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[Federal Register Volume 66, Number 84 (Tuesday, May 1, 2001)]
[Notices]
[Pages 21798-21801]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-10746]

[[Page 21798]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-44182; File No. SR-PCX-2001-01]

Self-Regulatory Organizations; Notice of Filing and Order 
Granting Accelerated Approval of Proposed Rule Change by the Pacific 
Exchange, Inc. Relating to Trust Issued Receipts

April 16, 2001.
    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 January 8, 2001, the Pacific Exchange, Inc. (``PCX'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'' or ``SEC'') the proposed rule change as described in 
Items I and II below, which Items have been prepared by the Exchange. 
Amendment No. 1 to the proposed rule change was filed on April 18, 
2001.\3\ The Commission is publishing this notice to solicit comments 
on the proposed rule change from interested persons, and to grant 
approval to the proposed rule change 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, the PCX made certain technical changes 
relating to numbering of proposed rule text. See letter from Cindy 
L. Sink, Senior Attorney, Regulatory Policy, PCX, to Andrew Shipe, 
Attorney, Division of Market Regulation, SEC, dated April 16, 2001 
(``Amendment No. 1'').
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The Exchange proposes to adopt generic listing requirements for 
Trust Issued Receipts (``TIRs'') that would permit its wholly-owned 
subsidiary PCX Equities, Inc. (``PCXE'' or ``the Corporation'') to 
trade, either by listing or pursuant to unlisted trading privileges 
(``UTP''), specified series of TIRs pursuant to Rule 19b-4(d) under the 
Act. Below is the text of the proposed rule change. Italics indicate 
text to be added.

* * * * *

PCX Equities, Inc. Trust Issued Receipts

    Rule 8.200(a). The Corporation will consider for trading, 
whether by listing or pursuant to unlisted trading privileges, Trust 
Issued Receipts that meet the criteria of this Rule.
    (b) Definitions. A Trust Issued Receipt is a security (1) that 
is issued by a trust (``Trust'') which holds specific securities 
deposited with the Trust; (2) that, when aggregated in some 
specified minimum number, may be surrendered to the Trust by the 
beneficial owner to receive the securities; and (3) that pay 
beneficial owners dividends and other distributions on the deposited 
securities, if any are declared and paid to the trustee 
(``Trustee'') by an issuer of the deposited securities.
    (c) Designation. The Corporation may trade, whether by listing 
or pursuant to unlisted trading privileges, Trust Issued Receipts 
based on one or more securities. The Trust Issued Receipts based on 
particular securities shall be designated as a separate series and 
shall be identified by a unique symbol. The securities that are 
included in a series of Trust Issued Receipts shall be selected by 
the Corporation or by such other person as shall have a proprietary 
interest in such Trust Issued Receipts.
    (d) Initial and Continued Listing and/or Trading. Trust Issued 
Receipts will be traded on the Corporation subject to application of 
the following criteria:
    (1) Commencement of Trading--For each Trust, the Corporation 
will establish a minimum number of Trust Issued Receipts required to 
be outstanding at the time of commencement of trading on the 
Corporation.
    (2) Continued Trading--Following the initial twelve month period 
following formation of a Trust and commencement of trading on the 
Corporation, the Corporation will consider the suspension of trading 
in or removal from listing of or termination of unlisted trading 
privileges for a Trust upon which a series of Trust Issued Receipts 
is based under any of the following circumstances:
    (A) 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;
    (B) if the Trust has fewer than 50,000 receipts issued and 
outstanding;
    (C) if the market value of all receipts issued and outstanding 
is less than 1,000,000; or
    (D) if any other event shall occur or condition exists which, in 
the opinion of the Corporation, makes further dealings on the 
Corporation inadvisable.
    Upon termination of a Trust, the Corporation requires that Trust 
Issued Receipts issued in connection with such trust be removed from 
listing or have their unlisted trading privileges terminated. A 
Trust may terminate in accordance with the provisions of the Trust 
prospectus, which may provide for termination if the value of 
securities in the Trust falls below a specified amount.
    (3) Term--The stated term of the Trust shall be as stated in the 
Trust prospectus; however, a Trust may be terminated under such 
earlier circumstances as may be specified in the Trust prospectus.
    (4) Trustee--The trustee must be a trust company or banking 
institution having substantial capital and surplus and the 
experience and facilities for handing corporate trust business. In 
cases where, for any reason, an individual has been appointed as 
trustee, as qualified trust company or banking institution must be 
appointed co-trustee.
    (5) Voting--Voting rights shall be as set forth in the Trust 
prospectus.
    (e) ETP Holders and ETP Firms. ETP Holders and ETP Firms shall 
provide to all purchasers of newly issued Trust Issued Receipts a 
prospectus for the series of Trust Issued Receipts.
    (f) Applicability. This Rule is applicable only to Trust Issued 
Receipts. Except to the extent inconsistent with this Rule, or 
unless the context otherwise requires, the provisions of the Bylaws 
and all other rules and procedures of the Board of Directors shall 
be applicable to the trading on the Corporation of such securities. 
Trust Issued Receipts are included within the definition of 
``security'' or ``securities'' as such terms are used in the Bylaws 
and Rules of the Corporation.

