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[Federal Register Volume 65, Number 196 (Tuesday, October 10, 2000)]
[Notices]
[Pages 60230-60233]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-25866]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-43396; File No. SR-CHX-00-16 and SR-Amex-00-10]

Self-Regulatory Organizations; Order Approving Proposed Rule 
Change and Amendment No. 1 Thereto and Notice of Filing and Order 
Granting Accelerated Approval of Amendment Nos. 2 and 3 by the Chicago 
Stock Exchange, Inc. Relating to the Listing and Trading of Trust 
Issued Receipts, and Order Approving Proposed Rule Change and Amendment 
No. 1 Thereto and Notice of Filing and Order Granting Accelerated 
Approval of Amendment No. 2 by the American Stock Exchange LLC Relating 
to the Listing and Trading of Trust Issued Receipts

September 29, 2000.

I. Introduction

    On May 5, 2000, the Chicago Stock Exchange, Incorporated (``CHX''), 
filed with the Securities and Exchange Commission (``Commission''), 
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ a proposed rule change 
relating to the listing and trading of trust issued receipts. On June 
7, 2000, CHX filed Amendment No. 1 to the proposal.\3\ The proposed 
rule change and Amendment No. 1 were published in the Federal Register 
on July 7, 2000.\4\ No comments were received on the proposal. On 
September 7, 2000, CHX filed Amendment No. 2 to the proposal.\5\ On 
September 20, 2000, CHX filed Amendment No. 3 to the proposal.\6\ This 
notice and order approves the proposed rule change and Amendment No. 1, 
solicits comment from interested persons on Amendment Nos. 2 and 3, and 
approves Amendment Nos. 2 and 3 on an accelerated basis.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ In Amendment No. 1, which was incorporated into the proposed 
rule change, CHX replaced a reference to ``trust issued receipts'' 
with a reference to ``a series of HOLDRs'' in the text of proposed 
Interpretation and Policy .01 to CHX Rule 27. See Letter from Ellen 
J. Neely, Vice President and General Counsel, CHX, to Andrew Shipe, 
Attorney, Division of Market Regulation (``Division''), Commission, 
dated June 6, 2000.
    \4\ Securities Exchange Act Release No. 42049 (June 28, 2000), 
65 FR 42049.
    \5\ In Amendment No. 2, CHX changed all references to ``HOLDRs'' 
in the proposed rule text to ``trust issued receipts.'' See Letter 
from Ellen J. Neely, Vice President and General Counsel, CHX, to 
Heather Traeger, Attorney, Division, Commission, dated September 5, 
2000.
    \6\ In Amendment No. 3, CHX changed the proposed rule text to 
clarify that the listing criteria apply to each ``security'' 
underlying the trust issued receipt, not each ``company.'' See 
Letter from Ellen J. Neely, Vice President and General Counsel, CHX 
to Heather Traeger, Attorney, Division, Commission, dated September 
19, 2000.
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    On February 14, 2000, the American Stock Exchange LLC (``Amex'') 
submitted to the Commission, pursuant to Section 19(b)(1) of the Act 
and Rule 19b-4 thereunder,\7\ a proposed rule change relating to 
generic listing standards for trust issued receipts. On June 2, 2000, 
Amex filed Amendment No. 1.\8\ The proposed rule change and Amendment 
No. 1 were published for comment in the Federal Register on June 12, 
2000.\9\ No comments were received on the proposal. On August 29, 2000, 
Amex filed Amendment No. 2 to the proposal.\10\ This notice and order 
approves the proposed rule change and Amendment No. 1, solicits comment 
from interested persons on Amendment No. 2, and approves Amendment No. 
2 on an accelerated basis.
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    \7\ 17 CFR 240.19b-4.
    \8\ See letter from Scott Van Hatten, Legal Counsel, Derivative 
Securities, Amex, to Nancy Sanow, Assistant Director, Division, 
Commission, dated May 24, 2000. In Amendment No. 1, Amex made 
several technical changes that were incorporated into the proposed 
rule change when it was noticed in the Federal Register. Amex also 
clarified that it, and not the Commission, may approve a series of 
HOLDRs for listing pursuant to Rule 19b-4(e) provided each of the 
component securities satisfies the proposed listing criteria.
    \9\ Securities Exchange Act Release No. 42895 (June 2, 2000), 65 
FR 36853.
    \10\ In Amendment No. 2, Amex changed all references to 
``HOLDRs'' in the proposed rule text to ``trust issued receipts.'' 
See Letter from Scott Van Hatten, Legal Counsel, Amex, to Nancy 
Sanow, Assistant Director, Division, Commission, dated August 25, 
2000.
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II. Description of the Proposals

