[Federal Register Volume 65, Number 233 (Monday, December 4, 2000)]
[Notices]
[Pages 75740-75746]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-30719]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-43620; File No. SR-CSE-00-06]


Self-Regulatory Organizations; Notice of Filing and Order 
Granting Accelerated Approval of Proposed Rule Change and Amendment No. 
1 Thereto by the Cincinnati Stock Exchange, Inc., To Provide for the 
Listing and Trading of Index Fund Shares

November 27, 2000.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 \2\ thereunder, notice is hereby given 
that on October 13, 2000, 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 primarily by the Exchange. On 
November 17, 2000, the CSE filed Amendment No. 1 to the proposal.\3\ 
The Commission is publishing this notice to solicit comments on the 
proposed rule change and Amendment No. 1 from interested persons, and 
to grant accelerated approval of the proposed rule change and Amendment 
No. 1.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ In Amendment No. 1, the CSE requested accelerated 
effectiveness of the proposed rule change and provided reasons 
therefor. See Letter from James M. Flynn, Staff Attorney, CSE, to 
Michael Gaw, Attorney-Adviser, Division of Market Regulation, 
Commission (November 16, 2000). The CSE in fact meant to request 
accelerated approval under Section 19(b)(2) of the Act in Amendment 
No. 1. Telephone conversation between James M. Flynn, Staff 
Attorney, CSE, and Michael Gaw, Attorney-Adviser, Division of Market 
Regulation, Commission, on November 21, 2000. Amendment No. 1 also 
made certain minor changes to the text of the proposed rule 
language, discussed below.
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The CSE proposes to amend its rules to adopt listing standards and 
trading rules for Index Fund Shares, including generic listing 
standards, which would permit the Exchange to trade, either by listing 
or pursuant to unlisted trading privileges (``UTP''), series of Index 
Fund Shares. Below is the text of the proposed rule change; new 
language is in italics.
* * * * *

Chapter XI

Trading Rules
Rule 11.9  National Securities Trading System
* * * * *

Rule 11.9(x)  Index Fund Shares

    (1) Applicability. This Chapter is applicable only to Index Fund 
Shares. Except to the extent inconsistent with this Chapter, or unless 
the context otherwise requires, the provisions of the Constitution and 
all other rules and policies of the Exchange shall be applicable to the 
trading on the Exchange of Index Fund Shares. Index Fund Shares are 
included within the definition of ``security'' or ``securities'' as 
such terms are used in the Constitution and Rules of the Exchange.
    (2) Definitions. The following terms as used in the Rules shall, 
unless the context otherwise requires, have the meanings herein 
specified.
    (a) Index Fund Share \4\ means a security (a) that is issued by an 
open-end management investment company based on a portfolio of stocks 
that seeks to provide investment results that correspond generally to 
the price and yield performance of a specified foreign or domestic 
stock index; (b) that is

[[Page 75741]]