Commentary:

    .01  The Corporation may approve trust issued receipts for 
trading, whether by listing or pursuant to unlisted trading 
privileges, pursuant to Rule 19b-4(e) under the Securities Exchange 
Act of 1934, provided that the following criteria are satisfied:
    (a) each security underlying the trust issued receipt must be 
registered under Section 12 of the Exchange Act;
    (b) each security underlying the trust issued receipt must have 
a minimum public float of at least $150 million;
    (c) each 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;
    (d) each 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;
    (e) each 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; and
    (f) the most heavily weighted security in the trust issued 
receipt cannot initially represent more than 20% of the overall 
value of the trust issued receipt.
* * * * *

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 is proposing to adopt generic listing requirements to

[[Page 21799]]

accommodate the trading, whether by listing or UTP, of TIRs pursuant to 
Rule 19b-4(e) under the Act.\4\ Rule 19b-4(e) provides that the listing 
and trading of a new derivative securities product by a self-regulatory 
organization (``SRO'') will not be deemed a proposed rule change, 
pursuant to paragraph (c)(1) of Rule 19b-4,\5\ if the Commission has 
approved, pursuant to Section 19(b) of the Act,\6\ the SRO's trading 
rules, procedures and listing requirements for the product class that 
include the new derivative securities product, and the SRO has a 
surveillance program for the product class.\7\ The Exchange believes 
that the Commission's approval of the proposed listing requirements for 
TIRs will allow PCXE to begin trading qualifying products without the 
need for notice and comment and Commission approval under section 19(b) 
of the Act.\8\ 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.
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    \4\ 17 CFR 240.19b-4(e).
    \5\ 17 CFR 240.19b-4(c)(1).
    \6\ 15 U.S.C. 78s(b).
    \7\ See Securities Exchange Act Release No. 40761 (December 8, 
1998), 63 FR 70952 (December 22, 1998).
    \8\ 15 U.S.C. 78s(b).
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    The Commission has previously approved requests of the American 
Stock Exchange (``Amex'') and the Chicago Stock Exchange (``CHX'') to 
provide generic standards to list and/or trade TIRs.\9\ The Exchange 
believes that its proposed listing requirements for TIR are 
substantially similar to the listing requirements at the Amex and CHX. 
The information provided below is intended to provide a description of 
how TIRs are created traded and is similar to that discussed in the 
original Amex TIRs Approval Order.\10\
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    \9\ See Securities Exchange Act Release No. 43496 (September 29, 
2000), 65 FR 60230 (October 10, 2000).
    \10\ See Securities Exchange Act Release No. 41892 (September 
21, 1999), 64 FR 52559 (September 29, 1999).
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    a. General. TIRs are negotiable receipts that are issued by a trust 
in which securities of issuers are deposited and held on behalf of the 
holders of the TIRs. They are designed to allow investors to hold 
interests in a variety of companies in a particular industry through a 
single, exchange-listed and traded instrument that represents 
beneficial ownership in the deposited securities. Holders may cancel 
their TIRs at any time to receive their pro rata share of the 
underlying securities.
    Beneficial owners of the receipts have the same rights, privileges, 
and obligations as they would if they beneficially owned the underlying 
securities outside the TIRs program. Holders of the receipts have the 
right to instruct the trustee to vote their pro rata share of the 
underlying securities evidenced by the receipts. They will receive 
reports, proxy solicitations, and other information distributed by the 
issuers of the deposited securities to their security holders, and will 
receive their pro rata share of the dividends and other distributions 
declared and paid by the issuers to the trustee.
    b. Creation of the Trust. TIRs will be issued by a trust created 
pursuant to a depositary trust agreement. After the initial offering, 
the trust may issue additional receipts on a continuous basis when an 
investor deposits the requisite securities in the trust. An investor 
