Federal Register / Vol. 62, No. 209 / Wednesday, October 29, 1997 / Notices 56211

2 17 CFR 240.19b–4.

3 15 U.S.C. 78f(b).

4 15 U.S.C. 78f(b)(5).

5 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).

6 15 U.S.C. 78s(b)(2).

7 17 CFR 200.30–3(a)(12).

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

2 17 CFR 240.19b–4.

3The Exchange filed Amendment No. 1 to the

proposed rule change on October 20, 1997, the

substance of which is incorporated into this release.

See letter from Adam Gurwitz, Vice President Legal,

CSE, the Heather Seidel, Attorney, Market

Regulation, Commission, dated October 17, 1997

(‘‘Amendment No. 1’’).

thereunder,2 a proposed rule change to

amend its rule relating to the

suspension of members and associated

persons who fail to pay debts owed to

the Exchange.

The proposed rule change was

published for comment in Securities

Exchange Act Release No. 39026 (Sept.

8, 1997), 62 FR 48123 (Sept. 12, 1997).

No comments were received on the

proposal. This order approves the

proposal.

Rule 2.23 presently requires that

members or associated persons who fail

to pay any debts owed to the Exchange

within 30 days after they become due

may be suspended from membership or

association with a member by the

Chairman of the Executive Committee

until payment is made.

The Exchange proposes to amend this

rule to clarify the application of Rule

2.23 to former members and persons

associated with members by providing

expressly that such persons who fail to

pay debts owed to the Exchange may be

barred from becoming a member and

associated person by the Chairman of

the Executive Committee until payment

is made.

The Exchange also proposes to add

new Interpretation .02 to provide that

the Exchange will report any suspension

or bar imposed pursuant to Rule 2.23 to

the Central Registration Depository

(‘‘CRD’’). This new paragraph is similar

to CBOE Rule 17.14 which provides for

the reporting by the Exchange to the

CRD of information concerning pending

formal Exchange disciplinary

proceedings. The Exchange also

proposes to delete references to a

regular membership and special

membership in the current Rule 2.23, as

CBOE no longer has any special

memberships, and to add language

clarifying that if a member fails to pay

an Exchange debt within 6 months, the

Chairman of the Executive Committee

may dispose of any memberships owned

by that member in accordance with Rule

3.41(b).

Finally, the proposed rule change also

includes several nonsubstantive

language changes.

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, and,

in particular, with the requirements of

Section 6(b).3 Specifically, the

Commission believes the proposal is

consistent with the Section 6(b)(5) 4

requirements 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.5 In this regard,

the Commission believes that the

proposed rule change will enhance the

public’s access to information

concerning suspensions and bars

imposed by the CBOE upon its members

and associated persons.

It is therefore ordered, pursuant to

Section 19(b)(2) of the Act,6 that the

proposed rule change (SR–CBOE–97–

33) is approved.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.7

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 97–28571 Filed 10–28–97; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–39268; File No. SR–CSE–

97–10]

Self-Regulatory Organizations; Notice

of Filing and Order Granting

Accelerated Approval of Proposed

Rule Change by the Cincinnati Stock

Exchange, Inc. Relating to Listing and

Trading Standards for Portfolio

Depositary Receipts

October 22, 1997.

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

Securities Exchange Act of 1934

(‘‘Act’’),1 and Rule 19b–4 thereunder,2

notice is hereby given that on October

14, 1997,3 the Cincinnati Stock

Exchange, Inc. (‘‘CSE’’ or ‘‘Exchange’’)

filed with the Securities and Exchange

Commission (‘‘Commission’’) the

proposed rule change as described in

Items I and II 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. The

Commission is also granting accelerated

approval of the proposed rule change.

