49270 Federal Register / Vol. 62, No. 182 / Friday, September 19, 1997 / Notices

6Securities Exchange Act Release No. 38728,

Securities Act Release No. 7422 (June 10, 1997).

7 15 U.S.C. 78f(b).

8 15 U.S.C. 78f(b)(5).

9 In approving this rule, the Commission has

considered the proposed rule’s impact on

efficiency, competition, and capital formation. 15

U.S.C. 78c(f).

10 15 U.S.C. 78s(b)(2).

11 17 CFR 200.30–3(a)(12).

1On June 4, 1997, the Exchange filed Amendment

No. 1 to this rule filing. Amendment No. 1

supersedes entirely the Exchange’s rule filing and

was incorporated into the notice in its entirety. On

June 17, 1997 and June 24, 1997, the Exchange filed

Amendment Nos. 2 and 3 respectively; Amendment

No. 3 replaces Amendment No. 2 in its entirety and

the substance of Amendment No. 3 was

incorporated into the notice. See letter from J. Craig

Long, Attorney, Foley & Lardner, to Ivette Lopez,

Assistant Director, Market Regulation, Commission,

dated May 27, 1997 (‘‘Amendment No. 1’’) and

letters from David T. Rusoff, Attorney, Foley &

Lardner, to Sharon Lawson, Senior Special Counsel,

Market Regulation, Commission, dated June 13,

1997 (‘‘Amendment No. 2’’) and June 18, 1997

(‘‘Amendment No. 3’’) respectively.

2 15 U.S.C. 78s(b)(1).

3 17 CFR 240.19b–4.

4See Letter from James F. Duffy, Executive Vice

President and General Counsel, Legal and

Regulatory Policy, American Stock Exchange, to

Jonathan G. Katz, Secretary, Commission, dated July

31, 1997 (‘‘Amex Comment Letter’’).

CHX petitioned the SEC in February of

this year to adopt a rule finding the

CHX’s Tier I listing standards to be

substantially similar to those of the

NYSE, Amex or Nasdaq/NMS. If the

SEC adopts such a rule, any security

listed on the CHX under its Tier I

standards would be exempt from

registration in all fifty states.

The Commission has recently

published for comment proposed Rule

146(b) which would designate various

exchanges’ listing standards as being

substantially similar to those of the

NYSE, Amex or Nasdaq/NMS.6 The

Commission has indicated that it

preliminary believes that the only

deficiency in the CHX Tier I standards,

which precludes it from designating the

CHX Tier I securities as qualifying, is

that there is no minimum share price

requirement for continued listing on

Tier I. If such deficiency was corrected,

the SEC indicated that it would consider

including CHX’s Tier I securities in the

final Rule 146(b).

As a result of the above, the CHX is

proposing to amend Article XXVIII,

Rule 14 of the Exchange rules to add a

minimum share price requirement for

continued listing of common stock on

Tier I. The proposed amendment is

virtually identical to Amex’s

requirement. In essence, the proposed

amendment states that an issuer that has

a common stock listed under Tier I that

is selling for a substantial period of time

at a low price per share must effect a

reverse split within a reasonable period

of time after being notified that the

Exchange deems such action to be

appropriate. The proposed amendment

then sets forth examples of pertinent

factors which the Exchange will review

in determining whether a reverse split is

appropriate. If the issuer fails to effect

a reverse split, then the Exchange would

initiate a proceeding to delist the

issuer’s common stock from Tier I.

III. Discussion

The Commission finds that the

proposed rule change is consistent with

the requirements of the Act and the

rules and regulations thereunder

applicable to a national securities

exchange, and, in particular, with the

requirements of section 6(b).7

Specifically, the Commission believes

the proposal is consistent with the

section 6(b)(5) 8 requirement that the

rules of an exchange be designed to

promote just and equitable principles of

trade, to prevent fraudulent and

manipulative acts, and, in general, to

protect investors and the public

interest.9 New Exchange Rule 14(a)(4)

provides the CHX with specific

authority to require an issuer with

common stock listed on Tier I to effect

a reverse stock split when the issue is

selling for a substantial period of time

at a low price per share. If such issuer

does not effect a reverse split of the

shares, which should have the effect of

increasing share price, within a

reasonable period of time after being

notified that the Exchange deems the

reverse split to be appropriate, the

Exchange will delist the issuer’s stock.

In establishing criteria to uphold the

quality of its market, the Commission

believes that it is appropriate for the

Exchange to have a maintenance

standard for securities selling at low

prices in conjunction with the other

standards for listing and maintenance.

The Commission finds that the share

price maintenance standard is a

reasonable measure for the Exchange to

use to maintain its quality control

standards for issuers listed on Tier I of

the Exchange and is a reasonable

standard to use to remove low-priced

securities from the Exchange. As noted

above, under the rule, the issuer will

have the opportunity to remedy

concerns about stock selling at a low

price by effecting a reverse stock split.

The Commission also believes that the

addition of the share price maintenance

standard to the Exchange’s maintenance

requirements for common stock should

help the Exchange monitor the

continued financial stability of

companies listed on Tier I because low

share prices can sometimes be the result

of financial difficulty with the issuer.

The maintenance standard will also

help ensure that stocks that are more

susceptible to manipulation will not be

traded on the Exchange. This should

protect investors and the public interest

consistent with section 6(b)(5) of the

Act.

IV. Conclusion

It is therefore ordered, pursuant to

Section 19(b)(2) of the Act,10 that the

proposed rule change (SR–CHX–97–17)

is approved.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.11

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 97–24865 Filed 9–18–97; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–39076; File No. SR–CHX–

97–06]

Order Granting Approval to Proposed

Rule Change

September 15, 1997.

Self-Regulatory Organizations; Order

Granting Approval to Proposed Rule Change

by the Chicago Stock Exchange, Inc., Relating

to Listing and Trading Standards for Portfolio

Depositary Receipts.

I. Introduction

On March 17, 1997,1 the Chicago

Stock Exchange, Inc. (‘‘CHX’’ or

‘‘Exchange’’) submitted to the Securities

and Exchange Commission

(‘‘Commission’’), pursuant to section

19(b)(1) of the Securities Exchange Act

of 1934 (‘‘Act’’) 2 and Rule 19b–4

thereunder,3 a proposed rule change to

add Rule 25 to Article XXVIII of CHX’s

rules relating to the listing and trading

of Portfolio Depository Receipts

(‘‘PDRs’’).

