[Federal Register Volume 62, Number 192 (Friday, October 3, 1997)]
[Notices]
[Pages 51917-51920]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-26285]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-39143; File No. SR-Amex-97-29]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the American Stock Exchange, Inc. Relating to Listing and 
Trading of DIAMONDS<SUP>SM</SUP> Trust Units

September 29, 1997.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''), 15 U.S.C. 78s(b)(1), notice is hereby given that on August 
11, 1997, the American Stock Exchange, Inc. (``Amex'' or ``Exchange'') 
filed with the Securities and Exchange Commission (``Commission'') the 
proposed rule change as described in Items I, II, and III below, which 
Items have been prepared by the self-regulatory organization. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Amex proposes to list and trade under Amex Rules 1000 et seq. 
DIAMONDS<SUP>SM</SUP>, units of beneficial interest in the DIAMONDS 
Trust. In addition, the Exchange proposes to adopt Amex Rule 1005, 
``Dow Jones Indexes,'' relating to license and warranty issues. The 
text of the proposed rule change is available at the

[[Page 51918]]

Office of the Secretary, Amex and at the Commission.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the self-regulatory organization 
included statements concerning the purpose of and basis for the 
proposed rule change and discussed any comments it received on the 
proposed rule change. The text of these statements may be examined at 
the places specified in Item IV below. The self-regulatory organization 
has prepared summaries, set forth in Sections A, B, and C below, of the 
most significant aspects of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    On December 11, 1992,\1\ the Commission approved Amex Rules 1000 et 
seq. to accommodate trading on the Exchange of Portfolio Depositary 
Receipts (``PDRs<SUP>SM</SUP>''), securities which represent interests 
in a unit investment trust (``Trust'') operating on an open-end basis 
and that hold a portfolio of securities. The Trust sponsor 
(``Sponsor'') for each series of PDRs is PDR Services Corporation, a 
wholly-owned subsidiary of Amex.\2\ Each Trust is intended to provide 
investors with an instrument that closely tracks the underlying 
securities portfolio, that trades like a share of common stock, and 
that pays to PDR holders periodic dividends proportionate to those paid 
with respect to the underlying portfolio of securities, less certain 
expenses, as described in the applicable Trust prospectus. The first 
Trust to be formed in connection with the issuance of PDRs was based on 
the Standard & Poor's 500 Index (``S&P 500 Index''), known as Standard 
& Poor's Depositary Receipts<SUP></SUP> (``SPDRs''), which have been 
trading on the Exchange since January 29, 1993.\3\ In 1995, the 
Commission approved Amex's listing and trading of PDRs based on the 
Standard & Poor's MidCap 400 Index<SUP>TM</SUP> (``MidCap SPDRs'').\4\
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    \1\ See Securities Exchange Act Release No. 31591 (December 11, 
1992), 57 FR 60253 (December 18, 1992) (``SPDRs Order'').
    \2\ ``PDRs'' is a service mark of PDR Services Corp.
    \3\ See SPDRs Order, supra note 1.
    \4\ See Securities Exchange Act Release No. 35534 (March 24, 
1995), 60 FR 16686 (March 31, 1995). ``Standard & Poor's 500,'' 
``Standard & Poor's MidCap 400 Index,'' ``Standard & Poor's 
Depositary Receipts<Register>,'' ``SPDRs<Register>,'' ``Standard & 
Poor's MidCap 400 Depositary Receipts'' and ``MidCap SPDRs'' are 
trademarks of The McGraw-Hill Companies, Inc. and are being used by 
the Exchange and the Sponsor under license among Standard & Poor's, 
a division of The McGraw-Hill Companies, Inc., the Exchange and the 
Sponsor. ``SPDRs'' and ``MidCap SPDRs'' are not sponsored, endorsed, 
sold, or promoted by S&P, and S&P makes no representation regarding 
the advisability of investing in SPDRs or MidCap SPDRs.
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    The Exchange now proposes to list and trade under Rules 1000 et 
seq. DIAMONDS<SUP>SM</SUP>, units of beneficial interest in the 
DIAMONDS Trust.\5\ The Sponsor will enter into a trust agreement with 
the Trustee, State Street Bank and Trust Company, in accordance with 
Section 26 of the Investment Company Act of 1940 (``1940 Act''). A 
distributor will act as underwriter of DIAMONDS on an agency basis. All 
orders to create DIAMONDS in Creation Unit size aggregations must be 
placed with the distributor, and it will be the responsibility of the 
distributor to transmit such orders to the Trustee. The distributor is 
a registered broker-dealer, and a member of the National Association of 
Securities Dealers, Inc.
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    \5\ ``Dow Jones Industrial Average<SUP>SM</SUP>,'' 
``DJIA<SUP>SM</SUP>,'' ``Dow Jones<SUP>SM</SUP>'' and ``DIAMONDS'' 
are each trademarks and service marks of Dow Jones & Company, Inc. 
(``Dow Jones'') and have been licensed for use for certain purposes 
by the Exchange and the Sponsor. DIAMONDS are not sponsored, 
endorsed, sold or promoted by Dow Jones, and Dow Jones makes no 
representation regarding the advisability of investing in such 
product.
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    The Dow Jones Industrial Average: \6\ The Dow Jones Industrial 
Average is the oldest continuous barometer of the U.S. stock market, 
and the most widely quoted indicator of U.S. stock market activity. The 
30 stocks now comprising the DJIA are all leaders in their respective 
industries, and their stocks are widely held by individuals and 
institutional investors.
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    \6\ The description of the DJIA included herein is based on 
materials prepared by Dow Jones.
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    The DJIA is a price-weighted stock index; that is, the component 
stocks are accorded relative importance based on their prices. The DJIA 
is called an ``average'' because originally it was calculated by adding 
up the component stock prices and then dividing by the number of 
stocks. The method remains the same today, but the divisor (the number 
that is divided into the total of the stock prices) has been increased 
to eight significant digits to minimize distortions due to rounding.
    The DJIA divisor is adjusted due to corporate actions that change 
the price of any of its component shares. The most frequent reason for 
such an adjustment is a stock split. For example, suppose a company in 
the DJIA issues one new share for each share outstanding. After this 
two-for-one ``split,'' each share of stock is worth half what it was 
immediately before, other things being equal. But without an adjustment 
in the divisor, this split would produce a distortion in the DJIA. An 
adjustment must be made to compensate so that the ``average'' will 
remain unchanged. At Dow Jones, this adjustment is handled by changing 
the divisor.\7\ The formula used to calculate divisor adjustments is:
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    \7\ Currently, the divisor is recalculated after the close of 
business on the day prior to the occurrence of the split.