will be permitted to withdraw the underlying securities upon delivery 
to the trustee of one or more round lots of 100 TIRs. Conversely, an 
investor may deposit the necessary securities and receive TIRs in 
return.
    c. The Trust Issued Receipts Portfolio. The companies represented 
by securities in the portfolio underlying the TIRs must meet the 
following minimum criteria: (1) The companies' common stock must be 
registered under section 12 of the Act; \11\ (2) the minimum public 
float of each company included in the portfolio must be at least $150 
million; (3) each security must either be listed on a national 
securities exchange or traded through the facilities of Nasdaq as a 
reported national market system security; (4) the average daily trading 
volume for each security must be at least 100,000 shares during the 
preceding sixty-day trading period; (5) the average daily dollar value 
of the shares traded during the preceding sixty-day trading period must 
be at least $1 million; and (6) the most heavily weighted security in 
the TIR cannot initially represent more than 20% of the overall value 
of the TIR.
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    \11\ 15 U.S.C. 78(1).
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    d. Criteria for Initial and Continued Listing. The Exchange intends 
to list or trade pursuant to UTP, specified series of TIRs that 
currently are listed on other exchanges and that are developed from 
time to time. Under the proposed rules, the Exchange may list or trade 
pursuant to Rule 19b-4(e),\12\ a series of TIRs that meet the specified 
criteria and such series has the requisite level of TIRs outstanding at 
the time of commencement of trading on the PCXE.\13\ The minimum number 
of receipts that must be outstanding at commencement of trading on PCXE 
will be included in any required submission under Rule 19b-4(e).
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    \12\ 17 CFR 240.19b-4(e).
    \13\ The Exchange anticipates requiring a minimum of 150,000 
outstanding receipts before trading can commence.
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    The Exchange believes that the proposed initial listing 
requirements will ensure that no security underlying a TIR will be 
readily susceptible to manipulation, while permitting sufficient 
flexibility in the construction of various TIRs to meet investors' 
needs. The Exchange also believes that these criteria will ensure 
sufficient liquidity for those investors seeking to purchase and 
deposit the underlying securities with the trustee to create a new TIR.
    In connection with continued listing, the Exchange will consider 
the suspension of trading in, or removal from listing of, a series of 
TIRs when any of the following circumstances arise: (1) The trust has 
more than sixty days remaining until termination and there are fewer 
than 50 record and/or beneficial holders of TIRs for 30 or more 
consecutive trading days; (2) the trust has fewer than 50, 000 receipts 
issued and outstanding; (3) the market value of all receipts issued and 
outstanding is less than $1 million; (4) such other event occurs or 
conditions exists which, in the opinion of the Exchange, makes further 
dealings on PCXE inadvisable.
    These flexible criteria will allow the Exchange to avoid delisting 
TIRs (and possibly terminating the trust) due to relatively brief 
fluctuations in market conditions that may cause the numbers of holders 
to vary. The Exchange will not, however, apply these delisting criteria 
for the initial 12-month period following the formation of a trust and 
commencement of trading on the PCXE. In addition, if the number of 
companies represented by the deposited securities drops to fewer than 
nine, and each time the number of companies is reduced thereafter, the 
Exchange will consult with the Commission to confirm the 
appropriateness of the continued listing of the TIRs.
    e. PCXE Rules Applicable to Trading of TIRs. Dealings in TIRs on 
the PCXE will be conducted pursuant to the PCXE's equity trading rules. 
PCXE's general dealing and settlement rules will apply, including its 
rules on clearance and settlement of securities transactions and its 
equity margin rules. Other generally applicable PCXE equity rules and 
procedures will also apply, including, among others, rules governing 
the Intermarket Trading System, priority of orders, operational