The proposed rule change as amended

by Amendment Nos. 1, 2, and 3,

together with the substance of the

proposal, was published for comment in

Securities Exchange Act Release No.

38777 (June 26, 1997) 62 FR 35866 (July

2, 1997). One comment letter was

received in response to the proposal.4

II. Background and Description

The Exchange proposes to adopt new

Rule 25 under Article XXVIII to

accommodate the trading of PDRs,

securities which are interests in a unit

investment trust (‘‘Trust’’) holding a
Federal Register / Vol. 62, No. 182 / Friday, September 19, 1997 / Notices 49271

5The Commission notes that CHX, if it were to

file a proposed rule change to list and trade a new

PDR, would have to request the appropriate

exemptions for the new product under the

Investment Company Act of 1940 (‘‘Investment

Company Act’’) (such as those exemptions

requested for SPDRs and MidCap SPDRs), such an

exemption from Investment Company Act Section

22(d) and Rule 22c–1 thereunder to allow the PDR

to trade in the secondary market.

6The Commission notes that CHX has stated its

intention to file a proposed rule change in the near

future in order to create a know-your-customer rule

in which a member, before recommending a

transaction in a security, would have to use due

diligence to learn the essential facts relating to

every customer, every order, and every account

accepted by the member. Telephone call between

Craig Long, Attorney, Foley & Lardner, Sharon

Lawson, Senior Special Counsel, Market

Regulation, Commission, and Heather Seidel,

Attorney, Market Regulation, Commission, on July

29, 1997.

portfolio of securities linked to an

index. Each Trust will provide investors

with an instrument that: (i) Closely

tracks the underlying portfolio of

securities, (ii) trades like a share of

common stock, and (iii) pays holders of

the instrument periodic dividends

proportionate to those paid with respect

to the underlying portfolio of securities,

less certain expenses (as described in

the Trust prospectus).

Under the proposal, the exchange may

list and trade, or trade pursuant to

unlisted trading privileges (‘‘UTP’’),

PDRs based on one or more stock

indexes or securities portfolios. PDRs

based on each particular stock index or

portfolio shall be designated as a

separate series and identified by a

unique symbol. The stocks that are

included in an index or portfolio on

which PDRs are based shall be selected

by the Exchange, or by such other

person as shall have a proprietary

interest in and authorized use of such

index or portfolio, and may be revised

as deemed necessary or appropriate to

maintain the quality and character of

the index or portfolio. As discussed in

more detail below, CHX intends to trade

two existing PDRs currently traded on

the American Stock Exchange

(‘‘Amex’’)—Standard & Poor’s

Depositary Receipts (‘‘SPDRs’’) and

Standard & Poor’s MidCap 400

Depositary Receipts (‘‘MidCap

SPDRs’’)—pursuant to UTP upon

approval of these listing standards. CHX

is not asking for permission to list

SPDRs or MidCap SPDRs at this time,

but rather will trade SPDRs and MidCap

SPDRs pursuant to unlisted trading

privileges once the generic listing

standards set forth herein are approved.

Pursuant to Rule 12f–5 under the Act,

in order to trade a particular class or

type of security pursuant to unlisted

trading privileges, CHX must have rules

providing for transactions in such class

or type of security. The Amex has

enacted listing standards for PDRs, and

CHX’s proposed rule change is designed

to create similar standards for PDR

listing and/or trading on CHX.

If at a later time CHX and the issuer

of the product desire to list SPDRs and

MidCap SPDRs or any other PDRs on

the Exchange, the Exchange will request

Commission approval for that listing in

a separate proposed rule change filed

pursuant to Section 19(b)of the Act.5

Additionally, in the event a new PDR is

listed on another exchange using listing

standards that are different than current

CHX listing standards or the CHX listing

standards proposed in this filing, the

CHX will file a proposed rule change

pursuant to Section 19(b) of the Act to

adopt the listing standard before it

trades that PDR pursuant to unlisted

trading privileges.

Criteria for Initial and Continued Listing

In connection with an initial listing,

the Exchange proposes that, for each

Trust of PDRs, the Exchange will

establish a minimum number of PDRs

required to be outstanding at the time of

commencement of Exchange trading,

and such minimum number will be filed

with the Commission in connection

with any required submission under

Rule 19b–4 for each Trust. If the

Exchange trades a particular PDR

pursuant to unlisted trading privileges,

the Exchange will follow the listing

exchange’s determination of the

appropriate minimum number.

Because the Trust operates an openend type basis, and because the number

of PDR holders is subject to substantial

fluctuations depending on market

conditions, the Exchange believes it

would be inappropriate and

burdensome on PDR holders to consider

suspending trading in or delisting a

series of PDRs, with the consequent

termination of the Trust, unless the

number of holders remains severely

depressed during an extended time

period. Therefore, twelve months after

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:

(a) 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

(b) If the index on which the Trust is

based is no longer calculated, or

(c) If such other event shall occur or

condition exists 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 will

be redeemed in accordance with

provisions of the Trust prospectus. A

Trust may also terminate under such

other conditions as may be set forth in

the Trust prospectus. For example, the

sponsor of the Trust (‘‘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.

Trading of PDRs

Dealings in PDRs on the Exchange

will be conducted pursuant to the

Exchange’s general agency-auction

trading rules. The Exchange’s general

dealing and settlement rules will apply,

including its rules on clearance and

settlement of securities transactions and

its equity margin rules. Other generally

applicable Exchange equity rules and

procedures will also apply, including,

among others, rules governing the

priority, parity and precedence of orders

and the responsibilities of specialists.6

With respect to trading halts, the

trading of PDRs will be halted, along

with the trading of all other listed or

traded stocks, in the event the ‘‘circuit

breaker’’ thresholds of CHX Article IX,

Rule 10A are reached. In addition, for

PDRs tied to an index, the triggering of

futures price limits for the Standard &

Poor’s 500 Composite Price Index (‘‘S&P

500 Index’’), Standard & Poor’s 100

Composite Price Stock Index (‘‘S&P 100

Index’’), or Major Market Index (‘‘MMI’’)

futures contracts will not, in itself,

result in a halt in PDR trading or a

delayed opening. However, the

Exchange could consider such an event,

along with other factors, such as a halt

in trading in S&P 100 Index Options

(‘‘OEX’’), S&P 500 Index Options

(‘‘SPX’’), or MMI Options (‘‘XMI’’), in

deciding whether to halt trading in

PDRs.

