Federal Register / Vol. 66, No. 114 / Wednesday, June 13, 2001 / Notices 31953

3For both phases of the private placement, the

NASD’s percentage ownership of Nasdaq assumes

that all warrants sold are fully exercised. Recently,

Nasdaq also announced an agreement to sell

subordinated debentures convertible into Nasdaq

common stock to a private equity firm. If fully

converted, this private equity firm would own

approximately 9.8% of Nasdaq common stock. The

Division currently is considering changes to

Nasdaq’s Certificate of Incorporation that would be

necessary to consummate the sale of these

debentures.

4Securities Exchange Act Release No. 37107

(April 11, 1996), 61 FR 16948 (April 18, 1996).

5Pursuant to Rule 3a1–1, an organization,

association, or group of persons shall be exempt

from the definition of ‘‘exchange’’ if it is operated

by a national securities association. Unless another

exemption from the definition of ‘‘exchange’’

applies, such organization, association, or group of

persons that otherwise meets the definition of an

‘‘exchange’’ must register as such with the

Commission. 17 CFR 240.3a1–1.

6The voting trust will automatically expire and

the NASD will no longer control or operate Nasdaq

upon Nasdaq’s registration as an exchange.

7Section 19(a) of the Exchange Act, 15 U.S.C.

78(s)(a).

8 15 U.S.C. 78f(b)(1).

9 15 U.S.C. 78j(a).

10 15 U.S.C. 78k(a).

11 15 U.S.C. 78k–1.

12 17 CFR 240.11Ac1–1(b)1(ii).

shares of Nasdaq it owned, and Nasdaq

also issued and sold additional shares.

As a result, the NASD’s ownership

interest in Nasdaq was reduced from

100% to 60%. The second phase of the

private placement was completed on

January 18, 2001, and as a result the

NASD’s ownership interest in Nasdaq

was further reduced to 40%.3

Nasdaq currently is operated by the

NASD pursuant to a Plan of Allocation

and Delegation of Functions by the

NASD to Subsidiaries as approved by

the Commission.4 Until approval of

Nasdaq’s exchange registration, the

shares of common stock underlying

unexercised and unexpired warrants, as

well as the shares of common stock

purchased through the valid exercise of

warrants, will be voted by a trustee at

the direction of the NASD. Thus, even

though the NASD has divested itself of

its ownership interest and currently

does not own a controlling interest in

Nasdaq, the NASD nonetheless

exercises effective control over Nasdaq

through voting until the Commission

approves Nasdaq’s exchange

registration.

II. Nasdaq’s Exchange Registration

Nasdaq currently is exempt from the

definition of ‘‘exchange’’ under Rule

3a1–1 because it is operated by the

NASD.5 Before the NASD may

relinquish control, Nasdaq must register

as a national securities exchange.6

Accordingly, Nasdaq has filed a

complete Form 1, including all of the

required exhibits, to register as a

national securities exchange.

The Form 1 provides detailed

information about Nasdaq and how it

proposes to satisfy the requirements of

the Exchange Act. The Commission

shall grant such registration if it finds

that the requirements of the Exchange

Act and the rules and regulations

thereunder with respect to Nasdaq are

satisfied.7 There are a number of

implications to Nasdaq’s separation

from the NASD and application to

register and operate as an exchange. For

example, Nasdaq will have to

demonstrate that it has the capacity to

comply, and enforce compliance by its

members, with the Exchange Act and its

own rules.8 In addition, while members

of a national securities association are

not subject to section 10(a) 9 when

trading Nasdaq stocks, if the

Commission approves Nasdaq’s

registration as an exchange, Section

10(a) will apply to such trading.

Moreover, while Nasdaq members are

not subject to section 11(a) 10 of the

Exchange Act for their Nasdaq

transactions, they would be subject to

section 11(a) if Nasdaq becomes an

exchange. Furthermore, while the Form

1 contemplates that Nasdaq will be an

exchange trading Nasdaq National

Market securities and Nasdaq SmallCap

securities, the future operation of the

Over-the-Counter Bulletin Board must

be addressed. Before Nasdaq can register

as a national securities exchange, it

must be able to satisfy its obligations

under section 11A 11 of the Act. Finally,

Nasdaq’s exchange registration has

implications for the NASD which, as a

national securities association, will

continue to be required to collect bids,

offers and quotation sizes for those

entities seeking to trade listed securities,

including Nasdaq securities, otherwise

than on a national securities

exchange.12 The Commission notes that

the NASD’s quotation and transaction

reporting facility must be operational

upon Nasdaq’s exchange registration.

III. Solicitation of Comments

A complete copy of Nasdaq’s Form 1

is available in the Commission’s Public

Reference Room, File No. 10–131.

Portions of Nasdaq’s Form 1, including

Nasdaq’s rules, also are available on the

Commission’s website at http:/

www.sec.gov/rules/other.shtml.

Interested persons should submit three

copies of their written data, views and

opinions on Nasdaq’s Form 1 to

Jonathan G. Katz, Secretary, Securities

and Exchange Commission, 450 Fifth

Street, NW., Washington, D.C. 20549–

0609. Comments also may be submitted

electronically at the following E-mail

address: rule-comments@sec.gov.

Comments must be received on or

before July 30, 2001. All comment

letters should refer to File No. 10–131;

this file number should be included on

the subject line if comments are

submitted using E-mail. The

Commission requests that commenters

focus on issues raised in Nasdaq’s Form

1, File No. 10–131, when submitting

comments in response to this notice.

Commenters wishing to address another

specific rule filing by the NASD

pending with the Commission should

direct their comments to that specific

rule proposal. Copies of all submissions,

amendments, and all written statements

will be available for public inspection

and copying at the Commission’s Public

Reference Room. Electronically

submitted comment letters will be

posted on the Commission’s Internet

website (http://www.sec.gov).

For questions regarding this release,

contact Rebekah Liu, Special Counsel, at

(202) 942–0133; Geoffrey Pemble,

Attorney, at (202) 942–0757, Division of

Market Regulation, Securities and

Exchange Commission, 450 Fifth Street,

Washington, DC 20549–1001.

By the Commission.

Jonathan G. Katz,

Secretary.

[FR Doc. 01–14831 Filed 6–12–01; 8:45 am]

BILLING CODE 8010–01–U

SECURITIES AND EXCHANGE

COMMISSION

[Investment Company Act Release No.

24999; 812–12406]

AB Funds Trust, et al.; Notice of

Application

June 7, 2001.

AGENCY: Securities and Exchange

Commission (‘‘Commission’’).