issued by such an open-end management investment company in a specified 
aggregate minimum number in return for a deposit of specified numbers 
of shares of stock and/or a cash amount with a value equal to the next 
determined net asset value; and (c) that, when aggregated in the same 
specified minimum number, may be redeemed at a holder's \5\ request by 
such open-end investment company which will pay to the redeeming holder 
the stock and/or cash with a value equal to the next determined net 
asset value.
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    \4\ In the proposed rule language submitted by the CSE, the term 
``Index Fund Share'' as used here inadvertently had the letter ``s'' 
at the end. In the final rule text, the word ``Share'' will be in 
the singular. See Amendment No. 1.
    \5\ In the initial language of the proposed rule, the CSE 
inadvertently omitted the apostrophe in the word ``holder's.'' The 
CSE has indicated that, in the official rule language, the 
apostrophe will be included. Telephone conservation between James M. 
Flynn, Staff Attorney, CSE, and Michael Gaw, Attorney-Adviser, 
Division of Market Regulation, Commission, on November 21, 2000.
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    (b) Reporting Authority. The term ``Reporting Authority'' in 
respect of a particular series of Index Fund Shares means the Exchange, 
a subsidiary of the Exchange, or an institution or reporting service 
designated by the Exchange or its subsidiary as the official source for 
calculating and reporting information relating to such series, 
including, but not limited to, any current index or portfolio value; 
the current value of the portfolio of any securities required to be 
deposited in connection with issuance of Index Fund Shares; the amount 
of any dividend equivalent payment or cash distribution to holders of 
Index Fund Shares, net asset value, or other information relating to 
the issuance, redemption or trading of Index Funds Shares.
    Nothing in this section shall imply that an institution or 
reporting service that is the source for calculating and reporting 
information relating to Index Fund Shares must be designated by the 
Exchange. The \6\ term ``Reporting Authority'' shall not refer to an 
institution or reporting service not so designated.
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    \6\ In the proposed rule language submitted by the CSE, the two 
sentences of this paragraph were inadvertently run together and 
joined with a comma. The CSE has indicated that, in the official 
rule language, the sentences will be separated by a period, and the 
first letter of the word beginning the second sentence (``The'') 
will be capitalized. See Amendment No. 1.
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    (3) Disclosure. Upon request of a customer, members and member 
organizations shall provide to all purchasers of Index Fund Shares a 
prospectus for the series of Index Fund Shares.
    (4) Designation. The trading of Index Fund Shares based on one or 
more securities, whether by listing or pursuant to unlisted trading 
privileges, shall be considered on a case-by-case basis. Each issue of 
Index Fund Shares shall be based on each particular stock index or 
portfolio and shall be designated as a separate series and shall be 
identified by a unique symbol. The securities that are included in a 
series of Index Fund Shares shall be selected by the Exchange or its 
agent, a wholly-owned subsidiary of the Exchange, or by such other 
person thereof, as shall have authorized use of such index. Such index 
or portfolio may be revised from time to time as may be deemed 
necessary or appropriate to maintain the quality and character of the 
index or portfolio.
    (5) Initial and Continued Listing and/or Trading. Each series of 
Index Fund Shares will be traded on the Exchange, whether by listing or 
pursuant to unlisted trading privileges, subject to application of the 
following criteria:
    (a) Commencement of Trading--For each Series, the Exchange will 
establish a minimum number of Index Fund Shares required to be 
outstanding at the time of commencement of trading on the Exchange.
    (b) Continued Trading--Following the initial twelve month period 
following commencement of trading on the Exchange of a series of Index 
Fund Shares, the Exchange will consider the suspension of trading, the 
removal from listing, or termination of unlisted trading privileges for 
such series under any of the following circumstances:
    (i) if there are fewer than 50 beneficial holders of the series of 
Index Fund Shares for 30 or more consecutive trading days;
    (ii) if the value of the index or portfolio of securities on which 
the series of Index Fund Shares is based is no longer calculated or 
available; or
    (iii) if such other event shall occur or condition exist which, in 
the opinion of the Exchange, makes further dealings on the Exchange 
inadvisable. Upon termination of an open-ended management investment 
company, the Exchange requires that Index Fund Shares issued in 
connection with such entity be removed from Exchange listing.
    (c) Voting. Voting rights shall be as set forth in the applicable 
open-end management investment company prospectus.
    * * * Interpretation and Policies
    .01 The Exchange may approve a series of Index Fund Shares for 
listing pursuant to Rule 19b-4(e) under the Securities Exchange Act of 
1934 provided each of the following criteria is satisfied:
    (a) Eligibility Criteria for Index Components. Upon the initial 
listing of a series of Index Fund Shares each component of an index or 
portfolio underlying a series of Index Fund Shares shall meet the 
following criteria as of the date of the initial deposit of securities 
to the fund in connection with the initial issuance of shares of such 
fund:
    (i) Component stocks that in the aggregate account for at least 90% 
of the weight of the index or portfolio shall have a minimum market 
value of at least $75 Million;
    (ii) The component stocks shall have a minimum monthly trading 
volume during each of the last six months of at least 250,000 shares 
for stocks representing at least 90% of the weight of the index or 
portfolio;
    (iii) The most heavily weighted component stock cannot exceed 25% 
of the weight of the index or portfolio, and the five most heavily 
weighted component stocks cannot exceed 65% of the weight of the index 
or portfolio;
    (iv) The underlying index or portfolio must include a minimum of 13 
stocks; and
    (v) All securities in an underlying index or portfolio must be 
listed on a national securities exchange or The Nasdaq Stock Market 
(including the Nasdaq SmallCap Market).
    (b) Index Methodology and Calculation.
    (i) The index underlying a series of Index Fund Shares will be 
calculated based on either the market capitalization, modified market 
capitalization, price, equal-dollar or modified equal-dollar weighting 
methodology;
    (ii) If the index is maintained by a broker-dealer, the broker-
dealer shall erect a ``fire-wall'' around the personnel who have access 
to information concerning changes and adjustments to the index and the 
index shall be calculated by a third party who is not a broker-dealer; 
and
    (iii) The current index value will be disseminated every 15 seconds 
over the Consolidated Tape Association's Network B.
    (c) Disseminated Information. The Reporting Authority will 
disseminate for each series of Index Fund Shares an estimate, updated 
every 15 seconds, of the value of a share of each series. This may be 
based, for example, upon current information regarding the required 
deposit of securities and cash amount to permit creation of new shares 
of the series or upon the index value.
    (d) Initial Series Outstanding. A minimum of 100,000 shares of a 
series of Index Fund Shares is required to be outstanding at 
commencement of trading.
    (e) Minimal Fractional Trading Variation. The minimum fractional