Under the proposed rule change, 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 Article XXXVI, Rule 19, the

Exchange’s rule governing trading halts

for Basket trading (except that the term

‘‘Basket’’ shall be replaced by ‘‘stock

index’’) in exercising its direction to
49272 Federal Register / Vol. 62, No. 182 / Friday, September 19, 1997 / Notices

7CHX plans to notify its members in an

information circular that it is their responsibility to

inform customers of the nature and terms of SPDRs

an MidCap SPDRs prior to recommending their

purchase. The circular also states that members

must deliver a SPDR or MidCap SPDR product

description to all purchases of the products and that

they must provide the prospectus upon request.

8The Commission notes that Amex, in its

comment letter to this rule filing, stated that the

Distributor does not have responsibility for

disseminating the SPDR and MidCap SPDR product

descriptions; therefore, CHX members cannot

obtain the product description from the Distributor,

as noted in the notice release, but can obtain its

form Amex. See Amex Comment Letter, supra note

4, and Section III infra.

9The Commission notes that SR–CHX–97–9, as

amended to remove the phrase ‘‘size and price

associated with the’’ from the filing, has become

effective. See Securities Exchange Act Release No.

38772 (June 25, 1997). In addition, CHX represents

that it will submit a separate rule filing pursuant

to Section 19(b)(2) of the Act further amending the

BEST Rule to add size and price to the definition

of the ITS/BBO. Phone conversation between David

Rusoff, Attorney, Foley & Lardner, and David

Sieradzki, Attorney, Market Regulation,

Commission, on June 17, 1997.

10Currently SPDRs and MidCap SPDRs are only

traded on Amex.

11Under the BEST Rule, Exchange specialists are

required to guarantee executions of all agency

market and limit orders for Dual Trading System

issues from 100 up to and including 2099 shares.

Subject to the requirements of the short sale rule,

the specialist must fill all agency market orders at

a price equal to or better than the ITS BBO. For all

agency limit orders in Dual Trading System issues,

the specialist must fill the order if: (1) The ITS BBO

at the limit price has been exhausted in the primary

market; (2) there has been a price penetration of the

limit in the primary market (generally known as a

trade-through of a CHX limit order); or (3) the issue

is trading at the limit price on the primary market

unless it can be demonstrated that the order would

not have been executed if it had been transmitted

to the primary market or the broker and specialist

agree to a specific volume related to, or other

criteria for, requiring a fill.

halt or suspend trading. For a PDR

based on an index, these factors would

include whether trading has been halted

or suspended in the primary market(s)

for any combination of underlying

stocks accounting for 20% or more of

the applicable current index group

value, or whether other unusual

conditions or circumstances detrimental

to the maintenance of a fair and orderly

market are present.

Disclosure

Proposed Rule 25 of Article XXVIII

requires that members and member

organizations provide to all purchasers

of each series of PDRs a written

description of the terms and

characteristics of such securities, in a

form approved by the Exchange, not

later than the time a confirmation of the

first transaction in such series of PDRs

is delivered to such purchaser. In this

regard, a member or member

organization carrying an omnibus

account for a non-member broker-dealer

will be required to inform such nonmember that execution of an order to

purchase PDRs for such omnibus

account will be deemed to constitute an

agreement by the non-member to make

such written description available to its

customers on the same terms as are

directly applicable to member and

member organizations. The written

description must be included with any

sales material on that series of PDRs that

a member provides to customers or the

public. Moreover, other written

materials provided by a member or

member organization to customers or

the public making specific reference to

a series of PDRs as an investment

vehicle must include a statement in

substantially the following form: ‘‘A

circular describing the terms and

characteristics of [the series of PDRs] is

available from your broker. It is

recommended that you obtain and

review such circular before purchasing

[the series of PDRs]. In addition, upon

request you may obtain from your

broker a prospectus for [the series of

PDRs].’’ Additionally, as noted above,

the Exchange requires that members and

member organizations provide

customers with a copy of the prospectus

for a series of PDRs upon request.

With respect to disclosure, because

SPDRs and MidCap SPDRs will be

traded pursuant to unlisted trading

privileges and will not be listed on CHX

at this time, CHX does not intend to

create its own product description to

satisfy the requirements of proposed

Rule 25(c) of Article XXVIII, which

requires members to provide to

purchasers, a written description of the

terms and characteristics of SPDRs and

MidCap SPDRs in a form approved by

the Exchange. Instead, the CHX will

deem a member or member organization

to be in compliance with this

requirement if the member delivers

either: (i) The current product

description produced by the Amex from

time to time, or (ii) the current

prospectus for the SPDR or MidCap

SPDR, as the case may be.7 It will be the

member’s responsibility to obtain these

materials directly from Amex 8 for

forwarding to purchasers in the time

frames prescribed by CHX and

Commission rules. The CHX will notify

members and member organizations of

this requirement in a notice to members.

Notwithstanding the foregoing

discussion concerning the applicability

of the Exchange’s equity trading rules to

PDRs generally, the Intermarket Trading

System (‘‘ITS’’) rules briefly will not be

applicable to SPDRs and MidCap SPDRs

traded on the CHX pursuant to unlisted

trading privileges. Currently, ITS is

being modified in order to accommodate

trading in a minimum variation of 1⁄64,

but the changes are not yet complete.

When such changes are made, which is

expected in the near future, CHX

intends to request that SPDRs and

MidCap SPDRs be designated as ITS

Securities. At such time as they are

designated ITS securities, the ITS rules

will apply to trading in SPDRs and

MidCap SPDRs.

The current inapplicability of the ITS

rules means, among other things, that

the ITS trade-through rule will not

apply. However, the CHX’s BEST Rule,

Article XX, Rule 37(a), will still be

applicable to SPDRs and MidCap

SPDRs, thereby guaranteeing the

execution of certain agency orders on

the basis of the size and price associated

with the best bid (for a sell order) or best

offer (for a buy order) among the Amex,

Boston, Cincinnati, Chicago, New York,

Pacific, Philadelphia and the

Intermarket Trading System/Computer

Assisted Execution System quote, which

quote is defined in SR–CHX–97–9 as the

‘‘ITS BBO.’’ 9 Because SPDRs and

MidCap SPDRs are not traded in all of

these market centers,10 for purposes of

this filing only, the ITS BBO is limited

to those market centers listed above that

trade SPDRs and MidCap SPDRs.11 For

example, if a CHX specialist receives an

agency limit order for a SPDR, so long

as all of the eligibility requirements of

the BEST Rule are met, the specialist

will be required to execute that order if

there has been a price penetration in the

primary market. In addition, if the

Amex specialist is disseminating the

best quote for SPDRs, the CHX specialist

will be required to execute eligible

agency market orders for SPDRs at the

price quoted on the Amex, even if the

CHX specialist is not, himself, quoting

at that price. The CHX SPDR and

MidCap SPDR specialist will have the

ability to monitor the current quotations

being disseminated by the Amex

specialist on a real-time basis. The

quotations for SPDRs and MidCap

SPDRs are disseminated through the

Consolidated Quotation System and are

available for viewing by the CHX

specialist at his or her post. Finally, the

CHX specialist will have access to the

Amex through the Amex’s PER System

(albeit through a correspondent firm).