ACTION: Notice of application under: (a)

Section 12(d)(1)(J) of the Investment

Company Act of 1940 (the ‘‘Act’’)

requesting an exemption from section

12(d)(1) of the Act; sections 6(c) and

17(b) of the Act requesting an

exemption from section 17(a) of the Act;

and section 17(d) of the Act and rule

17d-1 under the Act to permit certain

joint transactions; (b) section 12(d)(1)(J)

of the Act requesting an exemption from

section 12(d)(1)(G)(i)(II) of the Act; (c)

sections 6(c), 10(f) and 17(b) of the Act

requesting an exemption from sections

17(a), 17(e), 10(f) and 12(d)(3) of the Act

and rule 17e-1 under the Act; and (d)

section 17(b) of the Act requesting an

exemption from section 17(a) of the Act.

31954 Federal Register / Vol. 66, No. 114 / Wednesday, June 13, 2001 / Notices

1Applicants state that any entity that currently

intends to rely on the exemptive order requested is

named as an applicant and that any other existing

or future entity that relies on the order will comply

with the terms and conditions of the application.

Summary of the Application:

Applicants seek an order to permit

certain common trust funds to transfer

their assets to certain series of a

registered open-end management

investment company in exchange for

shares of the series, and to permit

certain series of the open-end

management investment company (a) to

invest cash reserves in an affiliated

money market fund; (b) to operate as

funds of funds, investing a portion of

their assets directly in securities; and (c)

advised by several investment advisers,

to engage in principal and brokerage

transactions with a broker-dealer

affiliated with one of the investment

advisers or to purchase securities in

certain underwritings. The transactions

would be between a broker-dealer and a

portion of the investment company’s

portfolio not advised by the adviser

affiliated with that broker-dealer. The

order also would permit these

investment companies not to aggregate

certain purchases from an underwriting

syndicate in which an affiliated person

of one of the investment advisers is a

principal underwriter. Further,

applicants request relief to permit a

portion of an investment company’s

portfolio to purchase securities issued

by an affiliated person of an investment

adviser to another portion, subject to the

limits in rule 12d3-1 under the Act.

Applicants: AB Funds Trust

(‘‘Trust’’), Annuity Board of the

Southern Baptist Convention (‘‘Annuity

Board’’) and SBC Financial Services,

Inc. (‘‘Adviser’’).

Filing Dates: The application was

filed on January 12, 2001 and amended

on June 7, 2001. Applicants have agreed

to file another amendment during the

notice period, the substance of which is

reflected in this notice.

Hearing or Notification of Hearing: An

order granting the application will be

issued unless the Commission orders a

hearing. Interested persons may request

a hearing by writing to the

Commission’s Secretary and serving

applicants with a copy of the request,

personally or by mail. Hearing requests

should be received by the Commission

by 5:30 p.m. on June 28, 2001 and

should be accompanied by proof of

service on the applicants, in the form of

an affidavit or, for lawyers, a certificate

of service. Hearing requests should state

the nature of the writer’s interest, the

reason for the request, and the issues

contested. Persons who wish to be

notified of a hearing may request

notification by writing to the

Commission’s Secretary.

ADDRESSES: Secretary, Securities and

Exchange Commission, 450 Fifth Street,

NW., Washington, DC 20549–0609.

Applicants, Rodney R. Miller, Esq.,

Annuity Board of the Southern Baptist

Convention, 2401 Cedar Springs Road,

Dallas, Texas 75201–1407.

FOR FURTHER INFORMATION CONTACT:

Karen L. Goldstein, Senior Counsel, at

(202) 942–0646 (Division of Investment

Management, Office of Investment

Company Regulation).

SUPPLEMENTARY INFORMATION: The

following is a summary of the

application. The complete application

may be obtained for a fee at the

Commission’s Public Reference Branch,

450 Fifth Street, NW., Washington, DC

20549–0102, (tel. (202) 942–8090).

Applicants’ Representations

A. Overview

1. The Annuity Board is a Texas nonprofit corporation that sponsors and

maintains retirement and welfare

benefit plans (‘‘plans’’) for the

employees of churches and

organizations controlled by, or

associated with, the Southern Baptist

Convention (‘‘SBC’’). The plans invest

primarily in four Southern Baptist

investment funds (‘‘BIFs’’) and nine

Southern Baptist investment pools

(‘‘BIPs’’), all of which are maintained by

the Annuity Board. The BIFs allocate

investments among the BIPs to achieve

an asset allocation that is appropriate to

each BIF’s investment strategy,

generally balancing fixed income and

equity exposure in proportion to a BIF’s

risk level. The BIFs and the BIPs are

managed in accordance with the moral

and ethical principles of the SBC and

are exempt from registration as

investment companies pursuant to

section 3(c)(14) of the Act.

2. The Annuity Board has been

charged with providing an expanded

range of investment opportunities to

Southern Baptist organizations and to

persons eligible to participate in the

plans provided by the Annuity Board.

These expanded services, which would

not be consistent with maintenance of

the BIPs’ and BIFs’ exemption from

registration under the Act, will be

provided by the Trust.

3. The Trust, established as a

Delaware business trust, will register

under the Act as an open-end

management investment company. The

Trust will have thirteen series

(collectively, the ‘‘Funds’’). Four of the

Funds will operate as funds of funds

pursuant to Section 12(d)(1)(G) under

the Act (the ‘‘Blended Funds’’). The

Blended Funds will allocate their

investments among the nine other

Funds (the ‘‘Select Funds’’). Investors

may also purchase shares of the Select

Funds directly.

4. The Adviser, a controlled affiliate

of the Annuity Board, will act as

investment adviser to the Trust, and

will register as an investment adviser

under the Investment Advisers Act of

1940 (‘‘Advisers Act’’), prior to serving

as investment adviser to the Trust. With

the exception of two Funds, at least two

subadvisers will exercise discretion over

each Select Fund’s assets

(‘‘Subadvisers’’). Each Subadviser will

be registered, or exempt from

registration, under the Advisers Act.

The Board of Trustees of the Trust

(‘‘Board’’) will have overall

responsibility for the management of the

Funds.

5. The Annuity Board proposes to

transfer the assets of the BIPs and the

BIFs to the corresponding Select Funds

and the Blended Funds, in exchange for

shares of those Funds (the ‘‘Transfer’’).