[[Page 75742]]

trading variation may vary among different series of Index Fund Shares 
but will be set at \1/16\, \1/32\, or \1/64\ of $1.00.
    (f) Hours of Trading. Trading will occur between 9:30 a.m. and 
either 4:00 p.m. or 4:15 p.m. for each series of Index Fund Shares, as 
specified by the Exchange.
    (g) Surveillance Procedures. The Exchange will utilize existing 
surveillance procedures for Index Fund Shares.
    (h)  Applicability of Other Rules. The provisions of the Cincinnati 
Stock Exchanges Rules and By-Laws will apply to all series of Index 
Fund Shares.
    .02 The following paragraphs only apply to series of Index Fund 
Shares that are the subject of an order by the Securities and Exchange 
Commission exempting such series from certain prospectus delivery 
requirements under Section 24(d) of the Investment Company Act of 1940. 
The Exchange will inform members and member organizations regarding 
application of these provisions to a particular series of Index Fund 
Shares by means of an Information Circular prior to commencement of 
trading in such series. The Exchange requires that members and member 
organizations provide to all purchasers of a series of Index Fund 
Shares a written description of the terms and characteristics of such 
securities, in a form prepared by the open-end management investment 
company issuing such securities, not later than the time a confirmation 
of the first transaction in such series is delivered to such purchaser. 
In addition, members and member organizations shall include such a 
written description with any sales material relating to a series of 
Index Fund Shares that is provided to customers or the public. Any 
other written materials provided by a member or member organization to 
customers or the public making specific reference to a series of Index 
Fund Shares as an investment vehicle must include a statement in 
substantially the following form: ``A circular describing the terms and 
characteristics of [the series of Index Fund Shares] has been prepared 
by the [open-end management investment company name] and is available 
from your broker or the Exchange. It is recommended that you obtain and 
review such circular before purchasing [the series of Index Fund 
Shares].''
    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 Index Fund Shares 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 same terms as are directly applicable to members and member 
organizations under this rule.
    Upon request of a customer, a \7\ member or member organization 
shall also provide a prospectus for the particular series of Index Fund 
Shares.
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    \7\ In the proposed rule language submitted by the CSE, the word 
``a'' as used here was omitted. The CSE has indicated that, in the 
official rule language, the word ``a'' will appear before the world 
``member.'' See Amendment No. 1.
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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 Exchange 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 Exchange 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
    The Exchange proposes, in a new CSE Rule 11.9(x), to adopt listing 
standards to accommodate the trading, whether by listing or pursuant to 
UTP, of Index Fund Shares. The CSE has stated that these standards are 
similar to those established by other exchanges.\8\ The CSE believes 
that the proposed rule change would further the intent of Rule 19b-4(e) 
under the Act \9\ by allowing trading on the Exchange to begin in Index 
Fund Shares, subject to the proposed generic standards, without the 
need for notice and comment and Commission approval. The CSE also 
believes that this new procedure has the potential to reduce the time 
frame for bringing these securities to market or for trading them 
pursuant to UTP.
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    \8\ See Exchange Act Release No. 34-42988 (June 28, 2000), 65 FR 
42041 (July 7, 2000) (accelerated approval of BSE generic listing 
standards for Index Fund Shares); Exchange Act Release No. 34-42975 
(June 22, 2000), 65 FR 40712 (June 30, 2000) (accelerated approval 
of CHX generic listing standards for Portfolio Depository Receipts 
and Investment Company Units); Exchange Act Release No. 34-42833 
(May 26, 2000), 65 FR 35679 (June 5, 2000) (accelerated approval of 
CBOE generic listing standards for Index Portfolio Shares); Exchange 
Act Release No. 34-42787 (May 15, 2000), 65 FR 33598 (May 24, 2000) 
(approval of Amex generic listing standards for Portfolio Depository 
Receipts and Index Fund Shares).
    \9\ 17 CFR 240.19b-4(e).
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i. Index Fund Shares Generally
    Index Fund Shares are securities that are issued by an open-end 
management investment company (``Fund'') that seeks to provide 
investment results that correspond generally to the price and yield 
performance of a specified foreign or domestic equity market index. 
Index Fund Shares will be issued by an entity registered with the 
Commission as an open-end management investment company, and which may 
be organized as a series fund providing for the creation of separate 
series of securities, each with a portfolio consisting of some or all 
of the component securities of a specified securities index.
    Issuance of Index Fund Shares by a Fund will be made only in 
minimum size aggregations or multiples thereof (``Creation Units''). 
The applicable Creation Unit size aggregation will be set forth in the 
Fund's prospectus and will vary from one series of Index Fund Shares to 
another, but generally will be of substantial size (e.g., value in 
excess of $450,000 per Creation Unit). It is expected that a Fund will 
issue and sell Index Fund Shares through a principal underwriter on a 
continuous basis at the net asset value per share next determined after 
an order to purchase Index Fund Shares in Creation Unit size 
aggregations is received in proper form.
    Index Fund Shares will be traded on the Exchange like other equity 
securities, and the CSE's equity trading rules will apply to the 
trading of Index Fund Shares. The Exchange expects that Creation Unit 
size aggregations of Index Fund Shares generally will be issued in 
exchange for the ``in kind'' deposit of a specified portfolio of 
securities, together with a cash payment representing, in part, the 
amount of dividends accrued up to the time of issuance. The Exchange 
anticipates that such deposits will be made primarily by institutional 
investors, arbitrageurs, and the Exchange designated dealers (generally 
referred to as ``specialists''). Redemption of Index Fund Shares 
generally will be made ``in kind'' with a portfolio of securities and 
cash exchanged for Index Fund Shares that have been tendered for 
redemption. Issuances of redemptions also could occur for cash under 
specified circumstances (e.g., if it is not possible to effect delivery 
of securities underlying the specific series in a particular foreign 
country) and at other times in the discretion of the Fund.
    The Exchange expects that a Fund will make available on a daily 
basis a list of the names and the required