This will enable the CHX specialist to

place limit orders on the Amex

specialist’s book or send market orders

to the Amex specialist for execution

against the Amex specialist’s quote. In

its filing, CHX states that these factors

should minimize the possibility that a
Federal Register / Vol. 62, No. 182 / Friday, September 19, 1997 / Notices 49273

12See Securities Exchange Act Release No. 31591

(December 11, 1992), 57 FR 60253 (December 18,

1992) (‘‘Amex Approval Order’’).

13The S&P MidCap 400 Index is a capitalizationweighted 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.

14See Securities Exchange Act Release No. 35534

(March 24, 1995), 60 FR 16686 (March 31, 1995)

(‘‘Amex MidCap Approval Order’’).

15To 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.

16A Portfolio Deposit also will include a cash

payment equal to a pro rata portion of the dividends

accrued on the Trust’s portfolio securities since the

last dividend payment by the Trust, plus or minus

an amount designed to compensate for any

difference between the net asset value of the

Portfolio Deposit and the underlying Index caused

by, among other things, the fact that a Portfolio

Deposit cannot contain fractional shares.

17The Trust will issue SPDRs in exchange for

‘‘Portfolio Deposits’’ of all of the S&P 500 Index

securities, weighted according to their

representation in the Index. The Trust is structured

so that the net asset value of an individual SPDR

should equal one-tenth of the value of the S&P 500

Index.

18The Trustee of the SPDR Trust will have the

right to vote any of the voting stocks held by the

Trust, and will vote such stocks of each issuer in

the same proportion as all other voting shares of

that issuer voted. Therefore, SPDR holders will not

be able to directly vote the shares of the issuers

underlying the SPDRs.

19An investor redeeming a Creation Unit will

receive Index securities and cash identical to the

Portfolio Deposit required of an investor wishing to

purchase a Creation Unit on that particular day.

Since the Trust will redeem in kind rather than for

cash, the Trustee will not be forced to maintain

cash reserves for redemptions. This should allow

the Trust’s resources to be committed as fully as

possible to tracking the underlying Index, enabling

the Trust to track the Index more closely than other

basket products that must allocate a portion of their

assets for cash redemptions.

CHX originated trade-through will

occur.

SPDRs and MidCap SPDRs Generally

As discussed above, rules to

accommodate the trading of PDRs

generally on Amex, along with Amex’s

trading of SPDRs and MidCap SPDRs,

were previously approved by the

Commission.12 The information

provided below is intended to provide

a description of how SPDRs and

MidCap SPDRs are created and traded

and is almost identical to that discussed

in the original Amex Approval Order.

The Sponsor of each series of PDRs

traded on the Amex is PDR Services

Corporation, a wholly-owned subsidiary

of the Amex. The PDRs are issued by a

Trust in a specified minimum aggregate

quantity (‘‘Creation Unit’’) in return for

a deposit consisting of specified

numbers of shares of stock plus a cash

amount.

The first Trust to be formed in

connection with the issuance of PDRs

was based on the S&P 500 Index, known

as Standard & Poor’s Depositary

Receipts (‘‘SPDRs’’). SPDRs have been

trading on the Amex since January 29,

1993. The second Trust to be formed in

connection with the issuance of PDRs

was based on the S&P MidCap 400

Index,13 known as Standard & Poor’s

MidCap 400 Depositary Receipts

(‘‘MidCap SPDRs’’).14 The Sponsor of

the two Trusts has entered into trust

agreements with a trustee in accordance

with Section 26 of the Investment

Company Act of 1940. PDR Distributors,

Inc. (‘‘Distributor’’) acts as underwriter

of both SPDRs and MidCap SPDRs on an

agency basis. The Distributor is a

registered broker-dealer, a member of

the National Association of Securities

Dealers, Inc., and a wholly-owned

subsidiary of Signature Financial Group,

Inc.

SPDR and MidCap SPDR Creation

All orders to create SPDRs or MidCap

SPDRs in creation unit size must be

placed with the Distributor, and it is the

responsibility of the Distributor to

transmit such orders to the Trustee.15

Payment with respect to creation orders

placed through the Distribution 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.

The securities and cash accepted by the

trustee are referred to, in the aggregate,

as a ‘‘Portfolio Deposit.’’ 16 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

SPDRs or MidCap SPDRs, which

aggregate numbers are referred to as a

‘‘Creation Unit.’’ Currently, a Creation

Unit will be made up of 25,000 MidCap

SPDRs or 50,000 SPDRs.17 Individual

SPDRs or 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.

The price of SPDRs and MidCap SPDRs

will be based on a current bid/offer

market. The minimum fraction for

trading in SPDRs and MidCap SPDRs on

Amex is 1⁄64ths. The CHX has proposed

this same minimum variation for the

trading of SPDRs and MidCap SPDRs on

CHX.

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 SPDR or 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 SPDR or MidCap SPDR.18

Redemption of SPDRs and MidCap

SPDRs

SPDRs and MidCap SPDRs in

Creation Unit size aggregations will be

redeemable in kind by tendering them

to the Trustee. While holders may sell

SPDRs and MidCap SPDRs in the

secondary market at any time, they must

accumulate at least 50,000 (or multiples

thereof) to redeem SPDRs or 25,000 (or

multiples thereof) to redeem MidCap

SPDRs through the Trust. SPDRs and

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.19

Distribution of SPDRs and MidCap

SPDRs

The SPDR Trust and the MidCap

SPDR Trust pay dividends quarterly.
49274 Federal Register / Vol. 62, No. 182 / Friday, September 19, 1997 / Notices

20The creation of PDRs in connection with the

DTC DRS represents the only circumstances under

which PDRs can be created in other than Creation

Unit size aggregations.

21See supra note 4.