Following the Transfer, the BIPs and

BIFs will terminate. Applicants request

an order under the Act to permit the

Transfer and exemptions from certain

provisions of the Act relating to the

operation of the Trust. Applicants

request that the relief (except the relief

relating to the Transfer) apply to any

future series of the Trust and to any

future registered open-end management

investment company advised by the

Adviser or any entity controlling,

controlled by, or under common control

with the Adviser.1

B. Investment of Cash Reserves in the

Money Market Fund

1. Other than the Select Fund that is

a money market Fund that complies

with rule 2a–7 under the Act (‘‘Money

Market Fund’’), each Select Fund (an

‘‘Investing Select Fund’’) has, or may be

expected to have, cash balances that

have not been invested in portfolio

securities (‘‘Cash Reserves’’). The Cash

Reserves may result from a variety of

sources, including dividends or interest

received from portfolio securities,

unsettled securities transactions,

reserves held for investment strategy

purposes, scheduled maturity of

investments, liquidation of investment

securities to meet anticipated

redemptions or dividend payments, and

new cash received from investors.

2. Applicants request an order to

permit the Investing Select Funds to

invest their Cash Reserves in shares of

the Money Market Fund and to permit

the Money Market Fund to sell its

Federal Register / Vol. 66, No. 114 / Wednesday, June 13, 2001 / Notices 31955

2The terms ‘‘Unaffiliated Subadviser,’’

‘‘Subadviser,’’ and ‘‘Unaffiliated Segment’’ include

the Adviser and the Segment of a Select Fund

directly advised by the Adviser, respectively,

provided that the Adviser manages its Segment of

the Select Fund independently of the Segments

managed by the other Subadvisers to the Select

Fund, and the Adviser does not control or influence

any other Subadviser’s investment decisions for its

Segment of the Select Fund. The Adviser does not

currently manage any Select Fund.

shares to, and redeem such shares from,

the Investing Select Funds. The

investment by each Investing Select

Fund in shares of the Money Market

Fund will be made in accordance with

that Investing Select Fund’s investment

policies and restrictions as set forth in

its registration statement.

C. Funds of Funds

Each Blended Fund proposes to invest

in shares of the Select Funds while also

investing a portion of its assets directly

in exchange listed equity futures

contracts and exchange listed U.S.

Treasury futures contracts. Applicants

request an exemption pursuant to

Section 12(d)(1)(J) of the Act from

Section 12(d)(1)(G)(i)(II) of the Act to

the extent necessary to permit each of

the Blended Funds, which will

otherwise operate pursuant to Section

12(d)(1)(G) of the Act, to make such

direct investments. These direct

investments will not include shares of

any investment companies.

D. Transactions Involving Funds With

Multiple Subadvisers

1. With the exception of two Select

Funds, each of the Select Funds will

have more than one Subadviser. Each

Subadviser will exercise discretion to

purchase and sell securities for a

discrete portion of a Select Fund’s assets

(each portion, a ‘‘Segment’’) in

accordance with the Select Fund’s

objectives, policies and restrictions.

Each Subadviser is paid directly by the

Select Fund it advises, based on a

percentage of the value of the Select

Fund’s assets allocated to its

management. The Adviser also may

directly advise a Segment of a Select

Fund.

2. Applicants request an exemption to

permit: (a) Any broker-dealer registered

under the Securities Exchange Act of

1934 (the ‘‘1934 Act’’) that itself serves

as Subadviser (either directly or through

a separate operation division)

(‘‘Affiliated Subadviser’’) or is an

affiliated person of a Subadviser to a

Segment of a Select Fund (‘‘Affiliated

Broker-Dealer’’) to engage in principal

transactions with a Segment of the

Select Fund that is advised by another

Subadviser that is not an affiliated

person of the Affiliated Broker-Dealer or

the Affiliated Subadviser (an

‘‘Unaffiliated Subadviser’’) (each such

Segment, an ‘‘Unaffiliated Segment’’);2

(b) an Affiliated Broker-Dealer to

provide brokerage services to an

Unaffiliated Segment, and the

Unaffiliated Segment to utilize such

brokerage services, without complying

with rule 17e–1(b) and (c) under the

Act; (c) an Unaffiliated Segment to

purchase securities during the existence

of an underwriting syndicate, a

principal underwriter of which is an

Affiliated Subadviser or a person of

which an Affiliated Subadviser is an

affiliated person (an ‘‘Affiliated

Underwriter’’); (d) a Segment advised by

an Affiliated Subadviser (‘‘Affiliated

Segment’’) to purchase securities during

the existence of an underwriting

syndicate, a principal underwriter of

which is an Affiliated Underwriter, in

accordance with the conditions of rule

10f–3 except that paragraph (b)(7) of the

rule would not require the aggregation

of purchases by the Affiliated Segment

with purchases by an Unaffiliated

Segment, and (e) an Unaffiliated

Segment to purchase securities issued

by an Affiliated Subadviser or an

affiliated person of the Affiliated

Subadviser engaged in securities-related

activities (‘‘Securities Affiliate’’), within

the limits of rule 12d3–1 under the Act.

E. The Transfer

Applicants request an exemption,

pursuant to section 17(b) of the Act,

from section 17(a) to permit the

following proposed transactions

constituting the Transfer: (a) Each BIP

will transfer its assets to a

corresponding Select Fund in exchange

for shares of the Select Fund and then

distribute the Select Fund shares, pro

rata, to its shareholders; and (b) each

BIF will transfer its assets to a

corresponding Blended Fund in

exchange for shares of the Blended

Funds and then distribute shares of the

Blended Funds pro rata to its

shareholders.

Applicants’ Legal Analysis

A. Investment of Cash Reserves by the

Investing Select Funds in the Money

Market Fund

1. Section 12(d)(1) of the Act

a. Section 12(d)(1)(A) of the Act

provides that a registered investment

company may not acquire securities of

another investment company if such

securities represent more than 3% of the

acquired company’s outstanding voting

stock, more than 5% of the acquiring

company’s total assets, or if such

securities, together with the securities of

other acquired investment companies,

represent more than 10% of the

acquiring company’s total assets.

Section 12(d)(1)(B) provides that no

registered open-end investment

company may sell its securities to

another investment company if the sale

will cause the acquiring company to

own more than 3% of the acquired

company’s outstanding voting stock, or

if the sale will cause more than 10% of

the acquired company’s voting stock to

be owned by investment companies.

b. Section 12(d)(1)(J) of the Act

provides that the Commission may

exempt any persons or transactions from

any provision of section 12(d)(1) to the

extent that the exemption is consistent

with the public interest and the

protection of investors. Applicants

request an order under section

12(d)(1)(J) of the Act to permit the

Investing Select Funds to purchase

shares of the Money Market Fund in

excess of the limits of section

12(d)(1)(A) and the Money Market Fund

to sell its shares to the Investing Select

Funds in excess of the limits of section

12(d)(1)(B).

c. Applicants maintain that the

proposed transactions will not result in

the abuses that sections 12(d)(1)(A) and

(B) were intended to address.