[[Page 75743]]

number of shares of each of the securities to be deposited in 
connection with issuance of Index Fund Shares of a particular series in 
Creation Unit size aggregations, as well as information relating to the 
required cash payment representing, in part, the amount of accrued 
dividends.
    A Fund may make periodic distributions of dividends from net 
investment income, including net foreign currency gains, if any, in an 
amount approximately equal to accumulated dividends on securities held 
by the Fund during the applicable period, net expenses and liabilities 
for such period.
ii. Criteria for Initial and Continued Listing
    The Exchange believes that the listing criteria proposed in its new 
rule are generally consistent with the listing standards used by the 
CSE for Portfolio Depository Receipts, currently found in Chapter XI, 
Rule 11.9(v) of the Exchange Rules.\10\
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    \10\ See Exchange Act Release No. 34-39268 (October 22, 1997), 
62 FR 56211 (October 29, 1997) (approval of CSE proposal to 
establish listing criteria for Portfolio Depository Receipts).
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    If Index Fund Shares are to be listed on the CSE, it will establish 
a minimum number of Index Fund Shares that must be outstanding at the 
commencement of Exchange trading, and such minimum number will be 
included in any required submission under Rule 19b-4.
    In connection with continued listing, the CSE will consider the 
suspension of trading in, or removal from listing of, a Fund upon which 
a series of Index Fund Shares is based when any of the following 
circumstances arise: (1) there are fewer than 50 beneficial holders of 
the series of Index Fund Shares for 30 or more consecutive trading 
days; (2) the value of the index or portfolio of securities on which 
the series of Index Fund Shares is based is no longer calculated or 
available; or (3) such other event shall occur or condition exists 
which, in the opinion of the Exchange, makes further dealings on the 
Exchange inadvisable. However, the CSE will not be required to suspend 
or delist from trading, based on the above factors, any Index Fund 
Shares for a period of twelve months after the initial listing of such 
Index Fund Shares for trading on the Exchange. In any case, upon 
termination of a Fund, the Exchange will require that Index Fund Shares 
issued in connection with that Fund be removed from Exchange listing.
    The Exchange believes that these proposed criteria are similar to 
the Index Fund Shares listing criteria currently used by the Amex.\11\
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    \11\ See supra note 8.
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iii. Required Standards To Permit Trading
    The CSE proposes to adopt generic listing and delisting standards 
to permit the trading, either by listing or pursuant to UTP, of Index 
Fund Shares pursuant to Rule 19b-4(e) under the Act.\12\ Accordingly, 
the CSE proposes to approve a series of Index Fund Shares for listing 
or trading under the following criteria.
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    \12\ 17 CFR 240.19b-4(e). Rule 19b-4(e) permits self-regulatory 
organizations (``SROs'') to list and trade new derivative products 
that comply with existing SRO trading rules, procedures, 
surveillance programs, and listing standards, without submitting a 
proposed rule change under Section 19(b) of the Act, 15 U.S.C. 
78s(b).
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Initial Listing Criteria