22The Commission notes that any imposition of

fees would have to be in compliance with the Act,

including the filing requirements under Section

19(b) of the Act. See infra note 34 and

accompanying text.

23Additionally, Amex believes it is problematic

to apply the current ITS trade-through rule to

index-based securities such as SPDRs that trade in

1⁄64th increments. In addition, Amex believes that

the trade through rule’s five minute time frame for

making a compliant is inappropriately long for

these securities.

24 15 U.S.C. 78f(b)(5).

25The Commission notes, however, that unlike

open-end funds where investors have the right to

redeem their fund shares on a daily basis, investors

could only redeem PDRs in creation unit share

sizes. nevertheless, PDRs would have the added

benefit of liquidity from the secondary market and

PDR holders, unlike holders of most other open-end

funds, would be able to dispose of their shares in

a secondary market transaction.

26 In approving this rule, the Commission notes

that it has considered the proposed rule’s impact on

The regular quarterly ex-dividend date

for SPDRs and MidCap SPDRs is 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 SPDRs

and MidCap SPDRs on the business day

preceding the ex-dividend date will be

entitled to receive an amount

representing dividends accumulated

through the quarterly dividend period

preceding such ex-dividend date net of

fees and expenses for such period. The

payment of dividends will be made on

the last Exchange business day in the

calendar month following the exdividend date (‘‘Dividend Payment

Date’’). On the Dividend Payment Date,

dividends payable for those securities

with ex-dividend dates following within

the period from the ex-dividend date

most recently preceding the current exdividend date will be distributed. The

Trustee will compute on a daily basis

the dividends accumulated within each

quarterly dividend period. Dividend

payments will be made through DTC

and its participants to all such holders

with funds received from the Trustee.

The MidCap SPDR Trust intends to

make the DTC DRS available for use by

MidCap SPDR holders through DTC

participant brokers for reinvestment of

their cash proceeds. The DTC DRS is

also available to holders of SPDRs.

Because some brokers may choose not to

offer the DTC DRS, an interested

investor 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.20

Any cash remaining will be distributed

pro rata to participants in the dividend

reinvestment.

III. Summary of Comments

The Commission received one

comment letter on the proposed rule

change, from Amex.21 Amex

commented on two aspects of the

proposal, the requirement that CHX

members deliver a product description

to purchasers of PDRs no later than the

time a confirmation is delivered to the

purchasers, and on the trading of SPDRs

and MidCap SPDRs pursuant to the ITS.

With regard to the first issue, Amex

notes that CHX will not create its own

product description but will deem its

members in compliance with the

delivery requirement if it delivers

Amex’s current product description or

the current SPDR or MidCap SPDR

prospectus, as applicable. CHX does not

intend to supply these materials to its

members but will require them to obtain

the documents from Amex or the

distributor of SPDRs and MidCap

SPDRs.

Amex states that is does not object to

the occasional request for prospectuses

and Product Descriptions made in

connection with trades on CHX, but

reserves the right to charge a reasonable

amount for the materials, if it finds that

the requests become burdensome.22

Amex also notes that the Distributor is

not responsible for providing the

Product Descriptions, that it is Amex’s

responsibility to provide the materials

to Amex members in connection with

the Exchange trading and compliance

with Amex Rule 1000.

Second, while Amex acknowledges

that SPDRs and MidCap SPDRs are not

traded through ITS at this time because

ITS cannot currently handle trading in

1⁄64ths (the minimum increment for

MidCap and SPDRs MidCap), it is

concerned about the future application

of ITS rules to trading of SPDRs and

MidCap SPDRs due to ongoing

modifications to ITS to permit

commitments to trade in increments as

small as 1⁄256ths. Amex states that

SPDRs and MidCap SPDRs be

designated as ITS securities once these

system changes are made. Amex states

that while it has no objection to the use

of ITS as an intermarket access

mechanism for trading of SPDRs and

MidCap SPDRs, it has serious concerns

about the application of ITS trade

through procedures to the trading of

these products because of the nature of

the product in that they are priced quite

differently from common stocks

Specifically, because of the extreme

frequency of quotation changes in

SPDRs and MidCap SPDRs, Amex

believes that cancellation or expiration

of ITS commitments in these products

would pose proportionally greater

market risk for market makers and

investors than for other ITS securities

because a price change is far more likely

to occur before an ITS commitment can

be resent. Amex also believes that

because of the frequency of quotation

changes in SPDRs and MidCap SPDRs,

the Amex specialist must be able to

receive very rapid confirmation that his

commitment sent to another market

through ITS has been executed, and that

a one or two minute time frame (the

time during which an ITS commitment

is irrevocable) would subject all market

participants to an unacceptable level of

market risk in a market with rapid

quotation changes. Amex states that it

intends to address with the Commission

and the ITS Operating Committee the

ITS procedures that it believes must be

changed to permit SPDRs to continue to

trade as they were designed to trade.23

IV. Discussion

The Commission finds that the

proposed rule changes are 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).24 The

Commission believes that providing for

the exchange-trading on CHX of PDRs,

in general, and SPDRs and MidCap

SPDRs, in particular, will offer investors

an efficient way of participating in the

securities markets. Specifically, the

Commission believes that the trading on

CHX of PDRs, in general, and SPDRs

and MidCap SPDRs pursuant to unlisted

trading privileges, in particular, will

provide investors with increased

flexibility in satisfying their investment

needs by allowing them to purchase and

sell a low-cost security replicating the

performance of a broad portfolio of

stocks at negotiated prices throughout

the business day, and by increasing the

availability of SPDRs and MidCap

SPDRs as an investment tool. The

Commission also believes that PDRs

will benefit investors by allowing them

to trade securities based on unit

investment trusts in secondary market

transactions.25 Accordingly, as

discussed below, the proposed rule

change is consistent with the

requirements of Section 6(b)(5) that

Exchange rules facilitate transactions in

securities while continuing to further

investor protection and the public

interest.26
Federal Register / Vol. 62, No. 182 / Friday, September 19, 1997 / Notices 49275

efficiency, competition, and capital formation. 15

U.S.C. 78c(f).

27See supra notes 12 and 14.

28Program trading is defined as index arbitrage or

any trading strategy involving the related purchase

or sale of a ‘‘basket’’ or group of fifteen or more

stocks having a total market value of $1 million or

more.