    The proposals would amend CHX Article XXVII, Rule 27 and Amex Rule 
1202 to provide generic standards that permit listing and trading, or 
trading pursuant to unlisted trading privileges (``UTP''), of trust 
issued receipts pursuant to Rule 19b-4(e) of the Act.\11\ This 
procedure would allow Amex and CHX to begin trading qualifying products 
without the need for notice and comment and Commission approval under 
section 19(b) of the Act, thus reducing the Exchanges' regulatory 
burden, and benefiting the public interest.
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    \11\ Rule 19b-4(e) provides that the listing and trading of a 
new derivative securities product by a self-regulatory organization 
(``SRO'') shall not be deemed a proposed rule change, pursuant to 
paragraph (c)(1) of Rule 19b-4, if the Commission has approved, 
pursuant to section 19(b) of the Act, the SRO's trading rules, 
procedures and listing standards for the product class that include 
the new derivative securities product and the self-regulatory 
organization has surveillance program for the product class. 17 CFR 
240.19b-4(e).
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    Amex and CHX believe that their proposals supplement the existing

[[Page 60231]]

rules \12\ with generic listing criteria meant, in part, to ensure that 
no security underlying a trust issued receipt will be readily 
susceptible to manipulation, while permitting sufficient flexibility in 
the construction of various trust issued receipts to meet investors' 
needs. Amex and CHX further believe that the additional criteria are 
meant to ensure sufficient liquidity for investors seeking to purchase 
and deposit the underlying securities with the trustee to create a new 
trust issued receipt.
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    \12\ The existing Amex and CHX rules provide that trust issued 
receipts will be listed and traded, or traded pursuant to UTP, 
subject to application of the following criteria: (a) Initial 
Listing--For each trust, the Exchange will establish a minimum 
number of trust issued receipts required to be outstanding at the 
time of commencement of trading on the Exchange; (b) Continued 
Listing--Following the initial twelve month period following 
formation of a trust and commencement of trading on the Exchange, 
the Exchange will consider the suspension of trading in or removal 
from listing of a Trust upon which a series of trust issued receipts 
is based under any of the following circumstances: (i) If the trust 
has more than 60 days remaining until termination and there are 
fewer than 50 record and/or beneficial holders of trust issued 
receipts for 30 or more consecutive trading days; (ii) if the trust 
has fewer than 50,000 receipts issued and outstanding; (iii) if the 
market value of all receipts issued and outstanding is less than 
$1,000,000; or (iv) if such other event shall occur or condition 
exists which in the opinion of the respective Exchange, makes 
further dealings on the Exchange inadvisable.
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    Thus, under the proposals, Amex and CHX could list or trade, 
pursuant to Rule 19b-4(e), any trust issued receipt product that met 
the following additional criteria: (1) Each component security in the 
trust issued receipt must be registered under Section 12 of the 
Act,\13\ (2) each component security underlying the trust issued 
receipt must have a minimum public float of at least $150 million; (3) 
each component security underlying the trust issued receipt must be 
listed on a national securities exchange or traded through the 
facilities of Nasdaq as a reported national market system security; (4) 
each component security underlying the trust issued receipt must have 
an average daily trading volume of at least 100,000 shares during the 
preceding sixty-day trading period; and (5) each component security 
underlying the trust issued receipt must have an average daily dollar 
value of shares traded during the preceding sixty-day trading period of 
at least $1 million. In addition, no underlying security may initially 
represent more than 20% of the overall value of the receipt.
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    \13\ 15 U.S.C. 781.
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    Finally, Amex and CHX will comply with the recordkeeping 
requirements of Rule 19b-4(e), and will file Form 19b-4(e) for each 
trust issued receipt listed under the rule within five business days of 
commencement of trading.\14\
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    \14\ 17 CFR 240.19b-4(e).
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III. Discussion