I. Self-Regulatory Organization’s

Statement of the Terms of Substance of

the Proposed Rule Change

The CSE proposes to adopt new

Exchange rule 11.9(v), to provide listing

standards for, and trading in Portfolio

Depositary Receipts (‘‘PDRs’’). The text

of the proposed rule change is available

at the Office of the Secretary, CSE 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 III 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

a. Listing Requirements for Portfolio

Depositary Receipts. The Exchange

proposes to adopt new Rule 11.9(v) to

accommodate the trading of PDRs, i.e.,

securities that are interests in a unit

investment trust (‘‘Trust’’) holding a

portfolio of securities linked to an

index. Each Trust will provide investors

with an instrument that (1) closely

tracks the underlying portfolio of

securities, (2) trades like a share of

common stock, and (3) 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, PDRs based

on one or more stock indices or

securities portfolios. PDRs based on

each particular stock index or portfolio

will 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 will

be selected by the Exchange, or by

another person having a proprietary

interest in and authorized use of such

index or portfolio, and may be revised

as may be deemed necessary or
56212 Federal Register / Vol. 62, No. 209 / Wednesday, October 29, 1997 / Notices

4CSE Rule 3.7, Recommendations to Customers,

will also apply to transactions in PDRs, including

SPDRs and MidCap SPDRs. That rule provides that

when recommending to a customer the purchase,

sale or exchange of any security, a member or

member organization shall have reasonable grounds

for believing that the recommendation is suitable

for such customer upon the basis of the facts

disclosed by such customer, after reasonable

inquiry by the member or member organization, as

to the customer’s other securities holdings and as

to the customer’s financial situation and needs.

Telephone conversation between Adam Gurwitz,

Vice-President Legal, CSE, and Heather Seidel,

Attorney, Market Regulation. Commission, on

October 17, 1997.

5See Securities Exchange Act Release No. 38221

(January 31, 1997), 62 FR 5871 (February 7, 1997)

and note 7 therein.

6SPDRs and MidCap SPDRs are defined and

discussed more fully below.

appropriate to maintain the quality and

character of the index or portfolio.

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 on an

open-end 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 that 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 occurs or

condition exists which, in the opinion

of the Exchange, makes further dealings

in such securities on the Exchange

inadvisable.

A Trust will 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 (the ‘‘Sponsor’’),

following notice to PDR holders, will

have discretion to direct that the Trust

be terminated if the value of securities

in such Trust falls below a specified

amount.

B. Trading of PDRs. Dealing 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 would apply, including

its rules on clearance and settlement of

securities transactions and its equity

margin rules. Other generally applicable

Exchange equity rules and procedures

would also apply including, among

others, rules governing the priority,

parity and precedence of orders and the

responsibilities of specialists.4

The CSE has represented that the

Exchange understands that SPDRs and

MidCap SPDRs will both become ITS

System securities on October 24, 1997.

The Exchange intends to trade both

SPDRs and MidCap SPDRs when they

become ITS System securities, but does

not intend to trade them before that

time.

With respect to trading halts, the

trading of PDRs would be halted, along

with trading of all other listed or traded

stocks, in the event the ‘‘circuit breaker’’

thresholds are reached.5 In addition, for

PDRs tied to an index, while the

triggering of futures price limits for the

S&P 500 Composite Price Index (‘‘S&P

500 Index’’), S&P Composite Price Stock

Index (‘‘S&P 100 Index’’) or Major

Market Index (‘‘MMI’’) futures contracts

will not, in themselves, result in a halt

in PDR trading or a delayed opening,

such an event could be considered by

the Exchange, along with other factors,

such as a halt in trading in S&P 100

Index Options (‘‘OEX’’), S&P 500 Index

Options (‘‘SPX’’), or Major Market Index

Options (‘‘XMI’’), in deciding whether

to halt trading in PDRs.

The Exchange will issue a circular to

its Members and Member Organizations

informing them of Exchange policies

regarding trading halts in such

securities. 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.

c. Disclosure. Proposed Rule 11.9(v)

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 Members 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.

Two existing PDRs, Standard & Poor’s

Depository Receipts (‘‘SPDRs’’) and

Standard & Poor’s MidCap 400

Depository Receipts (‘‘MidCap SPDRs’’),

are traded on the American Stock

Exchange (‘‘Amex’’).6 The Exchange is

not asking for permission to list SPDRs

or MidCap SPDRs pursuant to unlisted

trading privileges once the generic

listing standards set forth herein are

approved.