29Because of potential arbitrage opportunities,

the Commission believes that PDRs will not trade

at a material discount or premium in relation to

their net asset value. The mere potential for

arbitrage should keep the market price of a PDR

comparable to its net asset value, and therefore,

arbitrage activity likely will be minimal. In

addition, the Commission believes that Trust will

tract the underlying index more closely than an

open-end index fund because the Trust will accept

only in-kind deposits, and, therefore, will not incur

brokerage expenses in assembling its portfolio. In

addition, the Trust will redeem on in kind, thereby

enabling the Trust to invest virtually all of its assets

in securities comprising the underlying index.

30 Investment Company Act Rule 22c–1 generally

requires that a registered investment company

issuing a redeemable security, its principal

underwriter, and dealers in that security, may sell,

redeem, or repurchase the security only at a price

based on the net asset value next computed after

receipt of an investor’s request to purchase, redeem,

or resell. The net asset value of a mutual fund

generally is computed once daily Monday through

Friday as designated by the investment company’s

board of directors. The Commission granted SPDRs

and MidCap SPDRs and exemption from this

provision in order to allow them to trade at

negotiated prices in the secondary market. The

Commission notes that CHX would need to apply

for a similar exemption in the instance that it

wishes to list and trade a new PDR because the

exemptions are specific to SPDRs and MidCap

SPDRs.

31 Id.

28See supra note 12.

33The Commission notes that the exemptions

granted by the Commission under the Investment

Company Act that permit the secondary market

trading of SPDRs and MidCap SPDRs are

specifically conditioned upon the customer

disclosure requirements described above.

Accordingly, CHX rules adequately ensue its

members must deliver the current product

description to all investors in SPDRs and MidCap

SPDRs.

34The Commission notes that Amex would need

to file proposed rule change under Section 19(b) of

the Act in the event it decides to charge a fee for

supplying the SPDR of MidCap SPDR product

descriptions. The Commission notes that reasonable

fees would have to be imposed on the member firms

rather than the customers entitled to receive the

prospectus or the product description.

As the Commission noted in the

orders approving SPDRs and MidCap

SPDRs for listing and trading on

Amex,27 the Commission believes that

the trading on CHX of a security like

PDRs in general, and SPDRs and

MidCap SPDRs in particular, which

replicate the performance of a broad

portfolio of stocks, could benefit the

securities markets by, among other

things, helping to ameliorate the

volatility occasionally experienced in

these markets. The Commission believes

that the creation of one or more

products where actual portfolios of

stocks or instruments representing a

portfolio of stocks, such as PDRs, can

trade at a single location in an auction

market environment could alter the

dynamics of program trading, because

the availability of such single

transaction portfolio trading could, in

effect, restore the execution of program

trades to more traditional block trading

techniques.28

An individual SPDR has a value

approximately equal to one-tenth of the

value of the S&P 500 Index, and an

individual MidCap SPDRs has a value of

approximately one-fifth of the value of

the S&P MidCap 400 Index, making

them more available and useful to

individual retail investors desiring to

hold a security replicating the

performance of a broad portfolio of

stocks. Accordingly, the Commission

believes that trading of SPDRs and

MidCap SPDRs on CHX will provide

retail investors with a cost efficient

means to make investment decisions

based on the direction of the market as

a whole and may provide market

participants several advantages over

existing methods of effecting program

trades involving stocks.

The Commission also believes that

PDRs, in general, and SPDRs and

MidCap SPDRs, in particular, will

provide investors with several

advantages over standard open-end S&P

500 Index and S&P MidCap 400 Index

mutual fund shares. In particular,

investors will have the ability to trade

PDRs continuously throughout the

business day in secondary market

transactions at negotiated prices.29 In

contrast, pursuant to Investment

Company Act Rule 22c–1,30 holders and

prospective holders of open-end mutual

fund shares are limited to purchasing or

redeeming securities of the fund based

on the net asset value of the securities

held by the fund as designated by the

board of directors.31 Accordingly, PDRs

in general, and SPDRs and MidCap

SPDRs in particular, will allow

investors to (1) Respond quickly to

changes in the market; (2) trade at a

known price; (3) engage in hedging

strategies not currently available to

retail investors; and (4) reduce

transaction costs for trading a portfolio

of securities.

Although PDRs in general, and SPDRs

and MidCap SPDRs in particular, are

not leveraged instruments, and,

therefore, do not possess any of the

attributes of stock index options, their

prices will still be derived and based

upon the securities held in their

respective Trusts. In essence, SPDRs are

equity securities that are priced off a

portfolio of stocks based on the S&P 500

Index and MidCap SPDRs are equity

securities that are priced off a portfolio

of stocks based on the S&P MidCap 400

Index. Accordingly, the level of risk

involved in the purchase or sale of a

SPDR or MidCap SPDR (or a PDR in

general) is similar to the risk involved

in the purchase or sale of traditional

common stock, with the exception that

the pricing mechanism for SPDRs and

MidCap SPDRs (and PDRs in general) is

based on a basket of stocks.

Nonetheless, the Commission has

several specific concerns regarding the

trading of these securities. In particular,

PDRs raise disclosure, market impact,

and secondary market trading issues

that must be addressed adequately. As

discussed in more detail below, and in

the Amex Approval Order,32 the

Commission believes CHX adequately

addresses these concerns.

The Commission believes that the

CHX proposal contains several

provisions that will ensure that

investors are adequately apprised of the

terms, characteristics, and risks of

trading PDRs. As noted above, the

proposal contains four aspects

addressing disclosure concerns. First,

CHX members must provide their

customers trading PDRs with a written

explanation of any special

characteristics and risks attendant to

trading such PDR securities (such as

SPDRs or MidCap SPDRs), in a form

approved by CHX. As discussed above,

CHX’s filing states that SPDRs and

MidCap SPDRs product descriptions

should be obtained from Amex. The

Commission notes that although Amex

commented on CHX’s proposed method

regarding the delivery of the SPDR and

MidCap SPDR product descriptions, and

reserved the right to charge CHX

members for supplying the product

description should the task become

burdensome to Amex, Amex did not

object to the underlying policy of CHX

members obtaining the product

description from Amex. The

Commission believes that it is

reasonable under the Act to allow CHX

to require its members to obtain the

product description for SPDRs and

MidCap SPDRs from Amex.33 Amex

might decide to impose a reasonable

charge for this service.34 The

Commission also notes that Amex states

that the SPDR and MidCap SPDR

product descriptions are only available

from Amex, not the Distributor, and

therefore CHX members cannot obtain

them from the Distributor.