    After careful review, 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).\15\ Specifically, the Commission finds that the proposals to 
provide generic standards to permit listing and trading of trust issued 
receipts pursuant to Rule 19b-4(e) further the intent of that rule by 
facilitating commencement of trading in these securities without the 
need for notice and comment and Commission approval under section 19(b) 
of the Act. By establishing generic standards, the proposals should 
reduce Amex and CHX's regulatory burden, as well as benefit the public 
interest, by enabling Amex and CHX to bring qualifying products to the 
market more quickly. Accordingly, the Commission finds that Amex and 
CHX's proposals will promote just and equitable principles of trade, 
foster cooperation and coordination with persons engaged in regulating, 
clearing, settling, processing information with respect to, and 
facilitating transactions in securities, and, in general, protect 
investors and the public interest consistent with Section 6(b)(5) of 
the Act.\16\
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    \15\ 15 U.S.C. 78f(b)(5).
    \16\ 15 U.S.C. 78f(b)(5). In approving these rules, the 
Commission notes that is has considered the proposed rules' impact 
on efficiency, competition, and capital formation. 15 U.S.C. 78c(f).
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    Rule 19b-4(e) provides that the listing and trading of a new 
derivative securities product by an SRO shall not be deemed a proposed 
rule change, pursuant to paragraph (c)(1) of Rule 19b-4, if the 
Commission has approved, pursuant to section 19(b) of the Act, the 
SRO's trading rules, procedures and listing standards for the product 
class that include the new derivative securities product and the SRO 
has a surveillance program for the product class.\17\
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    \17\ See Securities Exchange Act Release No. 40761 (December 8, 
1998), 63 FR 70952 (December 22, 1998).
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    As described above, the Commission has previously approved Amex and 
CHX rules that permit the listing and trading of individual trust 
issued receipts on the Exchanges or pursuant to UTP.\18\ In approving 
these securities for trading, the Commission considered their 
structure, their usefulness to investors and the markets, and the 
Exchanges' rules and surveillance programs that govern their trading. 
The Commission concluded then that securities approved for listing 
under those rules would allow investors to: (1) Respond quickly to 
changes in the overall securities markets generally and for the 
industry represented by a particular trust; (2) trade, at a price 
disseminated on a continuous basis, a single security representing a 
portfolio of securities that the investor owns beneficially; (3) engage 
in hedging strategies similar to those used by institutional investors; 
(4) reduce transactions costs for trading a portfolio of securities; 
and (5) retain beneficial ownership of the securities underlying the 
trust issued receipts. The Commission believes, for the reasons set 
forth below, that additional trust issued receipts that satisfy the 
proposed generic standards and, therefore, can be listed under Rule 
19b-4(e) without prior Commission approval, should produce the same 
benefits to Amex and CHX and to investors.
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    \18\ See, e.g., Securities Exchange Act Release No. 42056 
(October 22, 1999), 64 FR 58870 (November 1, 1999) (CHX); Securities 
Exchange Act Release No. 41892 (September 21, 1999), 64 FR 52559 
(September 29, 1999) (Amex).
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    The Commission further believes that adopting generic listing 
standards for these securities and applying Rule 19b-4(e) should 
fulfill the intended objective of that rule by allowing those trust 
issued receipt products that satisfy the generic standards to start 
trading, without the need for notice and comment and Commission 
approval. Amex and CHX's ability to rely on Rule 19b-4(e) potentially 
reduces the time frame for bringing these securities to the market or 
for permitting the trading of these securities pursuant to UTP, and 
thus enhances investors' opportunities. The Commission notes that while 
the proposals reduce the Exchanges' regulatory burden, the Commission 
maintains regulatory oversight over any products listed under the 
generic standards through regular inspection oversight.
    The Commission finds that Amex and CHX's proposals contain adequate 
rules and procedures to govern the listing and trading of trust issued 
receipts pursuant to Rule 19b-4(e) on the Amex or CHX, or pursuant to 
UTP. As the Commission noted in its previous review and approval of CHX 
Article XXVIII, Rule 27, and Amex Rules 1200 et seq., all trust issued 
receipt products listed under the generic standards will be subject to 
the full panoply of Amex and CHX rules and procedures that now govern 
both the trading of trust issued