New Divisor = Current Divisor  x  Adjusted Sum of Prices/Unadjusted Sum 
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of Prices

    Changes in the composition of the DJIA are made entirely by the 
editors of The Wall Street Journal without consultation with the 
companies, the respective stock exchange, or any official agency. 
Additions or deletions of components may be made to achieve better 
representation of the broad market and of American industry.
    The DIAMONDS Trust: To be eligible to place orders to create 
DIAMONDS as described below, an entity or person must either 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 DIAMONDS, the distributor will instruct the Trustee to initiate 
the book-entry movement of the appropriate number of DIAMONDS to the 
account of the entity placing the order. DIAMONDS will be registered in 
book entry only, which records will be kept by DTC.
    Payment with respect to creation orders placed through the 
distributor will be made by (1) the ``in-kind'' deposit with the 
Trustee of a specified portfolio of securities that is substantially 
similar in composition to the component shares of the underlying index 
or portfolio; (2) a cash payment sufficient to enable the Trustee to 
make a distribution to the holders of beneficial interests in the Trust 
on the next dividend payment date as if all the securities had been 
held for the entire accumulation period for the distribution 
(``Dividend Equivalent Payment''), subject to certain specified 
adjustments; \8\ and (3) a cash payment or adjustment calculated by the 
Trustee to enable the securities portfolio portion to equal the net 
asset value of the Trust (the ``Balancing Amount''). The Balancing 
Amount and the Dividend Equivalent Payment are referred to as the 
``Cash Component'' in the case of a creation. The securities and cash