Applicants state that the Money Market

Fund will be managed specifically to

maintain a highly liquid portfolio, and

access to it will enhance each Investing

Select Fund’s ability to manage Cash

Reserves. Applicants state that there

will not be an inappropriate layering of

fees because shares of the Money Market

Fund sold to or redeemed by the

Investing Select Funds will not be

subject to a sales load, redemption fee,

distribution fee adopted in accordance

with rule 12b–1 under the Act, or a

service fee. Applicants state that if the

Money Market Fund shares were subject

to such fees, the Adviser will waive its

advisory fee for each Investing Select

Fund in an amount that offsets the

amount of the fees. In addition, in

connection with approving an

investment advisory contract under

section 15 of the Act, the Board of the

Investing Select Fund will consider to

what extent the advisory fee paid by the

Investing Select Fund to the Adviser

should be reduced as a result of the

Cash Reserves being invested in the

Money Market Fund. Each Investing

Select Fund also will invest Cash

Reserves in the Money Market Fund

only to the extent that the Investing

Select Fund’s aggregate investment of

Cash Reserves in the Money Market

Fund does not exceed 25% of the

Investing Select Fund’s total assets.

Applicants also state that the Money

31956 Federal Register / Vol. 66, No. 114 / Wednesday, June 13, 2001 / Notices

Market Fund will not acquire securities

of any investment company in excess of

the limits of section 12(d)(1)(A) of the

Act.

2. Section 17(a) of the Act

a. Sections 17(a)(1) and (2) of the Act

make it unlawful for any affiliated

person of a registered investment

company, or an affiliated person of the

affiliated person, acting as principal, to

sell or purchase any security to or from

the company. Section 2(a)(3) of the Act

defines an ‘‘affiliated person’’ of another

person to include any person 5% or

more of whose outstanding voting

securities are directly or indirectly

owned, controlled, or held with power

to vote by the other person; any person

directly or indirectly controlling,

controlled by, or under common control

with the other person; and, in the case

of an investment company, its

investment adviser.

b. Because the Adviser will serve as

each Select Fund’s investment adviser,

the Funds may be deemed to be under

common control and therefore affiliated

persons, or affiliated persons of an

affiliated person, of each other. In

addition, the Funds could be deemed to

be under common control by virtue of

the fact that they share a common

Board. In addition, if an Investing Select

Fund purchases more than 5% of the

outstanding voting securities of the

Money Market Fund, the Investing

Select Fund and Money Market Fund

would be affiliated persons of each

other. Accordingly, applicants state that

the sale and redemption of shares of the

Money Market Fund by the Investing

Select Fund may be prohibited by

section 17(a).

c. Section 17(b) of the Act authorizes

the Commission to exempt a transaction

from section 17(a) of the Act if the terms

of the proposed transaction, including

the consideration to be paid or received,

are reasonable and fair and do not

involve overreaching on the part of any

person concerned, and the proposed

transaction is consistent with the policy

of each investment company concerned

and the general purposes of the Act.

Section 6(c) of the Act authorizes the

Commission to exempt persons or

transactions, from the provisions of the

Act to the extent that such exemptions

are necessary or appropriate in the

public interest and consistent with the

protection of investors and the purposes

fairly intended by the policies and

provisions of the Act.

d. Applicants request an order under

sections 6(c) and 17(b) of the Act to

permit the Investing Select Funds to

purchase and redeem shares of the

Money Market Fund. Applicants state

that the proposed transactions satisfy

the standards of sections 6(c) and 17(b)

of the Act. Applicants state that the

consideration paid and received on the

sale and redemption of shares of the

Money Market Fund will be based on

the current net asset value per share of

the Money Market Fund. Applicants

also state that the Investing Select

Funds will retain their ability to invest

their Cash Reserves directly in money

market instruments and other short-term

instruments if they can obtain a higher

rate of return or for any other reason.

The Money Market Fund also reserves

the right to discontinue selling shares to

any of the Investing Select Funds if the

Board determines that the sales would

adversely affect the Money Market

Fund’s management and operations. In

addition, applicants state that the

investment of Cash Reserves of the

Investing Select Funds in shares of the

Money Market Fund will be effected in

accordance with each Investing Select

Fund’s investment restrictions and will

be consistent with each Investing Select

Fund’s policies as set forth in its

registration statement.

3. Section 17(d) of the Act and Rule

17d–1 under the Act

a. Section 17(d) of the Act and rule

17d–1 under the Act generally prohibit

an affiliated person of a registered

investment company, acting as

principal, from participating in or

effecting any transaction in connection

with any joint enterprise or joint

arrangement in which the investment

company participates unless the

Commission has approved the joint

arrangement by an order. Applicants

state that each Investing Select Fund

and the Money Market Fund, by

participating in the proposed

transactions, and the Adviser, by

effecting the proposed transactions,

could be deemed to be participants in a

joint enterprise for the purposes of

section 17(d) of the Act and rule 17d–

1 under the Act.

b. In passing on applications for

orders under section 17(d), rule 17d–1

requires that the Commission consider

whether an investment company’s

participation in a joint enterprise or

joint arrangement is consistent with the

provisions, policies, and purposes of the

Act, and the extent to which such

participation is on a basis different from

or less advantageous than that of other

participants. Applicants state that the

proposed transactions meet the

standards for an order under rule 17d–

1. Applicants state that the investment

by the Investing Select Funds of Cash

Reserves in shares of the Money Market

Fund would be on the same basis and

would be indistinguishable from any

other shareholder account maintained

by the Money Market Fund. The

proposed transactions will provide the

potential for increased returns and

reduced costs and reduced risks for the

Investing Select Funds and their

shareholders and are consistent with the

policies and purposes of the Act.

B. Investment by the Blended Funds in

the Select Funds

1. Section 12(d)(1)(G) of the Act

provides, in relevant part, that section

12(d)(1) will not apply to securities of

a registered open-end investment

company acquired by a registered openend investment company if: (i) The

acquiring company and the acquired

company are part of the same group of

investment companies, (ii) the acquiring

company holds only securities of

acquired companies that are part of the

same group of investment companies,

government securities, and short-term

paper; (iii) the aggregate sales loads and

distribution-related fees of the acquiring

company and the acquired company are

not excessive under rules adopted

pursuant to section 22(b) or section

22(c) of the Act by a securities

association registered under section 15A

of the 1934 Act or by the Commission;

and (iv) the acquired company has a

policy that prohibits it from acquiring

securities of registered open-end

management investment companies in

reliance on section 12(d)(1)(F) or (G).