[[Page 60232]]

receipts and the trading of equity securities on the Amex and CHX, 
including, among others, rules and procedures governing trading halts, 
disclosures to members, responsibilities of the specialist, account 
opening and customer suitability requirements, the election of a stop 
or limit order, and margin.\19\
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    \19\ Id.
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    The Commission further finds that: (1) By requiring that the 
underlying securities in a trust issued receipt are registered under 
section 12 of the Act and listed on a national securities exchange or 
Nasdaq and (2) by establishing minimum values for the number of 
outstanding receipts, average daily trading volume, average daily 
dollar volume, and public float, the Exchanges' proposed listing 
criteria will help to ensure that a minimum level of liquidity will 
exist to allow for the maintenance of fair and orderly markets for 
those trust issued receipt products listed and traded pursuant to Rule 
19b-4(e). The Commission believes that these listing criteria will help 
to ensure that no security underlying a trust issued receipt will be 
readily susceptible to manipulation, while permitting sufficient 
flexibility in the construction of various trust issued receipts to 
meet investors' needs. The Commission further believes that these 
criteria should serve to ensure that the underlying securities of such 
trust issued receipts are well capitalized and actively traded, which 
will help to ensure that U.S. securities markets are not adversely 
affected by the listing and trading of new trust issued receipts under 
Rule 19b-4(e). Accordingly, the Commission finds that these criteria 
are consistent with section 6(b)(5) of the Act, because they serve to 
prevent fraudulent or manipulative acts; promote just and equitable 
principles of trade; remove impediments to and perfect the mechanism of 
a free and open market and a national market system; and protect 
investors and the public interest.\20\
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    \20\ 15 U.S.C. 78f(b)(5).
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    Additionally, as the Commission noted in its previous review and 
approval of CHX Article XXVIII, Rule 27, and Amex Rules 1200 et seq., 
the Exchanges' delisting criteria allow them to consider the suspension 
of trading and the delisting of a trust issued receipt if an event 
occurs that makes further dealings in such securities inadvisable. This 
will give Amex and CHX flexibility to delist trust issued receipts if 
circumstances warrant. The proposals also rely on procedures to halt 
trading in trust issued receipts in certain enumerated circumstances 
that were approved previously by the Commission.\21\
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    \21\ See note 18, supra.
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    The Commission notes that, in connection with its previous review 
and approval of CHX Article XXVIII, Rule 27, and Amex rules 1200 et 
seq., it approved the Exchanges' minimum price increments, their 
surveillance procedures, and their disclosure and prospectus delivery 
requirements for trust issued receipts.\22\ In accord with these 
previous findings, the Commission believes that these rules, which will 
govern the trading of trust issued receipt products listed pursuant to 
Rule 19b-4(e), will provide adequate safeguards to prevent manipulative 
acts and practices and to protect investors and the public interest. 
Further, the Commission believes that the proposals will ensure that 
investors have information that will allow them to be adequately 
apprised of the terms, characteristics, and risk of trading trust 
issued receipts.
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    \22\ Id.
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    Finally, Amex and CHX will file Form 19-4(e) with the Commission 
within five business days of commencement of trading a trust issued 
receipt under the generic standards, and will comply with all Rule 19-
4(e) recordkeeping requirements.
    Accordingly, the Commission believes that Amex and CHX's proposed 
rules governing the listing and trading of trust issued receipts 
pursuant to Rule 19-4(e) provide adequate safeguards to prevent 
manipulative acts and practices and to protect investors and the public 
interest, consistent with section 6(b)(5) of the Act.\23\
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    \23\ 15 U.S.C. 78f(b)(5).