[[Page 51919]]

accepted by the Trustee are referred to, in the aggregate, as a 
``Portfolio Deposit.''
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    \8\ See ``Distributions'' infra.
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    The mandatory termination date of the Trust will be the first to 
occur of (i) January 30, 2122 or (ii) the date 20 years after the death 
of the last survivor of eleven persons named in the trust agreement 
between the Trust Sponsor and the Trustee.
    Issuance: 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 DIAMONDS, which aggregate 
number is referred to as a ``Creation Unit.'' The Exchange anticipates 
that, with respect to DIAMONDS, a Creation Unit will be made up of 
50,000 DIAMONDS. Individual DIAMONDS can then be traded in the 
secondary market like other equity securities.\9\ It is expected that 
Portfolio Deposits will be made primarily by institutional investors, 
arbitrageurs, and the Exchange specialist. The DIAMONDS Trust has been 
structured to provide for the initial issuance of DIAMONDS at a per 
unit price which would approximate 1/100th of the value of the DJIA. As 
of August 7, 1997 it is estimated that the value of such an individual 
DIAMONDS Unit would be approximately $81.88.
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    \9\ The DIAMONDS Trust, Series I, has filed with the Commission 
an application seeking, among other things, an order: (1) Permitting 
secondary market transactions in DIAMONDS at negotiated prices, 
rather than at a current public offering price described in the 
prospectus as required by Section 22(d) of the 1940 Act and Rule 
22c-1; and (2) permitting the sale of DIAMONDS to purchasers in the 
secondary market unaccompanied by a prospectus, when prospectus 
delivery is not required by Section 4(3) of the Securities Act of 
1933 but may be required according to Section 24(d) of the 1940 Act 
for redeemable securities issued by a Unit Investment Trust. These 
exemptions, if granted, will permit individual DIAMONDS to be traded 
in secondary market transactions similar to a closed-end investment 
company.
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    It is expected that the Trustee or Sponsor will make available (a) 
on a daily basis a list of the names and required number of shares for 
each of the securities in the current Portfolio Deposit; (b) on a 
minute-by-minute basis throughout the day, a number representing the 
value (on a per DIAMONDS Unit basis) of the securities portion of a 
Portfolio Deposit in effect on such day, plus accumulated dividends 
less expenses through the previous day's close, and (c) on a daily 
basis, the accumulated dividends, less expenses, per outstanding 
DIAMONDS Unit.
    Transactions in DIAMONDS may be effected on the Exchange until 4:15 
p.m. New York time each business day. The minimum fractional change for 
DIAMONDS shall be \1/64\ of $1.00.
    Redemption: DIAMONDS in Creation Unit size aggregations generally 
will be redeemable in kind by tendering them to the Trustee. While 
holders may sell DIAMONDS in the secondary market at any time, they 
must accumulate at least 50,000 (or multiples thereof) to redeem 
through the Trust. DIAMONDS will remain outstanding until redeemed or 
until the termination of the Trust. Creation Units generally will be 
redeemable on any business day in exchange for a portfolio of the 
securities held by the Trust identical in composition to the securities 
portion of a Portfolio Deposit in effect on the date request is made 
for redemption, together with a ``Cash Redemption Payment'' (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 generally 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.
    Distributions: The DIAMONDS Trust will pay monthly dividends. The 
first ex-dividend date for DIAMONDS will be the third Friday of the 
third full month following the commencement date of the Trust unless 
such date is not a Business Day, in which case the ex-dividend date 
will be the immediately preceding Business Day (the ``ex-dividend 
date''). Holders of DIAMONDS as reflected on the records of the DTC and 
the DTC Participants on the second business day following the ex-
dividend date will be entitled to receive an amount representing 
dividends accumulated through the monthly dividend period which ends on 
the business day preceding such ex-dividend date net of fees and 
expenses accrued daily for such period. The payment of dividends will 
be made on the first business day coincident with or following the 
Monday preceding the third Friday in the calendar month following the 
ex-dividend date (the ``Dividend Payment Date''). On the Dividend 
Payment Date, dividends payable for those securities with ex-dividend 
dates falling within the period from the ex-dividend date most recently 
preceding the current ex-dividend date will be distributed. The Trustee 
will compute on a daily basis the dividends accumulated within each 
monthly dividend period. Dividend payments will be made through DTC and 
its participants to all such holders with funds received from the 
Trustee. The DIAMONDS Trust intends to make the DTC Dividend 
Reinvestment Service available for use by DIAMONDS holders through DTC 
Participant brokers for reinvestment of their cash proceeds. An 
interested investor would have to consult his or her broker to 
ascertain the availability of dividend reinvestment through such 
broker.
    Criteria for Initial and Continued Listing: Because of the open-end 
nature of the Trust upon which a series of PDRs is based, the Exchange 
believes it is necessary to maintain appropriate flexibility in 
connection with listing a specific Trust. In connection with initial 
listing, the Exchange will establish a minimum number of PDRs required 
to be outstanding at the time of commencement of Exchange trading. For 
DIAMONDS, it is anticipated that a minimum of 150,000 DIAMONDS (i.e., 
three Creation Units of 50,000 DIAMONDS each), will be required to be 
outstanding when trading begins.
    The DIAMONDS Trust will be subject to the initial and continued 
listing criteria of Rule 1002(b). Rule 1002(b) provides that, following 
twelve months from 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 redeemed in accordance with provisions of the Trust prospectus. A 
Trust may also terminate under such other conditions as may be set 
further in the Trust prospectus. For example, the Sponsor, following 
notice to PDRs holders, shall have discretion to direct that the Trust 
be terminated if the value of securities in such Trust falls below a