Applicants state that the proposed

investment by the Blended Funds in the

Select Funds would comply with the

provisions of section 12(d)(1)(G), but for

the fact that each Blended Fund’s

policies contemplate that it may invest

a portion of its assets directly in

securities other than those specified in

section 12(d)(1)(G)(i)(II).

2. Applicants request an exemption

under section 12(d)(1)(J) of the Act from

section 12(d)(1)(G)(i)(II). Applicants

assert that permitting the Blended

Funds to invest directly in securities as

described in the application would not

raise any of the concerns that the

requirements of section 12(d)(1)(G)(i)(II)

were designed to address.

C. Transactions Involving Funds With

Multiple Subadvisers

1. Principal Transactions Between an

Unaffiliated Segment and an Affiliated

Broker-Dealer

a. Section 17(a) of the Act generally

prohibits sales or purchases of securities

between a registered investment

company and an affiliated person of,

promoter of, or principal underwriter

for such company, or any affiliated

Federal Register / Vol. 66, No. 114 / Wednesday, June 13, 2001 / Notices 31957

person of an affiliated person, promoter,

or principal underwriter. Section

2(a)(3)(E) of the Act defines an affiliated

person to be any investment adviser of

an investment company, and section

2(a)(3)(C) of the Act defines an affiliated

person of another person to include any

person directly or indirectly controlling,

controlled by, or under common control

with such person. Applicants assert that

an Affiliated Subadviser would be an

affiliated person of a Select Fund, and

an Affiliated Broker-Dealer would be

either an Affiliated Subadviser or an

affiliated person of an Affiliated

Subadviser, and thus an affiliated

person of an affiliated person (‘‘secondtier affiliate’’) of a Select Fund,

including the Unaffiliated Segment.

Accordingly, applicants state that any

transactions to be effected by an

Unaffiliated Subadviser on behalf of an

Unaffiliated Segment of a Select Fund

with an Affiliated Broker-Dealer are

subject to the prohibitions of section

17(a).

b. Applicants seek relief under

sections 6(c) and 17(b) to exempt

principal transactions prohibited by

section 17(a) because an Affiliated

Broker-Dealer is deemed to be an

affiliated person or a second-tier affiliate

of an Unaffiliated Segment of a Select

Fund solely because an Affiliated

Subadviser is the Subadviser to another

Segment of the Select Fund. The

requested relief would not be available

if the Affiliated Broker-Dealer (except by

virtue of serving as a Subadviser) is an

affiliated person or a second-tier affiliate

of the Adviser, principal underwriter or

promoter of the Trust, the Unaffiliated

Subadviser making the investment

decision or any officer, director or

employee of the Select Fund.

c. Applicants contend that section

17(a) is intended to prevent persons

who have the power to control an

investment company from using that

power to the person’s own pecuniary

advantage. Applicants assert that when

the person acting on behalf of an

investment company has no direct or

indirect pecuniary interest in a party to

a principal transaction, the abuses that

section 17(a) is designed to prevent are

not present. Applicants state that if an

Unaffiliated Subadviser purchases

securities on behalf of an Unaffiliated

Segment in principal transaction with

an Affiliated Broker-Dealer, any benefit

that might inure to the Affiliated BrokerDealer would not be shared by the

Unaffiliated Subadviser. In addition,

applicants state that Subadvisers are

paid on the basis of a percentage of the

value of the assets of the Segment

allocated to their management. The

execution of a transaction to the

disadvantage of the Unaffiliated

Segment would disadvantage the

Unaffiliated Subadviser to the extent

that it diminishes the value of the

Unaffiliated segment.

d. Applicants state that each

Subadviser’s contract assigns it

responsibility to manage a Segment of

the Select Fund and that each

Subadviser is responsible for making

independent investment and brokerage

allocation decisions based on its own

research and credit evaluations.

Applicants represent that the Adviser

does not dictate brokerage allocation or

investment decisions to any Select Fund

advised by a Subadviser, or have the

contractual right to do so, except with

respect to a Segment advised directly by

the Adviser. Applicants contend that, in

managing a discrete Segment of a Select

Fund, each Subadviser acts for all

practical purposes as though it is

managing a separate investment

company.

e. Applicants state that the proposed

transactions will be consistent with the

policies of the Select Fund involved,

since each Unaffiliated Subadviser is

required to manage the Unaffiliated

Segment in accordance with the

investment objectives and related

investment policies of the Select Fund

as described in its registration

statement. Applicants also assert that

permitting the transactions will be

consistent with the general purposes of

the Act and in the public interest

because the ability to engage in the

transactions increases the likelihood of

a Select fund achieving best price and

execution on its principal transactions,

while giving rise to none of the abuses

that the Act was designed to prevent.

Payment of Brokerage Compensation by

an Unaffiliated Segment to an Affiliated

Broker-Dealer

a. Section 17(e)(2) of the Act prohibits

an affiliated person or a second-tier

affiliate of a registered investment

company from receiving compensation

for acting as broker in connection with

the sale of securities to or by the

investment company if the

compensation exceeds the limits

prescribed by the section unless

otherwise permitted by rule 17e–1

under the Act. Rule 17–1 sets forth the

conditions under which an affiliated

person or a second-tier affiliate of an

investment company may receive a

commission which would not exceed

the ‘‘usual and customary broker’s

commission’’ for purposes of section

17(e)(2). Rule 17e–1(b) requires the

investment company’s board of

directors, including a majority of the

directors who are not interested persons

under section 2(a)(19) of the Act, to

adopt certain procedures and to

determine at least quarterly that all

transactions effected in reliance on the

rule complied with the procedures. Rule

17e–1(c) specifies the records that must

be maintained by each investment

company with respect to any transaction

effected pursuant to rule 17e–1.

b. As discussed above, applicants

state that an Affiliated Broker-Dealer is

either an affiliated person (as

Subadviser to another segment of a

Select Fund) or a second-tier affiliate of

an Unaffiliated Segment and thus

subject to section 17(e). Applicants

request an exemption under section 6(c)

from section 17(e) and rule 17e–1 to the

extent necessary to permit an

Unaffiliated Segment to pay brokerage

compensation to an Affiliated BrokerDealer acting as broker in the ordinary

course of business in connection with

the sale of securities to or by such

Unaffiliated Segment, without

complying with the requirements of rule

17e–1 (b) and (c). The requested

exemption would apply only where an

Affiliated Broker-Dealer is deemed to be

an affiliated person or a second-tier

affiliate of an Unaffiliated Segment

solely because an Affiliated Subadviser

is the Subadviser to another Segment of

the same Select Fund. The relief would

not apply if the Affiliated Broker-Dealer

(except by virtue of serving as

Subadviser) is an affiliated person or a

second-tier affiliate of the Adviser,

principal underwriter or promoter of the

Trust, the Unaffiliated Subadviser to the

Unaffiliated Segment of the Select Fund,

or any officer, director or employee of

the Select Fund.

c. Applicants believe that the

proposed brokerage transactions involve

no conflicts of interest or possibility of

self-dealing and will meet the standards

of section 6(c). Applicants state that the

interests of an Unaffiliated Subadviser

are directly aligned with the interests of

the Unaffiliated Segment it advises, and

an Unaffiliated Subadviser will enter

into brokerage transactions with

Affiliated Broker-Dealers only if the fees

charged are reasonable and fair, as

required by rule 17e–1(a) under the Act.