[[Page 21800]]

and regulatory trading halts, and responsibilities of specialists.\14\
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    \14\ PCXE's rules relating to odd lot executions will not apply 
because the trust issued receipts will be traded only in round lots 
or round lot multiples. In addition, the Exchange understands that 
the Commission has provided an exemption from the short sale rule, 
Rule 10a-1 under the Act (17 CFR 240.10a-1) for transactions in 
securities issued under the TIRs program. See S.E.C. Exemption 
Letter, 1999 WL 1038048 (S.E.C.). the Exchange will issue a notice 
to its members detailing the terms of the exemption.
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    The Exchange's surveillance procedures for TIRs will be similar to 
the procedures for portfolio depository receipts and will incorporate 
and rely upon existing surveillance systems.
    f. Disclosure and Dissemination of Information. The Exchange will 
distribute an information circular to its members in connection with 
the trading of TIRs. It will discuss the special characteristics and 
risks of trading this type of security, including the fact that TIRs 
are not individually redeemable. Specifically, the circular, among 
other issues, will discuss what TIRs are, how they are created, the 
requirement that member and member firms deliver a prospectus to 
investors purchasing TIRs prior to or concurrently with the 
confirmation of a TIRs transaction, applicable PCXE rules, 
dissemination information, trading information, and the applicability 
of suitability rules. In addition, the circular will inform members of 
specific PCXE policies, such as trading halts and market conditions 
particular to such securities.
2. Basis
    The Exchange believes that the proposed rule change is consistent 
with section 6(b) of the Act,\15\ in general, and furthers the 
objectives of section 6(b)(5),\16\ in particular, in that it is 
designed to promote just and equitable principles of trade, to enhance 
competition and to protect investors and the public interest.
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    \15\ 15 U.S.C. 78f(b).
    \16\ 15. U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

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

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

    Written comments on the proposed rule change were neither solicited 
nor received.

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, 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 provisions 
of 5 U.S.C. 552, will be available for inspection and copying in the 
Commission's Public Reference Room. Copies of such filing will also be 
available for inspection and copying at the principal office of the 
PCX. All submissions should refer to File No. SR-PCX-2001-01 and should 
be submitted by May 22, 2001.