Pursuant to SEC Rule 12f–5, in order

to trade a particular class or type of

security pursuant to unlisted trading

privileges, the Exchange must have

rules providing for transactions in such

class or type of security. The Amex has

enacted listing standards for PDRs, and

the Exchange’s proposed rule change is
Federal Register / Vol. 62, No. 209 / Wednesday, October 29, 1997 / Notices 56213

7CSE plans to notify its members in a regulatory

circular that members must comply with Rule 3.7,

Recommendations to Customers, prior to

recommending the purchase of SPDRs or MidCap

SPDRs to customers. The circular will also state that

members must deliver a SPDR or MidCap SPDR

product description to all purchasers of the

products and that they must provide the prospectus

upon the request.

8See Securities Exchange Act Release No. 31591

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

1992).

9The 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.

10See Securities Exchange Act Release No. 35534

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

11The Commission has recently approved a rule

change proposal covering the trading and listing of

PDRs on CHX, including SPDRs and MidCap

SPDRs. See Securities Exchange Act Release No.

39076 (September 15, 1997), 62 FR 49270

(September 19, 1997) (‘‘CHX Approval Order’’).

12The Trustee will abstain from voting if the

stocks held by the Trust cannot be voted in the

same proportion as all other shares of the securities

are voted.

13A 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 S&P 500 Index caused by,

among other things, the fact that a Portfolio Deposit

cannot contain fractional shares.

14The 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.

15An 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 S&P 500 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.

designed to create similar standards for

PDR listing and/or trading on the CSE.

As stated above, the Exchange proposes

to trade SPDRs and MidCap SPDRs

pursuant to unlisted trading privileges

upon approval of this rule filing.

If at a later time the Exchange and the

issuer of the product desires to list

SPDRs and MidCap SPDRs or any other

PDRs on the Exchange, the Exchange

will request SEC approval for that

listing in a separate proposed rule

change filed pursuant to Section 19(b) of

the Act. Additionally, in the event a

new PDR is listed on another exchange

using listing standards that are different

than current Exchange listing standards

or the Exchange listing standards

proposed in this filing, the Exchange

will file a proposed rule change

pursuant to Section 19(b) of the Act to

adopt the listing standards before it

trades that PDR pursuant to unlisted

trading privileges.

With respect to disclosure, because

SPDRs and MidCap SPDRs will be

traded pursuant to unlisted trading

privileges and will not be listed on the

Exchange at this time, the Exchange

does not intend to create its own

product description to satisfy the

requirements of proposed Rule 11.9(v),

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 Exchange

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 for forwarding to

purchasers in the time frames

prescribed by Exchange and

Commission rules. The Exchange will

notify members and member

organizations of this requirement in a

notice to members.

The remainder of this section of the

proposed rule change provides

background information on SPDRs and

MidCap SPDRs. The information,

requested by CSE to have been copied

from SR–AMEX–94–52 and SR–AMEX–

92–18, describes the structure and

mechanics of SPDRs and MidCap

SPDRs.

d. SPDRs and MidCap SPDRs

Generally. On December 11, 1992, the

Commission approved Amex Rules 1000

et seq.8 to accommodate trading on the

Amex of PDRs generally. The Sponsor of

each series of PDRs traded on the Amex

is PDR Services Corporation, a whollyowned 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,9 known as Standard & Poor’s

MidCap 400 Depositary Receipts

(‘‘MidCap SPDRs’’).10 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.11

E. SPDRs. The 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.12 Therefore,

SPDR holders will not be able to

directly vote the shares of the issuers

underlying the SPDRs.

The 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.13 An

Investor making a Portfolio Deposit into

the Trust will receive a ‘‘Creation Unit’’

composed of 50,000 SPDRs.14 The price

of SPDRs will be based on a current bid/

offer market. The Amex has designated

1/64’s as the minimum increment for

trading in SPDRs. The Exchange has

proposed this same minimum variation

for trading of SPDRs on the CSE. SPDRs

will not be redeemable individually, but

may be redeemed in Creation Unit size

(i.e., 50,000 SPDRs). Specifically, a

Creation Unit may be redeemed for an

in-kind distribution of securities

identical to a Portfolio Deposit.15 PDR

Distribution Services, Inc. a registered

broker-dealer, will act as underwriter of

SPDRs on an agency basis.