Second, members and member

organizations must include this written

product description with any sales

material relating to the series of PDRs

that is provided to customers or the
49276 Federal Register / Vol. 62, No. 182 / Friday, September 19, 1997 / Notices

35This reflects the fact that PDRs are equity

products and not an options product, and,

therefore, do not necessitate the imposition of

options-like rules.

36 In addition, for PDRs tied to an index, the

triggering of futures price limits for the S&P 500

Index, S&P 100 Index, or MMI futures contracts will

not, in itself, result in a halt in PDR trading or a

delayed opening. However, the Exchange could

consider such an event, along with other factors,

such as a halt in trading in OEX, SPX, or MMI

options, in deciding whether to halt trading in

PDRs.

37Even though PDR transactions may serve as

substitutes for transactions in the cash market, and

possibly make the order flow in individual stocks

smaller than would otherwise be the case, the

Commission acknowledges that during turbulent

market conditions the ability of large institutions to

redeem or create PDRs could conceivably have an

impact on price levels in the cash market. In

particular, if a PDR is redeemed, the resulting long

stock position could be sold into the market,

thereby depressing stock prices further. The

Commission notes, however, that the redemption or

creation of PDRs likely will not exacerbate a price

movement because PDRs will be subject to the

equity margin requirements of 50% and PDRs are

non-leveraged instruments. In addition, as noted

above, during turbulent market conditions, the

Commission believes PDRs and SPDRs and MidCap

SPDRs, in particular, will serve as a vehicle to

accommodate and ‘‘bundle’’ order flow that

otherwise would flow to the cash market, thereby

allowing such order flow to be handled more

efficiently and effectively. Accordingly, although

PDRs and SPDRs and MidCap SPDRs could, in

certain circumstances, have an impact on the cash

market, on balance we believe the product will be

beneficial to the marketplace and can actually aid

in maintaining orderly markets.

38The ITS Operating Committee has indicated

that it will be able to accommodate 64ths after its

September 18, 1997 meeting. Consequently, the

discussion regarding alternatives to ITS will only

need to be used for an extremely short period of

time. If ITS cannot handle 64ths after the next

meeting, the Commission still expects ITS to be

made available for SPDRs for messages in

increments of 16ths or greater until ITS can

accommodate 64ths.

public. Third, any other written

materials provided by a member or

member organization to customers or

the public referencing PDRs as an

investment vehicle must include a

statement, in a form specified by CHX,

that a circular and prospectus are

available from a broker upon request.

Fourth, 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 PDRs for such omnibus

account will be deemed to constitute

agreement by the non-member to make

the written product description

available to its customers on the same

terms as member firms. Accordingly, the

Commission believes that investors in

PDR securities, in general, and SPDRs

and MidCap SPDRs, in particular, will

be provided with adequate disclosure of

the unique characteristics of the PDR

instruments and other relevant

information pertaining to the

instruments.

Finally, under CHX’s proposal there

will be no special account opening or

customer suitability rules applicable to

the trading of PDRs.35 Nevertheless,

pursuant to CHX Rules Article VIII, Rule

17, CHX’s equity rule governing account

opening will apply. In addition, the

Commission notes that CHX intends to

file a proposed rule change to create a

rule that would require members, before

recommending any transactions in

securities, to use due diligence to learn

the essential facts relative to every

customer, every order, and every

account accepted by the member. Upon

adoption of this rule, it would apply to

recommendations in PDRs generally,

including transactions in SPDRs and

MidCap SPDRs.

The Commission believes CHX has

adequately addressed the potential

market impact concerns raised by the

proposal. First, CHX’s proposal permits

listing and trading of specific PDRs only

after review by the Commission.

Second, CHX has developed policies

regarding trading halts in PDRs.

Specifically, the Exchange would halt

PDR trading if the circuit breaker

parameters under CHX Article IX, Rule

10A were reached.36 In addition, in

deciding whether to halt trading or

conduct a delayed opening in PDRs, in

general, and SPDRs and MidCap SPDRs,

in particular, CHX represents that it will

be guided by, but not necessarily bound

to, relevant stock index option trading

rules. Specifically, consistent with CHX

Article XXXVI, Rule 19, CHX may

consider whether trading has been

halted or suspended in the primary

market(s) for any combination of

underlying stocks accounting for 20% or

more of the applicable current index

group value or whether other unusual

conditions or circumstances detrimental

to the maintenance of a fair and orderly

market are present.

The Commission believes that the

trading of PDRs in general on CHX

should not adversely impact U.S.

securities markets. As to the trading of

SPDRs and MidCap SPDRs pursuant to

UTP, the Commission notes that the

corpus of the SPDR Trust is a portfolio

of stocks replicating the S&P 500 Index,

a broad-based capitalization-weighted

index consisting of 500 of the most

actively-traded and liquid stocks in the

U.S.. The corpus of the MidCap SPDR

Trust is a portfolio of stocks replicating

the S&P MidCap 400 Index, also a

broad-based, capitalization-weighted

index consisting of 400 actively traded

and liquid U.S. stocks. In fact, as

described above, the Commission

believes SPDRs and MidCap SPDRs may

provide substantial benefits to the

marketplace and investors, including,

among others, enhancing the stability of

the markets for individual stocks.37

Accordingly, the Commission believes

that SPDRs and MidCap SPDRs do not

contain features that will make them

likely to impact adversely the U.S.

Securities markets, and that the addition

of their trading on CHX pursuant to UTP

could produce added benefits to

investors through the increased

competition between other market

centers trading the product.

Finally, the Commission notes that

CHX has submitted surveillance

procedures for the trading of PDRs,

specifically SPDRs and MidCap SPDRs,

and believes that those procedures,

which incorporate and rely upon

existing CHX surveillance procedures

governing equities, are adequate under

the Act.

The Commission finds that CHX’s

proposal contains adequate rules and

procedures to govern the trading of PDR

securities, including trading SPDRs and

MidCap SPDRs pursuant to UTP.

Specifically, PDRs are equity securities

that will be subject to the full panoply

of CHX rules governing the trading of

equity securities on CHX, including,

among others, rules governing the

priority, parity and precedence of orders

and the responsibilities of specialists. In

addition, CHX has developed specific

listing and delisting criteria for PDRs

that will help to ensure that the markets

for PDRs will be deep and liquid. As

noted above, CHX’s proposal provides

for trading halt procedures governing

PDRs. Finally, the Commission notes

that CHX has stated its intention to file

a rule requiring members, prior to

recommending a transaction in any

security, to use due diligence to learn

the essential facts relative to the

customer, every order, and every

account accepted by the member.