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

    After careful review, the Commission finds that the proposed rule 
change is consistent with the requirements of section 6(b)(5) of the 
Act \17\ and the rules and regulations thereunder applicable to a 
national securities exchange. Specifically, the Commission finds that 
the proposal to provide standards to permit listing and trading of 
trust issued receipts pursuant to Rule 19b-4(e) \18\ furthers the 
intent of that rule by facilitating commencement of trading in these 
securities without the need for notice and comment and Commission 
approval. By establishing listing standards, the proposals should 
reduce PCX's regulatory burden, as well as benefit the public interest, 
by enabling PCX to bring qualifying products to the market more 
quickly. Accordingly, the Commission finds that PCX'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.\19\
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    \17\ 15 U.S.C. 78f(b)(5).
    \18\ 17 CFR 240.19b-4(e).
    \19\ 15 U.S.C. 78f(b)(5). In approving these rules, the 
Commission has considered their impact on efficiency, competition, 
and capital formation. 15 U.S.C. 78c(f).
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    As described above, the Commission has previously approved similar 
Amex and CHX rules that permit the listing and trading of individual 
trust issued receipts.\20\ 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 notes 
that PCX's proposed standards are substantially similar to the Amex and 
CHX standards. The Commission therefore believes that trust issued 
receipts that satisfy PCX's proposed standards should produce the same 
benefits to PCX and to investors.
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    \20\ 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 listing standards for 
these securities and applying Rule 19b-4(e) should fulfill the intended 
objective of that rule by allowing those products that satisfy the 
listing standards to start trading without the need for notice and 
comment and Commission approval. PCX'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 it maintains regulatory oversight over any products listed under 
the generic standards through regular inspection oversight.
    The Commission finds that PCX's proposal contains adequate rules 
and procedures to govern the listing and trading of trust issued 
receipts pursuant to Rule 19b-4(e) on the PCX, or pursuant to UTP. All 
trust issued receipt products listed under the standards will be 
subject to the full panoply of PCX rules and procedures that now govern 
both the trading of trust issued receipts and the trading of equity 
securities on the Amex and CHX, including, among

[[Page 21801]]

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.
    The Commission further finds that: (1) By requiring that the 
underlying securities in a trust issued receipt be 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 Exchange's 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 receipts 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,\21\ 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.
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    \21\ 15 U.S.C. 78f(b)(5).
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    Additionally, as the Commission noted in its previous review and 
approval of CHX and Amex Rules, the Exchange's delisting criteria 
allows it 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 the Exchange flexibility to 
delist trust issued receipts if circumstances warrant.
    The Commission notes that, in connection with its previous review 
and approval of CHX and Amex Rules, it approved similar applicable 
minimum price increments, surveillance procedures, and disclosure and 
prospectus delivery requirements for trust issued receipts.\22\ In 
accord with these previous findings, the Commission believes that PCX's 
proposed rules will provide adequate safeguards to prevent manipulative 
acts and practices and to protect investors and the public interest. 
Further, the Commission believes that the proposal 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\ See note 22, supra.
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    Finally, PCX will file Form 19b-4(e) with the Commission within 
five business days of commencement of trading a trust issued receipt 
under the listing standards and will comply with all Rule 19b-4(e) 
recordkeeping requirements.
    The Commission finds good cause for approving the proposed rule 
change (SR-PCX-2001-01) prior to the thirtieth day after the date of 
publication of notice thereof in the Federal Register. The Commission 
notes that the proposed rule change is similar to rules previously 
approved by the Commission for Amex and CHX, and that is concerns 
issues that previously have been the subject of a full comment period 
pursuant to section 19(b) of the Act.\23\ The Commission does not 
believe that the proposed rule change raises novel regulatory issues 
that were not addressed in the previous filings. Moreover, the 
Commission believes that approving the listing and trading of TIRs on 
the PCX will increase industry competitiveness by providing an 
additional venue for the trading of such issues, to the benefit of the 
investor. Accordingly, the Commission finds that there is good cause, 
consistent with section 6(b)(5) of the Act,\24\ to approve the proposal 
on an accelerated basis, and before expiration of the period for filing 
comments.
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    \23\ 15 U.S.C. 78s(b).
    \24\ 15 U.S.C. 78f(b)(6).
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V. Conclusion

    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\25\ that the proposed rule change (SR-PCX-2001-01) is hereby 
approved on an accelerated basis.
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    \25\ 15 U.S.C. 78s(6)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\26\
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    \26\ 17 CFR 200.30-3(a)(12)
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-10746 Filed 4-30-01; 8:45 am]
BILLING CODE 8010-01-M
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