F. MidCap SPDRs. All orders to create

MidCap SPDRs in Creation Unit size

aggregations (which has been set at

25,000) must be placed with the

Distributor, and it will be the

responsibility of the Distributor to

transmit such orders to the Trustee.

To be eligible to place orders to create

MidCap SPDRs as described below, an

entity or person either must be a

participant in the Continuous Net

Settlement (‘‘CNS’’) system of the

National Securities Clearing Corporation

(‘‘NSCC’’) or a Depository Trust

Company (‘‘DTC’’) participant. Upon

acceptance of an order to create a

MidCap SPDRs, the Distributor will

instruct the Trustee to initiate the bookentry movement of the appropriate

number of MidCap SPDRs to the

account of the entity placing the order.

MidCap SPDRs will be maintained in

book-entry form at DTC.

Payment with respect to creation

orders placed through the Distributor
56214 Federal Register / Vol. 62, No. 209 / Wednesday, October 29, 1997 / Notices

16PDRs may be created in other than Creation

Unit size aggregations in connection with the DTC

Dividend Reinvestment Service (‘‘DRS’’).

17The Creation of PDRs in connection with DTC

DRS represents the only circumstances under

which PDRs can be created in other than Creation

Unit size aggregations.

18 15 U.S.C. 78f(b).

19 15 U.S.C. 78f(b)(5).

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 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.’’

G. Issuance of MidCap SPDRs. Upon

receipt of a Portfolio Deposit in payment

for a creation order placed through the

Distributor as described above, the

Trustee will issue a specified number of

MidCap SPDRs, which aggregate

number is referred to as a ‘‘Creation

Unit.’’ A Creation Unit is made up of

25,000 MidCap SPDRs.16 Individual

MidCap SPDRs can then be traded in

the secondary market like other equity

securities. Portfolio Deposits are

expected to be made primarily by

institutional investors, arbitrageurs, and

Exchange specialists.

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-byminute basis throughout the day, a

number representing the value (on a per

MidCap SPDR basis) of the securities

portion of a Portfolio Deposit in effect

on such day; and (3) on a daily basis,

the accumulated dividends, less

expenses, per outstanding MidCap

SPDR.

The Amex has set the minimum

fractional trading variation for MidCap

SPDRs at 1/64 of $1.00. The Exchange

is proposing this same minimum

variation for MidCap SPDRs.

H. Redemption of MidCap SPDRs.

MidCap SPDRs in Creation Unit size

aggregations will be redeemable in kind

by tendering them to the Trustee. While

holders may sell MidCap SPDRs in the

secondary market at any time, they must

accumulate at least 25,000 (or multiples

thereof) to redeem them through the

Trust. MidCap SPDRs will remain

outstanding until redeemed or until the

termination of the Trust. Creation Units

will be redeemable on any business day

in exchange for a portfolio of the

securities held by the Trust identical in

weighting and composition to the

securities portion of a Portfolio Deposit

in effect on the date a request is made

for redemption, together with a ‘‘Cash

Component’’ (as defined in the Trust

prospectus), including accumulated

dividends, less expenses, through the

date of redemption. The number of

shares of each of the securities

transferred to the redeeming holder will

be the number of shares of each of the

component stocks in a Portfolio Deposit

on the day a redemption notice is

received by the Trustee, multiplied by

the number of Creation Units being

redeemed. Nominal service fees may be

charged in connection with the creation

and redemption of Creation Units. The

Trustee will cancel all tendered

Creation Units upon redemption.

I. Distributions for MidCap SPDRs.

The MidCap SPDR Trust will pay

dividends quarterly. The regular

quarterly ex-dividend date for MidCap

SPDRs will be the third Friday in

March, June, September, and December,

unless that day is a New York Stock

Exchange holiday, in which case the exdividend date will be the preceding

Thursday. Holders of MidCap SPDRs on

the business day preceding the exdividend date will be entitled to receive

an amount representing dividends

accumulated through the quarterly

dividend period preceding such exdividend 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 ex-dividend date

(‘‘Dividend Payment Date’’). On the

Dividend Payment Date, dividends

payable for those securities with exdividend 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 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 cash

proceeds of MidCap SPDR holders

participating in the reinvestment to

obtain the Index securities necessary to

create the requisite number of SPDRs.17

Any cash remaining will be distributed

pro rata to participants in the dividend

reinvestment.