As mentioned earlier, the trading of

SPDRs and MidCap SPDRs will not be

subject to ITS for a brief period of time

until ITS can accommodate trading in

increments of 1/64ths. In most

instances, the Commission would

predicate the trading of an equity

product on more than one exchange on

application of relevant ITS rules and

procedures. In this instance, however,

the delay in ITS implementation will be

very brief.38 The Commission believes

that the procedures specified by CHX to

replace the ITS trade-through rule

during this brief period will help ensure

that a customer receives the best price

for a transaction in SPDRs or MidCap

SPDRs among the market centers that
Federal Register / Vol. 62, No. 182 / Friday, September 19, 1997 / Notices 49277

39The Commission does not want to suggest that

Amex’s concerns are unfounded, but only that the

proper venue for their resolution is the proper ITS

committee, not the Rule 19b–4 process.

40 15 U.S.C. 78s(b)(2).

41 17 CFR 200.30–3(a)(12).

1 15 U.S.C. 78s(b)(1).

2The Commission has modified the text of the

summaries prepared by DTC.

3When a CD is redeemed prior to maturity, the

beneficial owner of the CD is charged an early

withdrawal fee unless the beneficial owner is

deceased or has been adjudicated incompetent (or

for any other reason listed in the applicable trust

agreement or bond indenture). If the early

withdrawal request is based on one of those

circumstances, the early withdrawal fee is waived,

and the early redemption is considered ‘‘exempt.’’

Some issuers require owners seeking an exempt

early redemption to submit documentation

substantiating the exemption. Such documentation

presently is submitted to DTC by participants with

the VOI form.

4 DTC has advised the Commission that the RIPS

procedures currently contain the following

provision which will also be applicable to CD early

redemption information on RIPS:

The information provided by means of the RIPS

function is based upon communications (whether

oral or written) received by DTC from a variety of

sources, and DTC does not represent that such

information is accurate, or adequate or fit for any

particular purpose. DTC shall not be liable for (1)

any loss resulting directly or indirectly from

mistakes, omissions, interruptions, delays, errors or

defects arising from or related to the information

provided on the RIPS function, and (2) any special,

consequential, exemplary, incidental, or punitive

damages. The information provided in the RIPS

function with respect to a particular reorganization

activity is subject to change at any time without

prior notice.

trade the products. In particular, CHX’s

BEST Rule, which will apply to the

trading of SPDRs and MidCap SPDRs,

guarantees the execution of agency

orders from 100 shares up to 2099

shares at the best bid or offer on any ITS

market center that trades SPDRs and

MidCap SPDRs. In addition, CHX

specialists will have the ability to

monitor the current SPDR and MidCap

SPDR quotations disseminated by Amex

through the Consolidated Quotation

System. Finally, CHX specialists will

have the ability to place limit orders on

the Amex specialist’s book or send

market orders to the Amex specialist for

execution against the Amex specialist’s

quote, through Amex’s PER System

(although through a correspondent

firm). Though not as efficient as full ITS

access, these alternative procedures are

reasonable given the very short time

until ITS accepts 64ths.

The Commission believes that Amex’s

statements in its comment letter

regarding the trading of SPDRs and

MidCap SPDRs through ITS should be

resolved, as the Amex letter suggests,

through the proper ITS committee, not

through Commission action on the CHX

proposal. Otherwise, the ITS process

could be used to prevent action on the

CHX’s proposal for competitive

reasons.39

V. Conclusion

It is therefore ordered, pursuant to

Section 19(b)(2) of the Act,40 that the

proposed rule change (SR–CHX–97–6) is

approved.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.41

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 97–24968 Filed 9–18–97; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–39070; File No. SR–DTC–

97–10]

Self-Regulatory Organizations; the

Depository Trust Company; Notice of

Filing and Immediate Effectiveness of

Proposed Rule Change Relating to the

Certificate of Deposit Early

Redemption Service

September 12, 1997.

Pursuant to section 19(b)(1) of the

Securities Exchange Act of 1934

(‘‘Act’’),1 notice is hereby given that on

June 3, 1997, the Depository Trust

Company (‘‘DTC’’) 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 primarily by DTC. The

Commission is publishing this notice to

solicit comments from interested

persons on the proposed rule change.

I. Self-Regulatory Organization’s

Statement of the Terms of Substance of

the Proposed Rule Change

The proposed rule change will modify

DTC’s existing Certificate of Deposit

Early Redemption Service (‘‘CERR’’) to

allow participants to transmit certificate

of deposit (‘‘CD’’) early redemption

instructions by electronic delivery

rather than by delivery of hardcopy

forms (i.e., paper).

II. Self-Regulatory Organization’s

Statement of the Purpose of, and

Statutory Basis for, the Proposed Rule

Change

In its filing with the Commission,

DTC 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. DTC has prepared

summaries, set forth in sections (A), (B),

and (C) below, of the most significant

aspects of such statements.2

(A) Self-Regulatory Organization’s

Statement of the Purpose of, and

Statutory Basis for, the Proposed Rule

Change

Currently, DTC participants

redeeming CDs prior to maturity must

process such transactions through DTC’s

Voluntary Offering Program. These

participants submit early redemption

instructions to DTC by way of a

hardcopy Voluntary Offering Instruction

Form (‘‘VOI Form’’) which must be

accompanied by any additional required

documentation.3 Upon receipt of early

redemption instructions, DTC debits the

participant’s general free account and

enters a corresponding credit in the

same account using a contra-CUSIP

number. When DTC receives the

proceeds of an early redemption from

the issuer, DTC credits the principal

amount and any accrued interest minus

any applicable penalty for early

redemption to the participant’s

settlement account.

DTC proposes to modify CERR by

offering participants the ability to

transmit early redemption instructions

to DTC electronically through DTC’s

Participant Terminal System (‘‘PTS’’).

DTC will modify its already existing

PTS function, the Reorganization

Inquiry for Participants System

(‘‘RIPS’’), to offer information regarding

early redemption 4 such as: (i) a CD’s

eligibility for processing through CERR;

(ii) the last date prior to maturity on

which an issuer will accept a CD for

early redemption; and (iii) whether or

not an issuer requires the immediate

submission of documents supporting an

exempt early redemption. In addition,

DTC will add a CERR function to PTS

through which participants will be able

to transmit early redemption

instructions electronically to DTC.

In order to submit an early

redemption instruction to DTC

electronically, a participant will input

information into CERR, including (i) the

quantity of the eligible securities to be