    Upon the initial listing of a series of Index Fund Shares, 
component stocks that in the aggregate account for at least 90 percent 
of the weight of the underlying index or portfolio must have a minimum 
market value of at least $75 million. The compotent stocks representing 
at least 90 percent of the weight of the index or portfolio must have a 
minimum monthly trading volume during each of the last six months of at 
least 250,000 shares. The most heavily weighted component stocks in an 
underlying index or portfolio cannot exceed 25 percent of the weight of 
the index or portfolio, and the five most heavily weighted component 
stocks cannot exceed 65 percent of the weight of the index or 
portfolio.\13\ All securities in an underlying index or portfolio must 
be listed on either a national securities exchange or the Nasdaq Stock 
Market (including the Nasdaq SmallCap Market). Finally, any series of 
Index Fund Shares must meet these eligibility criteria as of the date 
of the initial deposit of securities and cash into the trust or fund.
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    \13\ The CSE states that, under Subchapter M of the Internal 
Revenue Code, for a fund to qualify as a regulated investment 
company, the securities of a single issuer can account for no more 
than 25 percent of a fund's total assets, and at least 50 percent of 
a fund's total assets must be comprised of cash (including 
government securities) and securities of single issuers whose 
securities account for less than 5 percent of such fund's total 
assets.
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Continued Listing Criteria

    The index underlying a series of Index Fund Shares will be 
calculated based on either the market capitalization, modified market 
capitalization, price, equal-dollar, or modified equal-dollar weighting 
methodology. In addition, if the index is maintained by a broker-
dealer, the broker-dealer will erect a fire-wall around the personnel 
who have access to information concerning changes and adjustments to 
the index, and the index will be calculated by a third party who is not 
a broker-dealer.
    The current index value will be disseminated every 15 seconds over 
the Consolidated Tape Association's Network B. The Reporting Authority 
will disseminate for each series of Index Fund Shares an estimate, 
updated every 15 seconds, of the value of a share of each series. This 
may be based upon, for example, current information regarding the 
required deposit of securities plus any cash amount to permit creation 
of new shares of the series or upon the index value.
    Index Fund Shares will be registered in book entry form through the 
Depository Trust Company. A minimum of 100,000 shares of a series of 
Index Fund Shares is required to be outstanding at commencement of 
trading. Trading in Index Fund Shares on the Exchange will occur 
between 9:30 a.m. and either 4:00 p.m. or 4:15 p.m. (all times Eastern 
Standard Time) for each series of Index Fund Shares, as specified by 
the CSE.
    Pursuant to UTP, the CSE will rely upon the primary exchange that 
originally listed the respective Fund to monitor, surveil, and insure 
that the proceeding listing criteria are met by each index or portfolio 
that is listed and traded on the CSE. The CSE has stated that it will 
also monitor the respective primary exchange's actions, news releases, 
and disclosures made about any Index Fund Shares traded on the CSE.
iv. CSE Rules Applicable to the Trading of Index Fund Shares
    Index Fund Shares are considered ``securities'' under the CSE's 
Rules and are subject to all applicable trading rules, including the 
provisions of CSE Chapter XIV, Rule 14.9, ITS ``Trade-Throughs'' and 
``Locked Markets,'' which prohibit Exchange members from initiating 
trade-throughs for Intermarket Trading System securities, as well as 
rules governing priority, parity, and precedence of orders; market 
volatility-related trading halt provisions; and responsibilities of CSE 
Designated Dealers.\14\ CSE equity margin rules also

[[Page 75744]]