The Exchange requests accelerated

approval of the proposed rule change

pursuant to Section 19(b)(2) of the Act.

The Exchange believes that accelerated

approval is appropriate because the

listing standards proposed in the

proposed rule change closely mirror

both the listing standards of the primary

market for SPDRs and Mid-Cap SPDRs,

Amex, and the standards proposed by

two other regional exchanges that have

announced their intention to trade

PDRs, the CHX and the Pacific

Exchange. The Exchange believes its

proposed rule change should be granted

accelerated approval for the same

reasons the Commission determined to

approve the standards of those other

exchanges.

2. Statutory Basis

The CSE believes that the proposed

rule change is consistent with Section

6(b) of the Act 18 in general, and furthers

the objectives of Section 6(b)(5) of the

Act 19 in particular in that it is designed

to promote just and equitable principles

of trade and to remove impediments to

and perfect the mechanism of a free and

open market and a national market

system, and, in general, to protect

investors and the public interest.

Specifically, the proposed rule change

will increase competition in PDR

markets by permitting Exchange

members to compete for PDR order flow.

By adopting the proposed rule change,

the Exchange will bring the benefits of

competition, including increased

efficiency and price competition, to

those markets.

B. Self-Regulatory Organization’s

Statement on Burden on Competition

The Exchange does not believe that

the proposed rule change will impose

any burden on competition.

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. Solicitation of Comments

Interested persons are invited to

submit written data, views and

arguments concerning the foregoing.
Federal Register / Vol. 62, No. 209 / Wednesday, October 29, 1997 / Notices 56215

20 15 U.S.C. 78f(b)(5).

21The 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.

22 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).

23See supra notes 8 and 10.

24Program 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.

25Because 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 the 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 in kind, thereby

enabling the Trust to invest virtually all of its assets

in securities comprising the underlying index.

26 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 an exemption from this

provision in order to allow them to trade at

negotiated prices in the secondary market. The

Commission notes that CSE 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.

27 Id.

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–CSE–97–10 and should be

submitted by November 19, 1997.

IV. Commission’s Findings and Order

Granting Accelerated Approval of

Proposed Rule Change

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).20 The

Commission believes that providing for

the exchange-trading on CSE 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

CSE 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.21 Accordingly, as

discussed below, the proposed rule

change is consistent with the

requirements of Section 6(b)(5) of the

Act that Exchange rules facilitate

transactions in securities while

continuing to further investor protection

and the public interest.22

As the Commission noted in the

orders approving SPDRs and MidCap

SPDRs for listing and trading on

Amex,23 the Commission believes that

the trading on CSE 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.24

An individual SPDR has a value

approximately equal to one-tenth of the

value of the S&P 500 Index, and an

individual MidCap SPDR 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 CSE 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.25 In

contrast, pursuant to Investment

Company Act Rule 22c–1,26 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.27 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 price 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 PDR in

general) is similar to the risk involved

in the purchase or sale of traditional

common stock, with the exception that
56216 Federal Register / Vol. 62, No. 209 / Wednesday, October 29, 1997 / Notices

28See supra note. 8.

29The Commission notes that, in the context of

a proposed rule change by CHX to add rules for

listing and trading of PDRs in general, and to trade

SPDRs and MidCap SPDRs pursuant to UTP, 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. See CHX Approval Order, supra note

11.

30The 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, CSE rules adequately ensure its

members must delivery the current product

description to all investors in SPDRs and MidCap

SPDRs.

31The Commission notes that Amex would need

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

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

for supplying the SPDR or 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.

32See supra note. 4.

33 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.

34Even 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.

35As mentioned earlier, CSE has represented that

it will not begin to trade SPDRs and MidCap SPDRs

until they are eligible to trade over ITS. The

Commission also reiterates its belief, expressed in

the CHX Approval Order, 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 (or this) proposal. The 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. See supra note 11.