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    The Commission finds good cause for approving Amendments No. 2 to 
the CHX and Amex proposed rule changes prior to the thirtieth day after 
the date of publication of notice in the Federal Register, pursuant to 
section 19(b)(2) of the Act. Amendments No. 2 to the proposed rule 
changes established that the proposed generic standards are for the 
listing and trading of all trust issued receipts that satisfy the 
proposed standards. The proposed generic standards are not limited to 
HOLDRs, a type of trust issued receipt. Because the amendments 
establish the scope of the proposed rule change, the Commission 
believes that it is necessary to approve them at the same time as 
approving the proposed rule changes. Accordingly, the Commission finds 
that there is good cause, consistent with section 6(b)(5) of the 
Act,\24\ to approve Amendments No. 2 to the proposals on an accelerated 
basis.
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    \24\ 15 U.S.C. 78s(b)(5).
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    The Commission also finds good cause for approving Amendment No. 3 
to the CHX proposed rule change prior to the thirtieth day after the 
date of publication of notice in the Federal Register pursuant to 
section 19(b)(2) of the Act. Amendment No. 3 changes the CHX proposed 
rule text to clarify that the listing criteria apply to the specific 
``security'' underlying the trust issued receipt, and not to the 
``company'' underlying the trust issued receipt. The Commission 
believes that this clarification is significant. A company could have 
multiple issues, only one of which underlies the trust issued receipt. 
If the text of the proposed rule change used the word ``company,'' the 
aggregate values for all issues of the company could meet the listing 
criteria for minimum daily float, daily trading volume and daily dollar 
volume; yet, these values would not be an accurate accounting of the 
value of the specific security that underlies the trust issued 
receipts. Thus, it is conceivable that a security underlying a trust 
issued receipt might not satisfy the proposed listing criteria, but the 
company's securities as a whole would satisfy the proposed criteria. 
Because Amendment No. 3 changes the proposed rule text to specify that 
it is the individual security that must be evaluated for listing 
purposes, the Commission believes that it is necessary to approve it at 
the same time as approving the proposed rule changes. Accordingly, the 
Commission finds that there is good cause, consistent with section 
6(b)(5) of the Act,\25\ to approve CHX Amendment No. 3 on an 
accelerated basis.
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    \25\ 15 U.S.C. 78s(b)(5).
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning both Amex Amendment No. 2 and CHX Amendment Nos. 2 
and 3, including whether those amendments are consistent with the Act. 
Persons making written submissions should file six copies thereof with 
the Secretary, Securities and Exchange Commission, 450 Fifth Street, 
NW, Washington, DC 20549-0609. Copies of the submission, all subsequent 
amendments, all written statements with respect to the proposed rule 
change that are filed with the Commission, and all written 
communications relating to the proposed rule change between the 
Commission and any person, other than those that may be withheld from 
the public in accordance with the

[[Page 60233]]

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-CHX-00-16 or SR-Amex-00-10 and should be submitted by October 
31, 2000.

V. Conclusion

    For the foregoing reasons, the Commission finds that Amex and CHX's 
proposals relating to the listing and trading of trust issued receipts 
pursuant to Rule 19-4(e) are consistent with the requirements of the 
Act and rules and regulations thereunder.
    It is therefore ordered, pursuant to section19(b)(2) of the 
Act,\26\ that the proposed rule change (SR-CHX-00-16), as amended, and 
the proposed rule change (SR-Amex-00-10), as amended, are approved.
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    \26\ 15 U.S.C. 78s(b)(2).
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    For the Commission, by the Division of Market Regulation, pursuant 
to delegated authority.\27\
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    \27\ 17 CFR 200.30-3(a)(12).

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-25866 Filed 10-6-00; 8:45 am]
BILLING CODE 8010-01-M
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