will apply to trading in Index Fund Shares.
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    \14\ The term ``Designated Dealer'' means a proprietary Member 
who maintains a minimum net capital of at least the greater of 
$500,000 or the amount required under Rule 15c3-1 under the Act, 17 
CFR 240.15c3-1, and who has been approved by the Exchange's 
Securities Committee to perform market functions by entering bids 
and offers for Designated Issues into the System. See CSE Rule 
11.9(a)(3).
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    The CSE's surveillance procedure for Index Fund Shares will be 
similar to the existing CSE procedures used for Portfolio Depositary 
Receipts \15\ and will incorporate and rely upon existing Exchange 
surveillance systems. The Exchange has stated that it believes these 
procedures will effectively monitor the trading activity in Index Fund 
Share products so as to ensure full compliance with Exchange rules and 
the federal securities laws.\16\
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    \15\ See CSE Rule 11.9(v).
    \16\ See Amendment No. 1
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    Prior to the commencement of trading in Index Fund Shares, the 
Exchange will issue a circular to members highlighting the 
characteristics of Index Fund Shares. The circular will discuss the 
special characteristics and risks of trading this type of security. 
Specifically, the circular will discuss what Index Fund Shares are, how 
they are created and redeemed, the requirement that members and member 
firms deliver a prospectus to investors purchasing Index Fund Shares 
prior to or concurrently with the confirmation of a transaction, 
applicable Exchange Rules, dissemination information, trading 
information, and the applicability of suitability rules.
    Additionally, the circular will inform members of specific Exchange 
policies, such as trading halts and market conditions particular to 
such securities. First, the circular will advise that trading will be 
halted in the event the market volatility trading halt parameters have 
been reached.\17\ Second, the circular will advise that the Exchange 
may consider factors such as the extent to which trading is not 
occurring in one or more deposited securities and whether other unusual 
conditions or circumstances detrimental to the maintenance of a fair 
and orderly market in such securities are present.
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    \17\ See CSE Rules, Chapter XIV.
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    Pursuant to Rule 12f-5 under the Act,\18\ to trade a particular 
class or type of security pursuant to UTP, the Exchange must have rules 
providing for transactions in such class or type of security. The CSE's 
proposed rule change is designed to create standards substantially 
similar to those approved for other exchanges.
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    \18\ 17 CFR 240.12f-5.
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v. Disclosure to Customers
    The CSE will require its members to provide all purchasers of newly 
issued Index Fund Shares with a prospectus for each separate Fund. 
Because the Creation Units will be in continuous distribution, the 
prospectus delivery requirements of Section 5(b)(2) of the Securities 
Act of 1933 \19\ will apply to all investors in Index Fund Shares, 
including investors who make secondary market purchases on the Exchange 
in Index Fund Shares. With respect to series of Index Fund Shares that 
are the subject of an order by the Commission exempting such series 
from certain prospectus delivery requirements under Section 24(d) of 
the Investment Company Act of 1940,\20\ the CSE will inform members and 
member organizations regarding disclosure obligations with respect to a 
particular series of Index Fund Shares by means of an Information 
Circular prior to commencement of trading in such series.
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    \19\ 15 U.S.C. 77e(b)(2).
    \20\ 15 U.S.C. 80a-24(d).
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    For any exempted series, the Exchange requires that members and 
member organizations provide to all purchasers of a series of Index 
Fund Shares a written description of the terms and characteristics of 
such securities, in a form prepared by the Fund issuing such 
securities, not later than the time a confirmation of the first 
transaction in such series is delivered to a purchaser. In addition, 
members and member organizations shall include such written description 
with any sales material relating to a series of Index Fund Shares that 
is provided to customers or the public. Any other written materials 
provided by a member or member organization to customers or the public 
making specific reference to a series of Index Fund Shares as an 
investment vehicle must include a statement in substantially the 
following form: ``A circular describing the terms and characteristics 
of [the series of Index Fund Shares] has been prepared by the [Fund 
name] and is available from your broker or the Exchange. It is 
recommended that you obtain and review such circular before purchasing 
[the series of Index Fund Shares]. In addition, upon request you may 
obtain from your broker a prospectus for [the series of Index Fund 
Shares].''
    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 Index Fund Shares 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 same terms as are directly applicable to members and member 
organizations under this rule.
    Upon request of a customer a member or member organization shall 
also provide a prospectus for the particular series of Index Fund 
Shares.
vi. Minimum Fractional Change
    The CSE proposes that the minimum fractional change for Index Fund 
Shares on the Exchange will be 1/16th, 1/32nd, or 1/64th of $1.00, 
depending on the series of Index Fund Shares. The Exchange has stated 
that these are the same minimum fractional increments for the trading 
of Index Fund Shares on the CSE, until such time as decimal increments 
are implemented.
2. Statutory Basis
    The CSE believes that the proposed rule change is consistent with 
Section 6(b)(5) of the Act, \21\ in that it is designed to promote just 
and equitable principles of trade; to foster cooperation and 
coordination with persons engaged in regulating securities 
transactions; 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.
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    \21\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The CSE does not believe that the proposed rule change would impose 
any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act.

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 in connection 
with the proposed rule change.

III. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. 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-
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

[[Page 75745]]

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-00-06 and should be 
submitted by December 26, 2000.