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,28 the

Commission believes CSE adequately

addresses these concerns.

The Commission believes that the

CSE 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,

CSE 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 CSE. As discussed above,

CSE’s filing states that SPDRs and

MidCap SPDRs product descriptions

should be obtained from Amex.29 The

Commission believes that it is

reasonable under the Act to allow CSE

to require its members to obtain the

product description for SPDRs and

MidCap SPDRs from Amex.30 Amex

might decide to impose a reasonable

charge for this service.31

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

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 CSE,

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, CSE’s Rule 3.7,

Recommendations to Customers, will

apply to the trading of PDRs, including

transactions in SPDRs and MidCap

SPDRs.32

The Commission believes CSE has

adequately addressed the potential

market impact concerns raised by the

proposal. First, CSE’s proposal permits

listing and trading of specific PDRs only

after review by the Commission.

Second, CSE has developed policies

regarding trading halts in PDRs.

Specifically, the Exchange would halt

PDR trading if the circuit breaker

parameters under CSE Rule 12.11 were

reached.33 In addition, in deciding

whether to halt trading or conduct a

delayed opening in PDRs, in general,

and SPDRs and MidCap SPDRs, in

particular, CSE represents that it will be

guided by, but not necessarily bound to,

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 CSE

should not adversely impact U.S.

securities markets. As to the trading of

SPDRs and MidCap SPDR 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.34

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 CSE pursuant to UTP

could produce added benefits to

investors through the increased

competition between other market

centers trading the product.35
Federal Register / Vol. 62, No. 209 / Wednesday, October 29, 1997 / Notices 56217

36See supra note 11.

37 15 U.S.C. 78s(b)(2).

38 17 CFR 200.30–3(a)(12).

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

2 17 CFR 240.19b–4.

3See letter from Leonard Mayer, President, Mayer

& Schweitzer, Inc., to Jonathan G. Katz, Secretary,

Commission, dated September 12, 1997 (‘‘Mayer

letter’’), and letter from Paul Chalmers, Senior Vice

President, International Trading, Canaccord Capital,

to Jonathan G. Katz, Secretary, Commission, dated

September 17, 1997 (‘‘Canaccord letter’’).

4See Securities Exchange Act Release No. 25637

(May 2, 1988), 53 FR 16488 (May 9, 1988).

5 ‘‘Interpretation of the Board of Governors—

Execution of Retail Transactions in the Over-theCounter Market.’’

6The best execution interpretation in Article III,

Section 1 of the NASD’s Rules of Fair Practice was

converted into NASD Rule 2320 in connection with

the NASD’s Manual revision project. See Securities

Exchange Act Release No 36698 (January 11, 1996),

61 FR 1419 (January 19, 1996.)

7See NASD Rule 2320(a).

8Schedule H of the By-laws required NASD

members executing principal transactions in nonNasdaq securities to report price and volume data

for the days on which their sales or purchases

exceeded 50,000 shares or $10,000. In 1993,

member obligations under Schedule H were

modified or eliminated as a result of the NASD

adopting real-time reporting of transactions for nonNasdaq securities. See Securities Exchange Act

Release No. 32647 (July 16, 1993), 58 FR 39262

(July 22, 1993).

9On March 31, 1997, the SEC granted permanent

approval of the OTC Bulletin Board. See Securities

Exchange Act Release No. 38456 (March 31, 1997),

62 FR 16635 (April 7, 1997).

10See Securities Exchange Act Release No. 27975

(May 1, 1990), 55 FR 19123 (May 8, 1990).

11These changes include: requiring that all priced

quotations entered by market makers in domestic

securities be firm for at least one trading unit (see

Securities Exchange Act Release No. 29261 (May

31, 1991), 56 FR 29297 (June 26, 1991)); calculating

inside quotes for individual securities and

disseminating this information through vendors;

Continued

Finally, the Commission notes that

CSE 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 CSE surveillance procedures

governing equities, are adequate under

the Act.

