughout the
business day. 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.\11\
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\10\ 15 U.S.C. 78f(b)(5).
\11\ In approving this rule, the Commission notes that it has
considered the proposed rule's impact on efficiency, competition,
and capital formation. 15 U.S.C. 78c(f).
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The Commission believes that trust issued receipts will provide
investors with an alternative to trading a broad range of securities on
an individual basis, and will give investors the ability to trade trust
issued receipts representing a portfolio of securities continuously
throughout the business day in secondary market transactions at
negotiated prices. Trust issued receipts will allows investors to: (1)
Respond quickly to changes in the overall securities markets generally
and for the industry represented by a particular trust; (2) trade, at a
price disseminated on a continous basis, a single security representing
a portfolio of securities that the investor owns beneficially; (3)
engage in hedging strategies similar to those used by institutional
investors; (4) reduce transaction costs for trading a portfolio of
securities; and (5) retain beneficial ownership of the securities
underlying the trust receipts.
Although trust issued receipts are not leveraged instruments, and,
therefore, do not possess any of the attributes of stock index options,
their prices will be derived and based upon the securities held in
their respective trusts. Accordingly, the level of risk involved in the
purchase or sale of trust issued receipts is similar to the risk
involved in the purchase or sale of traditional common stock, with the
exception that the pricing mechanism for trust issued receipts is based
on a basket of securities.\12\ Nevertheless, the Commission believes
that the unique nature of trust issued receipts raises certain product
design, disclosure, trading, and other issues that must be addressed.
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\12\ The Commission has concerns about continued listing of the
trust issued receipts if the number of component securities falls to
a level below nine securities, because the receipts may no longer
adequately reflect a cross section of the selected industry.
Accordingly, the Amex has agreed to consult the Commission, once the
trust has fewer than nine component securities, and for each
subsequent loss of a security thereafter.
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B. Lasting and Trading of Trust Issued Receipts
The Commission finds that the Amex's proposal contains adequate
rules and procedures to govern the trading of turest issued receipts.
Trust issued receipts are equity securities that will be subject to the
full panoply of Amex rules governing the trading of equity securities
on the Amex, including, among others, rules governing the priority,
parity and procedence of orders, responsibilities of the specialist,
account opening and customer suitability requirements, and the election
of a stop or limit oder.\13\
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\13\ Trading rules pertaining to the availability of odd-lot
trading do not apply because trust issued receipts only can be
traded in round-lots.
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In addition, the Amex has developed specific listing and delisting
criteria for trust issued receipts that will help to ensure that a
minimum level of liquidity will exist for trust issued receipts to
allow for the maintenance of fair and orderly markets. The delisting
criteria
[[Page 52564]]
also allows the Amex to consider the suspension of trading and the
delisting of a trust issued receipt if an event occurred that made
further dealings in such securities inadvisable. This will give the
Amex flexibility to delist trust issued receipts if circumstances
warrant such action. Amex's proposal also provides procedures to halt
trading in trust issued receipts in certain enumerated circumstances.
Moreover, in approving this proposal, the Commission notes the
Exchange's belief that trust issued receipts will not trade at a
material discount or premium in relation to the overall value of the
trusts' assets because of potential arbitrage opportunities. The
Exchange represents that the potential for arbitrage should keep the
market price of a trust issued receipt comparable to the overall value
of the deposited securities.
Furthermore, the Commission believes that the Exchange's proposal
to trade trust issued receipts in minimum fractional increments of \1/
16\th of $1.00 is consistent with the Act. The Commission believes that
such trading should enhance market liquidity, and should promote more
accurate pricing, tighter quotations, and reduced price fluctuations.
The Commission also believes that such trading should allow customers
to receive the best possible execution of their transactions in trust
issued receipts.
Finally, the Amex has developed surveillance procedures for trust
issued precepts that incorporate and rely upon existing Amex
surveillance procedures governing equities. The Commission believes
that these surveillance procedures are adequate to address concerns
associated with listing and trading trust issued receipts, including
any concerns associated with purchasing and redeeming round-lots of 100
receipts. Accordingly, the Commission believes that the rules governing
the trading of trust issued receipts provide adequate safeguards to
prevent manipulative acts and practices and to protect investors and
the public interest.
C. Disclosure and Dissemination of Information
The Commission believes that the Exchange's proposal will ensure
that investors have information that will allow them to be adequately
apprised of the terms, characteristics, and risks of trading trust
issued receipts. The prospectus will address the special
characteristics of a particular trust issued receipt basket, including
a statement regarding its redeemability and method of creation. The
Commission notes that all investors in trust issued receipts who
purchase in the initial offering will receive a prospectus. In
addition, anyone purchasing a trust issued receipt directly from the
trust (by delivering the underlying securities to the trust) will also
receive a prospectus. Finally, all Amex member firms who purchase trust
issued receipts from the trust for resale to customers must deliver a
prospectus to such customers.
The Commission also notes that upon the initial listing of any
trust issued receipts, 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 the Exchange members' prospectus
delivery requirements, and highlight the characteristics of purchases
in trust issued receipts. The circular also will inform members of
Exchange policies regarding trading halts in trust issued receipts.
D. Scope of the Commission's Order
The Commission is approving in general the Amex's proposed listing
standards for trust issued receipts, and, specifically, the listing of
the Internet HOLDRs described herein. The Commission specifically notes
that, notwithstanding approval of the listing standards for trust
issued receipts, other similarly structured products, including trust
issued receipts based on other industries, will require review by the
Commission prior to being traded on the Exchange. Additional series
cannot be listed prior to contacting Division staff. In addition, the
Amex may be required to submit a rule filing prior to trading a new
issue or series on the Exchange.
E. Accelerated Approval
The Commission finds good cause for approving proposed Amendment
Nos. 1, 2, 3 and 4 prior to the thirtieth day after the day after the
date of publication of notice of filing in the Federal Register.
Specifically, the amendments strengthen the proposed rule change by
clarifying and expanding the explanations regarding the nature and
composition of the trust issued receipts, the trading halt procedures,
the applicable equity trading rules, the minimum fractional change, the
potential for arbitrage opportunities, the disclosure requirements, the
reconstitution events, the termination events and the continued listing
criteria. Moreover, the Commission notes that the proposed rule change
was noticed for the full statutory period and no comment letters were
received. Finally, Amendment Nos. 1, 2, 3 and 4 do not raise any new
regulatory issues. Accordingly, the Commission finds that there is good
cause, consistent with Section 6(b)(5) of the Act, to approve Amendment
Nos. 1, 2, 3 and 4 to the proposal on an accelerated basis.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning Amendments Nos. 1, 2, 3 and 4, including whether
these amendments are consistent with the Act. Persons making written
submissions should file six copies thereof with the Secretary,
Securities and Exchange Commission, 450 Fifth Street, NW., Washington,
DC 20549-0609. Copies of the submission, all subsequent amendments, all
written statements with respect to the proposed rule change that are
filed with the Commission, and all written communications relating to
the proposed rule change between the Commission and any person, other
than those that may be withheld from the public in accordance with the
provisions of 5 U.S.C. 552, will be available for inspection and
copying at the Commission's Public Reference Room. Copies of such
filing will also be available for inspection and copying at the
principal office of the Exchange. All submissions should refer to File
No. SR-AMEX-99-20 and should be submitted by October 20, 1999.
V. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\14\ that the proposed rule change (SR-Amex-99-20), as amended, is
approved.
\14\ 15 U.S.C. 78s(b)(2).
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For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\15\
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\15\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-25281 Filed 9-28-99; 8:45 am]
BILLING CODE 8010-01-M