[[Page 51920]]

specified amount.\10\ The DIAMONDS Trust may also terminate if the 
license agreement with Dow Jones terminates.
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    \10\ With respect to the DIAMONDS Trust, the Sponsor has the 
discretionary right to terminate the Trust if the value of Trust 
Securities (as defined in the Trust registration statement) falls 
below $150,000,000 at any time after six months following, and prior 
to three years following, inception of the Trust. Following such 
time, the Sponsor has the discretionary right to terminate if Trust 
Securities fall below $350,000,000 in value, adjusted annually for 
inflation.
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    Trading Halts: Prior to commencement of trading in DIAMONDS, 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 further in Rule 918C(b) 
in exercising its discretion to halt or suspend trading. These factors 
would include whether trading has been halted or suspended in the 
primary market(s) for any combination of underlying stocks accounting 
for 20% or more of the applicable current index group value \11\; or 
whether other unusual conditions or circumstances detrimental to the 
maintenance of a fair and orderly market are present.\12\
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    \11\ Amex Rule 918C(b)(3).
    \12\ Amex Rule 918C(b)(4).
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    Terms and Characteristics: Under Amex Rule 1000, Commentary .01, 
Amex members and member organizations are required to provide to all 
purchasers of DIAMONDS a written description of the terms and 
characteristics of such securities, in a form prepared by the Exchange, 
not later than the time a confirmation of the first transaction in each 
series is delivered to such purchaser. The Exchange also requires that 
such description be included with any sales material on DIAMONDS that 
is provided to customers or the public. In addition, the Exchange 
requires that members and member organizations provide customers the 
prospectus for DIAMONDS upon request.
    A member or member organization carrying an omnibus account for a 
non-member broker-dealer is required to inform such non-member that 
execution of an order to purchase DIAMONDS for such omnibus account 
will be deemed to constitute agreement by the non-member to make such 
written description available to its customers on the terms as are 
directly applicable to members and member organizations.
    Prior to commencement of trading of DIAMONDS, the Exchange will 
distribute to Exchange members and member organizations an Information 
Circular calling attention to characteristics of the DIAMONDS Trust and 
to applicable Exchange rules.
    Adoption of Rule 1005: The Exchange proposes to adopt Rule 1005 
(``Dow Jones Indexes'') stating that Dow Jones has licensed the 
Exchange to use certain Dow Jones indexes for purposes of the listing 
and trading of particular series of Portfolio Depositary Receipts on 
the Exchange, and stating, among other things, that Dow Jones and the 
Exchange make no warranty, express or implied, as to results to be 
obtained by any person or entity from the use of the Indexes or any 
data included therein.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b) of the Act in general and furthers the objectives of 
Section 6(b)(5) \13\ in particular in that it is designed to prevent 
fraudulent and manipulative acts and practices, to promote just and 
equitable principles of trade, to foster cooperation and coordination 
with persons engaged in regulating, clearing, settling, processing 
information with respect to, and facilitating transactions in 
securities, and, in general, to protect investors and the public 
interest. The Exchange believes that Portfolio Depositary Receipts, 
generally, and DIAMONDS specifically, have the potential to benefit the 
markets by providing an alternate trading instrument, such as those 
encouraged by the Division of Market Regulation in its report, ``The 
October 1987 Market Break,'' that may help temper market volatility and 
reduce stress on individual index component stocks during unusual 
market conditions.
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    \13\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any inappropriate burden on competition.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    No written comments were either solicited or received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 35 days of the publication of this notice in the Federal 
Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) By order approve the proposed rule change, or
    (B) Institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing. Persons making written submissions 
should file six copies thereof with the Secretary, Securities and 
Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549. 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 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-97-29 and 
should be submitted by October 24, 1997.


    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-26285 Filed 10-2-97; 8:45 am]
BILLING CODE 8010-01-M