IV. Commission's Findings and Order Granting Accelerated Approval 
of Proposed Rule Change

    The Commission finds that the proposal 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). \22\ Specifically, the Commission 
finds that the CSE's proposal to establish generic standards to permit 
the trading of Index Fund Shares pursuant to Rule 19b-4(e) furthers 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. \23\ By establishing generic 
standards, the proposal should reduce the CSE's regulatory burden, as 
well as benefit the public interest, by enabling the Exchange to bring 
qualifying products to the market more quickly. Accordingly, the 
Commission finds that the CSE's proposal 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. \24\ The Commission notes 
that it has previously approved similar rules, including generic 
listing standards, relating to similar products traded on the Boston 
Stock Exchange, the American Stock Exchange, the Chicago Board Options 
Exchange, and the Chicago Stock Exchange. \25\
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    \22\ 15 U.S.C. 78f(b)(5).
    \23\ 15 U.S.C. 78s(b)
    \24\ 15 U.S.C. 78f(b)(5). In approving this rule, the Commission 
notes that it has considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
    \25\ See supra note 8.
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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 Exchange 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. \26\ The 
Commission's approval of the proposed generic listing standards for 
Index Fund Shares will allow those series of Index Fund Shares that 
satisfy those standards to start trading under Rule 19b-4(e), without 
the need for notice and comment and Commission approval. The Exchange's 
ability to rely on Rule 19b-4(e) for these products potentially reduces 
the time frame for bringing these securities to the market and thus 
enhances investors' opportunities. The Commission notes that, while the 
proposal reduces the Exchange's regulatory burden, the Commission 
maintains regulatory oversight over any products listed under the 
generic standards through regular inspection oversight.
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    \26\ See Exchange Act Release No. 40761 (December 8, 1998), 63 
FR 70952 (December 22, 1998) (adopting release for Rule 19b-4(e)).
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    The Commission previously concluded that Index Fund Shares and like 
products that it approved for trading under similar rules on other 
exchanges would allow investors: (1) To respond quickly to market 
changes through intra-day trading opportunities, (2) to engage in 
hedging strategies similar to those used by institutional investors, 
and (3) to reduce transactions costs for trading a portfolio of 
securities.\27\ The Commission believes, for the reasons set forth 
below, that the product classes that satisfy the proposed standards for 
Index Fund Shares should produce the same benefits to the CSE and to 
investors.
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    \27\ See supra note 25.
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    The Commission finds that the Exchange's proposal contains adequate 
rules and procedures to govern the trading of Index fund Shares under 
Rule 19b-4(e). All series of Index Fund Shares listed under the 
proposed standards will be subject to the full panoply of CSE rules and 
procedures that now govern the trading of existing securities on the 
CSE.\28\ Accordingly, any new series of Index Fund Shares listed and 
traded on the Exchange, or pursuant to UTP, will be subject to CSE 
rules governing the trading of equity securities, including, among 
others, rules and procedures governing trading halts, disclosures to 
members, responsibilities of the specialist, account opening and 
customer suitability requirements, and margin. These criteria allow the 
CSE to consider the suspension of trading and the delisting of a series 
if an event occurred that made further dealings in such securities 
inadvisable. This will give the CSE flexibility to delist Index Fund 
Shares if circumstances warrant such action.
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    \28\ The Commission notes that, although Index Fund Shares are 
not leveraged instruments and therefore do not possess any of the 
attributes of stock index options, their prices will be derived and 
based upon the securities held in their respective Funds. 
Accordingly, the level of risk involved in the purchase or sale of 
Index Fund Shares is similar to the risk involved in the purchase or 
sale of traditional common stock. Nevertheless, the Commission 
believes there are unique aspects to trading Index Fund Shares, 
which the Exchange has sufficiently and adequately addressed in this 
proposal.
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    The Commission believes that the CSE's proposal will ensure that 
investors have information that will allow them to be adequately 
apprised of the terms, characteristics, and risks of trading Index Fund 
Shares. Members and member organizations will be required to provide to 
all purchasers of Index Fund Shares a written description of the terms 
and characteristics of these securities, to include their description 
in sales materials provided to customers or the public, to include a 
specific statement relating to the availability of the description in 
other types of materials distributed to customers or the public, and to 
provide a copy of the prospectus, when requested by the customer. The 
proposal also requires a member or member organization carrying an 
omnibus account for a non-member broker-dealer to notify the non-member 
that execution of an order to purchase Index Fund Shares constitutes an 
agreement by the non-member to provide the product description to its 
customers.
    The Commission also notes that, upon the initial listing or trading 
pursuant to UTP of any Index Fund Shares, the CSE will issue a circular 
to its members explaining the unique characteristics and risks of this 
particular type of security. The circular also will note the prospectus 
or product description delivery requirements of Exchange members and 
inform members of their responsibilities under CSE Rules in connection 
with customer transactions in these securities. The Commission believes 
that these requirements ensure adequate disclosure to investors about 
the terms and characteristics of a particular series and are consistent 
with Section 6(b)(5) of the Act.\29\
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    \29\ 15 U.S.C. 78f(b)(5).
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    In addition, the CSE has developed specific listing criteria for 
series of Index Fund Shares qualifying for Rule 19b-4(e) treatment that 
will help to ensure that a minimum level of liquidity will exist to 
allow for the maintenance