Applicants also note that an Unaffiliated

Subadviser has a fiduciary duty to

obtain best price and execution for the

Unaffiliated Segment.

3. Purchases of Securities from Offerings

with an Affiliated Underwriter

a. Section 10(f) of the Act, in relevant

part, prohibits a registered investment

company from knowingly purchasing or

otherwise acquiring, during the

existence of any underwriting or selling

syndicate, any security (except a

31958 Federal Register / Vol. 66, No. 114 / Wednesday, June 13, 2001 / Notices

security of which the company is the

issuer) a principal underwriter of which

is an officer, director, member of an

advisory board, investment adviser, or

employee of the company, or an

affiliated person of any of those persons.

Section 10(f) also provides that the

Commission may exempt by order any

transaction or classes of transactions

from any of the provisions of section

10(f), if and to the extent that such

exemption is consistent with the

protection of investors. Rule 10f–3

under the Act exempts certain

transactions from the prohibitions of

section 10(f) if specified conditions are

met. Paragraph (b)(7) of rule 10f–3 limits

the securities purchased by the

investment company, or by two or more

investment companies having the same

investment adviser, to 25% of the

principal amount of the offering of the

class of securities.

b. Applicants state that each

Subadviser to a Select Fund, although

under contract to manage only a distinct

Segment of the Select Fund, is

considered an investment adviser to the

entire Select Fund. As a result,

applicants, state that all purchases of

securities by an Unaffiliated Segment

from an underwriting syndicate a

principal underwriter of which is an

Affiliated Underwriter would be subject

to section 10(f).

c. Applicants request relief under

section 10(f) from section 10(f) to permit

an Unaffiliated Segment to purchase

securities during the existence of an

underwriting or selling syndicate, a

principal underwriter of which is an

Affiliated Underwriter. Applicants

request relief from section 10(f) only to

the extent those provisions apply solely

because an Affiliated Subadviser is an

investment adviser to the Select Fund.

The requested relief would not be

available if the Affiliated Underwriter

(except by virtue of serving as

Subadviser) is an affiliated person or a

second-tier affiliate of the Adviser,

principal underwriter or promoter of the

Trust, the Unaffiliated Subadviser

making the investment decision with

respect to the Unaffiliated Segment of

the Select Fund, or any officer, director,

or employee of the Select Fund.

Applicants also seek relief from section

10(f) to permit an Affiliated Segment to

purchase securities during the existence

of an underwriting syndicate, a

principal underwriter of which is an

Affiliated Underwriter, provided that

the purchase will be in accordance with

the conditions of rule 10f–3, except that

paragraph (b)(7) of the rule will not

require the aggregation of purchases by

the Affiliated Segment with purchases

by an Unaffiliated Segment.

d. Applicants state that section 10(f)

was adopted in response to concerns

about the ‘‘dumping’’ of otherwise

unmarketable securities on investment

companies, either by forcing the

investment company to purchase

unmarketable securities from its

underwriting affiliate, or by forcing or

encouraging the investment company to

purchase the securities from another

member of the syndicate. Applicants

submit that these abuses are not present

in the context of the Select Funds

because a decision by an Unaffiliated

Subadviser to purchase securities from

an underwriting syndicate, a principal

underwriter of which is an Affiliated

Underwriter, involves no potential for

‘‘dumping.’’ In addition, applicants

assert that aggregating purchases would

serve no purpose because there is no

collaboration among Subadvisers to the

same Select Fund, and any common

purchases by an Affiliated Subadviser

and an Unaffiliated Subadviser would

be coincidence.

4. Purchases of Securities Issued by a

Securities Affiliate

a. Section 12(d)(3) of the Act generally

prohibits a registered investment

company from acquiring any security

issued by any person who is a broker,

dealer, investment adviser, or engaged

in the business of underwriting

(collectively, ‘‘securities-related

activities’’). Applicants assert that

because a Securities Affiliate is engaged

in securities-related activities, an

Unaffiliated Segment of a Select Fund

advised by an Unaffiliated Subadviser

would be prohibited by section 12(d)(3)

from purchasing the securities issued by

the Securities Affiliate.

b. Rule 12d3–1 under the Act exempts

from the prohibition of section 12(d)(3)

purchases of securities of an issuer

engaged in securities-related activities if

certain conditions are met. One of these

conditions, set forth in rule 12d3–1(c),

prohibits the acquisition of a security

issued by the investment company’s

investment adviser, promoter, or

principal underwriter, or any affiliated

person of the investment adviser,

promoter, or principal underwriter.

c. Applicants state that each

Subadviser to a Segment is considered

to be an investment adviser to the entire

Select Fund. Thus, applicants state that

a purchase by an Unaffiliated Segment

of securities issued by a Securities

Affiliate would not meet rule 12d3–1(c)

and that applicants are therefore unable

to rely on the rule.

d. Applicants request an exemption

under section 6(c) from section 12(d)(3)

to permit an Unaffiliated Segment to

purchase securities issued by a

Securities Affiliate, provided that all of

the requirements of rule 12d3–1, except

rule 12d3–1(c), are met. Applicants state

that their proposal does not raise the

conflicts of interest that rule 12d3–1(c)

was designed to address because of the

nature of the affiliation between a

Securities Affiliate and the Unaffiliated

Segment. Applicants submit that each

Subadviser acts independently of the

other Subadvisers in making investment

and brokerage allocation decisions for

the assets allocated to its Segment and

that Unaffiliated Subadvisers have no

economic incentive to purchase shares

of a Securities Affiliate other than to

increase the value of the Unaffiliated

Segment or Select Fund for the benefit

its shareholders. Applicants state that

the requested relief would not extend to

securities issued by the Subadviser

making the purchase, the Adviser, a

principal underwriter or promoter of the

Trust or to any affiliated person of these

entities. Applicants assert that

prohibiting an Unaffiliated Segment of a

Select Fund from purchasing securities

issued by a Securities Affiliate may

cause Unaffiliated Subadvisers to forego

investment opportunities that would be

in the best interests of the Funds’

shareholders.