The Commission finds that CSE’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 CSE rules governing the trading of

equity securities on CSE, including,

among others, rules governing the

priority, parity and precedence of orders

and the responsibilities of specialists. In

addition, CSE 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, CSE’s proposal provides

for trading halt procedures governing

PDRs. Finally, the Commission notes

that CSE has stated that Rule 3.7,

Recommendations to Customers, will

apply to the trading of PDRs in general,

and SPDRs and MidCap SPDRs, in

particular.

The Commission finds good cause for

approving the proposed rule change

prior the thirtieth day after the date of

publication of notice of filing thereof in

the Federal Register. The Commission

believes that accelerated approval of the

proposal is appropriate because it is

very similar to CHX’s previously

approved proposal covering the listing

and trading of PDRs in general, and

SPDRs and MidCap SPDRs, in

particular.36 As such, the Commission

believes that the proposed rule change

does not raise any new regulatory

concerns or issues.

It is therefore ordered, pursuant to

Section 19(b)(2) 37 that the proposed

rule change is hereby approved on an

accelerated basis.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.38

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 97–28572 Filed 10–28–97; 8:45 am]

BILLING CODE 8010–-01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–39266; File No. SR–NASD–

97–42)]

Self-Regulatory Organizations;

National Association of Securities

Dealers, Inc.; Order Granting Approval

to Proposed Rule Change to Amend

NASD Rule 2320(g) to Provide

Authority to the Staff of NASD

Regulation to Grant Exemptions From

Such Provision

October 22, 1997.

I. Introduction

On June 17, 1997, the National

Association of Securities Dealers, Inc.

(‘‘NASD’’ or ‘‘Association’’) submitted

to the Securities and Exchange

commission (‘‘Commission’’), pursuant

to Section 19(b)(1) of the Securities

Exchange Act of 1934 (‘‘Exchange

Act’’) 1 and Rule 19b–4 thereunder,2 a

proposed rule change to amend NASD

Rule 2320(g) to provide the staff of

NASD Regulation authority to grant

exemptions from such provision.

Notice of the proposed rule change,

together with the substance of the

proposal, was published for comment in

Securities Exchange Act Release No.

38936 (August 14, 1997), 62 FR 44503

(August 21, 1997). Two comment letters

were received on the proposal.3

II. Description

NASD Rule 2320(g) (‘‘The Three

Quote Rule’’ or ‘‘Rule’’) was adopted on

May 2, 1998 4 as an amendment to the

NASD’s best execution interpretation 5

under Article III, Section 1 of the

NASD’s Rules of Fair Practice.6 The

Three Quote Rule was adopted in

connection with the NASD’s efforts to

develop a nationwide automated market

surveillance program for non-Nasdaq,

over-the-counter (‘‘OTC’’) securities,

commonly referred to as ‘‘pink sheet’’

stocks, and was designed to create a

standard to help assure that members

would fulfill their best execution

responsibilities to customers in nonNasdaq securities, especially

transactions involving relatively illiquid

securities with non-transparent prices.

The Rule expanded a member’s best

execution obligation to customers by

setting forth additional requirements for

customer transactions in non-Nasdaq

securities. In particular, the Rule

requires members that execute

transactions in non-Nasdaq securities on

behalf of customers to contact a

minimum of three dealers (or all dealers

if there are three or less) to obtain

quotations to enable them to determine

the best inter-dealer market. Each

member is generally required to use

reasonable diligence to ascertain this

best inter-dealer market for a security,

and to buy or sell in that market so that

the resultant price to the customer is as

favorable as possible under prevailing

market conditions.7

Concurrent with these activities, the

Commission also approved Schedule H

to the NASD’s By-Laws, which

established an electronic system of

mandatory price and volume reporting

for the OTC non-Nasdaq securities.8 On

May 1, 1990, the Commission issued an

order approving the operation of the

NASD’s OTC Bulletin Board Display

Service (‘‘OTC Bulletin Board’’) for a

pilot term of one year.9 The NASD

introduced the OTC Bulletin Board to

allow NASD eligible members to enter,

update and retrieve quotation

information on a real-time basis in nonNasdaq securities.10

Since the establishment of the OTC

Bulletin Board, significant market,

regulatory and technology related

improvements have occurred in the

non-Nasdaq marketplace.11 In