[[Page 75746]]

of fair and orderly markets. Specifically, the proposed generic listing 
standards require that a minimum of 100,000 shares of a series of Index 
fund Shares be outstanding as of the start of trading. The Commission 
believes that this minimum number of securities is sufficient to 
establish a liquid market at the commencement of trading.
    The Commission believes that the proposed generic listing standards 
ensure that the securities composing the underlying indexes and 
portfolios are well capitalized and actively traded. These 
capitalization and liquidity criteria serve to prevent fraudulent or 
manipulative acts, and are therefore consistent with Section 6(b)(5) of 
the Act. Furthermore, the Commission finds that the Exchange's proposal 
to trade Index Fund Shares in increments of \1/16\, \1/32\, or \1/64\, 
of $1.00, until the Exchange is required to convert to decimal trading, 
is consistent with the Act.
    The Exchange also represents that the Reporting Authority will 
disseminate for each series of Index Fund Shares an estimate, updated 
every 15 seconds, of the value of a share of each series. The 
Commission believes that the information the Exchange proposes to have 
disseminated will provide investors with timely and useful information 
concerning the value of each series.
    The Commission also notes that certain concerns are raised when a 
broker-dealer is involved in both the development and maintenance of a 
stock index upon which products such as Index Fund Shares are based. 
The proposal requires that, in such circumstances, the broker-dealer 
must have procedures in place to prevent the misuse of material, non-
public information regarding changes and adjustments to the index, and 
that the index value be calculated by a third party who is not a 
broker-dealer. The Commission believes that these requirements should 
help address concerns raised by a broker-dealer's involvement in the 
management of such an index.
    In its proposed generic listing standards, the CSE represents that 
it will rely upon its existing surveillance procedures for supervision 
of trading in Index Fund Shares listed or traded pursuant to Rule 19b-
4(e). The Commission believes that these surveillance procedures are 
adequate to address concerns associated with listing and trading Index 
Fund Shares, including those listed or traded under the generic 
standards. Accordingly, the Commission believes that the rules 
governing the trading of such securities 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.\30\ 
The Commission further notes that the Exchange has represented that it 
will file form 19b-4(e) with the Commission within five business days 
of commencement of trading a series under the generic standards, and 
will comply with all Rule 19b-4(e) recordkeeping requirements.\31\
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    \30\ 15 U.S.C. 78f(b)(5).
    \31\ Telephone conversation between James M. Flynn, Staff 
Attorney, CSE, and Michael Gaw, Attorney-Adviser, Division of Market 
Regulation, Commission, on November 1, 2000.
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    The Commission finds good cause for approving the proposed rule 
change and Amendment No. 1 thereto prior to the thirtieth day after the 
date of publication of notice thereof in the Federal Register. The 
Commission notes that the CSE's proposal regarding the listing and 
trading of Index Fund Shares will be substantially similar to the rules 
for similar products traded on other exchanges that the Commission has 
previously approved, and that they raise issues that previously have 
been the subject of a full comment period under Section 19(b) of the 
Act.\32\ The Commission does not believe that the proposal raises novel 
regulatory issues that were not addressed in the previous filings. 
Accordingly, the Commission finds that there is good cause, consistent 
with Section 6(b)(5) of the Act,\33\ to approve the proposed rule 
change and Amendment No. 1 on an accelerated basis.
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    \32\ 15 U.S.C. 78s(b) See supra note 25.
    \33\ 15 U.S.C. 78f(b)(6).
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    It Is Therefore Ordered, pursuant to Section 19(b)(2) of the 
Act,\34\ that the proposed rule change (SR-CSE-00-06) and Amendment No. 
1 thereto are hereby approved on an accelerated basis.
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    \34\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\35\
Margaret H. McFarland,
Deputy Secretary.
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    \35\ 17 CFR 200.30-3(a)(12).
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[FR Doc. 00-30719 Filed 12-1-00; 8:45 am]
BILLING CODE 8010-01-M