D. The Transfer

1. Section 17(a) of the Act provides

that it is unlawful for any affiliated

person of a registered investment

company, or any affiliated person of

such person, acting as principal,

knowingly (a) to sell any security or

other property to such registered

investment company, or (b) to purchase

from such registered investment

company any security or other property.

Section 2(a)(3) of the Act defines the

term ‘‘affiliated person’’ of another

person to include (a) any person owing,

controlling, or holding with power to

vote, 5% or more of the outstanding

voting securities of such other person;

(b) any person controlling, controlled

by, or under common control with, any

investment adviser thereof.

2. Because the BIPs might be viewed

as acting as principal in the Transfer,

and because the BIPs and the Funds

might be viewed as being under

common control of the Annuity Board

within the meaning of section 2(a)(3) of

the Act, the Transfer may be subject to

the prohibitions of section 17(a).

3. Rule 17a–7 exempts certain

purchase and sale transactions

otherwise prohibited by section 17(a) if

an affiliation exists solely by reason of

having a common investment adviser,

common directors, and/or common

officers, provided, among other

requirement, that the transaction

Federal Register / Vol. 66, No. 114 / Wednesday, June 13, 2001 / Notices 31959

involves a cash payment against prompt

delivery of the security. The relief

provided by rule 17a–7 may not be

available for the Transfer because the

ownership of 5% or more of the

outstanding voting shares of the Funds

by the Annuity Board may create an

affiliation ‘‘not solely by reason of’’

having a common investment adviser,

common directors, and/or common

officers. In addition, the Transfer will be

effected on a basis other than cash.

4. Rule 17a–8 exempts mergers,

consolidations, and assets sales of

registered investment companies from

the provisions of section 17(a) of the Act

if an affiliation exists solely by reason

of having a common investment adviser,

common directors, and/or common

officers, provided, among other

requirements, that the board of directors

of each affiliated investment company

make certain determinations that the

transactions are fair. The relief provided

by rule 17a–8 may not be available for

the Transfer because the BIPs are not

registered investment companies. In

addition, the relief provided by rule

17a–8 may not be available for the

Transfer because the ownership of 5%

or more of the outstanding voting shares

of the Funds by the Annuity Board may

create an affiliation ‘‘not solely by

reason of’’ having a common investment

adviser, common directors, and/or

common officers.

5. Applicants seek an order under

section 17(b) to allow the Transfer.

Applicants submit that the Transfer

satisfies the standard for relief under

section 17(b). Applicants state that the

Transfer will comply with rule 17a–7(b)

through (f) and any applicable no-action

letters.

6. The Transfer is designed to provide

the current BIP and BIF participants

substantially the same assets and

investment vehicles currently available

to them, but in a registered investment

company structure. Applicants state that

the assets of the BIPs to be transferred

to the Select Funds will be valued in

accordance with the provisions of rule

17a–7(b) under the Act. The BIP

corresponding to the Money Market

Fund will value its assets in accordance

with rule 2a–7 under the Act. The

transfer of Select Fund shares by the

BIFs to the Blended Funds in exchange

for Blended Funds’ shares will be made

at the net asset value of the Select

Funds’ and Blended Funds’ shares

determined in accordance with the Act.

The transactions will occur

simultaneously and will involve no

brokerage commissions, fees or other

expenses, other than customary transfer

fees.

7. Applicants state that the Transfer

will not occur unless the Board,

including a majority of the Trustees who

will not be ‘‘interested trustees’’ as

defined in section 2(a)(19) of the Act

(the ‘‘Disinterested Trustees’’), has

determined that participation by the

Funds in the Transfer is in the best

interests of each Fund and its

shareholders and that the interests of

existing shareholders of the Funds will

not be diluted as a result of the Transfer.

Applicants’ Conditions

Applicants agree that any order

granting the requested relief will be

subject to the following conditions:

A. Investment of Cash Reserves in the

Money Market Fund

1. Investment in shares of the Money

Market Fund will be in accordance with

each Investing Select Fund’s policies as

set forth in its prospectus and statement

of additional information.

2. The shares of the Money Market

Fund sold to and redeemed from the

Investing Select Funds will not be

subject to a sales load, redemption fee,

distribution fee under a plan adopted in

accordance with rule 12b–1 under the

Act or service fee as defined in rule

2830(b)(9) of the Conduct Rules of the

National Association of Securities

Dealers, Inc. or if such shares are subject

to any such fee, the Adviser will waive

its advisory fee for each Investing Select

Fund in an amount that offsets the

amount of such fees incurred by the

Investing Select Fund.

3. Prior to reliance on the requested

order by any Investing Select Fund, the

Board will hold a meeting for the

purpose of voting on the Advisory

Agreement. Before approving the

advisory contract, the Board, including

a majority of the Disinterested Trustees,

will consider to what extent, if any, the

advisory fees charged to an Investing

Select Fund by the Adviser should be

reduced to account for the reduced

services provided to the Investing Select

Fund by the Adviser as a result of Cash

Reserves being invested in the Money

Market Fund. The Adviser will provide

the Board with specific information

regarding the approximate cost to the

Adviser for, or portion of the advisory

fee under the existing advisory fee

attributable to, managing the Cash

Reserves of the Investing Select Fund

that can be expected to be invested in

the Money Market Fund. The minute

books of the Investing Select Fund will

fully record the Board’s consideration in

approving the advisory contract,

including the fees referred to above.

4. Each Investing Select Fund will

invest Cash Reserves in, and hold shares

of, the Money Market Fund only to the

extent that the Investing Select Fund’s

aggregate investment of Cash Reserves

in the Money Market Fund does not

exceed 25% of the Investing Select

Fund’s total assets. For purposes of this

limitation, each Investing Select Fund

will be treated as a separate investment

company.

5. Each Investing Select Fund, the

Money Market Fund, and any future

registered open-end investment

company that may rely on the order,

will be part of the same group of

investment companies as defined in

section 12(d)(1)(G)(ii) of the Act and

will be advised by the Adviser, or a

person controlling, controlled by, or

under common control with the

Adviser.

6. The Money Market Fund will not

acquire securities of any other

investment company in excess of the

limits contained in section 12(d)(1)(A)

of the Act.

B. The Blended Funds

1. Before approving any advisory

contract under section 15 of the Act, the

Board, including a majority of the

Disinterested Trustees, will find that

advisory fees, if any, charged under the

contract with a Blended Fund are based

on services provided that are in addition

to, rather than duplicative of, services

provided pursuant to any underlying

Select Fund’s advisory contract. This

finding, and the basis upon which it

was made, will be recorded fully in the

minute books of the Blended Funds.

2. Applicants will comply with all

provisions of section 12(d)(1)(G), except

for section 12(d)(1)(G)(i)(II) to the extent

that it restricts a Blended Fund from

investing directly in securities as

described in the application.

C. Transactions Involving Funds With

Multiple Subadvisers

1. Each Fund relying on the requested

order will be advised by an Affiliated

Subadviser and at least one Unaffiliated

Subadviser will be operated in the

manner described in the application.

2. No Affiliated Subadviser, Affiliated

Broker-Dealer, Affiliated Underwriter of

Securities Affiliate (except by virtue of

serving as Subadviser to a Segment of a

Fund) will be an affiliated person or a

second-tier affiliate of the Adviser, any

Unaffiliated Subadviser, any principal

underwriter or promoter of a Select

Fund, or any officer, director, or

employee of a Select Fund.

3. No Affiliated Subadviser will

directly or indirectly consult with any

Unaffiliated Subadvisers concerning

allocation of principal or brokerage

transactions or concerning the purchase

31960 Federal Register / Vol. 66, No. 114 / Wednesday, June 13, 2001 / Notices

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

2 17 CFR 240.19b–4.

3 17 CFR 240.11 Ac1–5.

4 Generally, the Rule seeks to improve the ability

of public investors to evaluate how their orders are

handled after being submitted to a broker-dealer for

execution. The Rule requires market centers that

trade national market system securities to prepare

and make publicly available standardized, monthly

reports containing statistical information

concerning the handling and execution of their

covered orders. To facilitate cross-market

comparisons, the Rule established and defines

uniform measures to execution quality, including

effective spread, rate of price improvement and

disimprovement, fill rate, and execution speed.

of securities issued by Securities

Affiliates. Subadvisers may consult with

the Adviser in order to monitor

regulatory compliance, including

compliance with the limits of rule

12d3–1.

4. No Affiliated Subadviser will

participate in any arrangement whereby

the amount of its subadvisory fees will

be affected by the investment

performance of an Unaffiliated

Subadviser.

5. With respect to purchases of

securities by an Affiliated Segment of a

Select Fund during the existence of any

underwriting or selling syndicate, a

principal underwriter of which is an

Affiliated Underwriter, the conditions of

rule 10f–3 under the Act will be

satisfied except that paragraph (b)(7)

will not require the aggregation of

purchases by the Affiliated Segment of

the Select Fund with purchases by an

Unaffiliated Segment.

6. Each Select Fund will comply with

rule 12d3–1, except paragraph (c) of that

rule solely with respect to purchases by

an Unaffiliated Segment of a Select

Fund of securities issued by a Securities

Affiliate that would be prohibited by

rule 12d3–1 solely because the

Securities Affiliates is an Affiliated

Subadviser, or an affiliated person of an

Affiliated Subadviser to an Affiliated

Segment of the Select Fund.

D. The Transfer

1. The Transfer will comply with rule

17a–7(b) through (f) and any relevant

Commission staff no-action positions.

2. The Transfer will not occur unless

and until the Board, including a

majority of the Disinterested Trustees,

finds that participation by each Select

Fund and each Blended Fund in the

Transfer is in the best interest of each

Select Fund and each Blended Fund

and their shareholders and that the

interests of any existing shareholders of

each Select Fund and each Blended

Fund will not be diluted as a result of

the Transfer. These findings, and the

basis upon which they are made, will be

recorded in the minute books of the

Trust.

For the Commission, by the Division of

Investment Management, under delegated

authority.

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 01–14872 Filed 6–12–01; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–44392; File No. SR–CHX–

2001–12]

Self-Regulatory Organizations; Notice

of Filing and Immediate Effectiveness

of Proposed Rule Change by the

Chicago Stock Exchange, Inc.

Amending Its Membership Dues and

Fees Schedule

June 6, 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 May 24,

2001, the Chicago Stock Exchange, Inc.

(‘‘CHX’’ or ‘‘Exchange’’) filed with the

Securities and Exchange Commission

(‘‘SEC’’ or ‘‘Commission’’) the proposed

rule change as described in Items, I, II,

and III below, which Items have been

prepared by the Exchange. The

Commission is publishing this notice to

solicit comments on the proposed rule

change from interested persons.

I. Self-Regulatory Organization’s

Statement of the Terms of Substance of

the Proposed Rule Change

The CHX proposes to amend its

membership dues and fees schedule (the

‘‘Schedule’’), effective June 1, 2001, to

begin rebilling member firms for

execution quality reports prepared by

third parties pursuant to Rule 11 Ac1–

5 3 (the ‘‘Rule’’) under the Act and to

increase the earned credits available

through the specialist credit program.

Below is the text of the proposed rule

change; proposed additions are

italicized and proposed deletions are

[bracketed].

* * * * *

MEMBERSHIP DUES AND FEES

* * * * *

H. Equipment, Information Services and

Technology Charges

* * * * *

Execution quality reports prepared by

third parties

Rebilled at cost.

* * * * *

M. Credits

1. Specialist Credits

Total monthly fees owed by a

specialist to the Exchange will be

reduced (and specialists will be paid

each month for any unused credits [but

to no less than zero]) by the application

of the following credits:

* * * * *

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

CHX included statements concerning

the purpose of, and basis for, the

proposed rule change and discussed any

comments it received on the proposed

rule change. The text of these statements

may be examined at the places specified

in Item IV below. The CHX 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 proposed rule change amends the

Schedule in two ways. First, the

proposal would assess a new fee that

reimburses the Exchange for its cost in

procuring execution quality reports

pursuant to the Rule 4 that are prepared

by third parties. The Exchange currently

is compiling and making public, at no

cost to its member firms, the data

required by the Rule. From time to time,

however, the Exchange contracts with

third parties to provide separate

execution quality reports for its member

firms. Through this proposal, the

Exchange proposes to pass the cost of

these reports on to the members that

receive them.

Second, the proposed rule change

would revise the specialist credit

program to provide that the Exchange

will pay specialists for any unused

credits that they earn each month. The

CHX represents that this credit program

is designed to stimulate growth on the

Exchange, exchange the competitive

capability of specialist firms, and foster

cooperation on the Exchange’s trading

floor by rewarding specialists for their

work to increase Exchange revenue.