[Federal Register Volume 66, Number 3 (Thursday, January 4, 2001)]
[Notices]
[Pages 838-843]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-157]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-43773; File No. SR-Phlx-00-31]


Self Regulatory Organizations; Notice of Filing and Order 
Granting Accelerated Approval of Proposed Rule Change and Amendments 
No. 1 and No. 2 by the Philadelphia Stock Exchange, Inc., Relating to 
the Listing of Trust Issued Receipts

December 27, 2000.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on October 18, 2000, the Philadelphia Stock Exchange, Inc. (``Phlx'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission'') the proposed rule change as described in 
Items I and II below, which Items have been prepared by the Exchange. 
On December 13, 2000, the Phlx filed Amendment No. 1 to the proposed 
rule change.\3\ On December 18, 2000, the Phlx filed Amendment No. 2 to 
the proposed rule change.\4\ The Commission is publishing this notice 
to solicit comments on the proposed rule change and Amendments No. 1 
and No. 2 from interested persons and to approve the proposal and 
Amendments No. 1 and No. 2 on an accelerated basis.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Letter from John Dayton, Assistant Secretary and 
Counsel, Phlx, to Nancy J. Sanow Assistant Director, Division of 
Market Regulation (``Division''), Commission, dated December 12, 
2000 (``Amendment No. 1''). In Amendment No. 1, the Phlx corrected 
technical errors in the rule text and the language of the rule text. 
The Phlx also deleted proposed Phlx Rule 803(j)(4) because the 4:00 
p.m. deadline until which trust issued receipts can trade is already 
addressed in current Phlx Rule 101, Supplementary Material .02. The 
Phlx determined to reserve Phlx Rule 803(j)(4) for future use.
    \4\ See Letter from John Dayton, Assistant Secretary and 
Counsel, Phlx, to Nancy J. Sanow Assistant Director, Division, 
Commission, dated December 15, 2000 (``Amendment No. 2''). In 
Amendment No. 2, the Phlx renumbered proposed Phlx Rule 133, 
Supplementary Material .05 as proposed Phlx Rule 136(b). Phlx Rule 
136 was created in a separate Phlx filing and relates to trading 
halts in certain exchange traded funds. See Securities Exchange Act 
Release No. 43717 (December 13, 2000) (Phlx-00-54). The Phlx also 
clarified certain changes to the rule text made in Amendment No. 1.
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The Phlx proposes to amend its rules to create listing criteria and 
additional trading halt criteria to allow the Exchange to list and 
trade trust issued receipts, and to trade Holding Company

[[Page 839]]

Depositary Receipts (``HOLDRs''),\5\ a type of trust issued receipt, 
pursuant to unlisted trading privileges (``UTP'').
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    \5\ ``HOLDRs'' and ``Holding Company Depositary Receipts'' are 
service marks of Merrill Lynch & Co.
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    Below is the text of the proposed rule change. Proposed new 
language is in italics.
* * * * *

Rule 136. Trading Halts in Certain Exchange Traded Funds

    (a) Rule 1047A(c) shall apply to the trading of Trust Shares listed 
pursuant to the terms of Rule 803(i). The term ``option'' as used 
therein shall be deemed for the purposes of this rule only to include a 
Trust Share.
    (b) Rule 1047A(c) shall apply to the trading of Trust Issued 
Receipts listed pursuant to the terms of Rule 803(j). The term 
``option'' as used therein shall be deemed for the purposes of this 
rule only to include a Trust Issued Receipt. The term ``index'' as used 
therein shall be deemed for the purposes of this rule only to mean 
``basket''.
* * * * *

Criteria for Listing--Tier I

Rule 803

(j) Trust Issued Receipts 
    (1) Applicability, Rule 803(j) is applicable only to Trust Issued 
Receipts. Except to the extent inconsistent with Rule 803(j) or unless 
the context otherwise requires, the provisions of the By-laws and all 
other rules and policies of the Board of Governors shall be applicable 
to the trading on the Exchange of such securities. Trust Issued 
Receipts are included within the definition of ``security'' or 
``securities'' as such terms are used in the By-laws 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) Trust Issued Receipts. The term ``Trust Issued Receipt'' means 
a security
    (i) that is issued by a trust (``Trust'') which holds specified 
securities deposited with the Trust;
    (ii) that, when aggregated in some specified minimum number, may be 
surrendered to the Trust by the beneficial owner to receive the 
securities; and 
    (iii) that pays beneficial owners dividends and other distributions 
on the deposited securities, if any are declared and paid to the 
trustee by an issuer of the deposited securities.
    (B) Reporting Authority. The term ``Reporting Authority'' in 
respect of a particular series of Trust Issued Receipts means the 
Exchange, a wholly-owned subsidiary of the Exchange, an institution 
(including the Trustee for that series of Trust Issued Receipts), or a 
reporting service designated by the Exchange or its subsidiary or by 
the exchange that lists a particular series of Trust Issued Receipts 
(if the Exchange is trading the particular series of Trust Issued 
Receipts pursuant to unlisted trading privileges) as the official 
source for calculating and reporting information relating to such 
series of Trust Issued Receipts, including, but not limited to, any 
current basket or portfolio value; the current value of the basket or 
portfolio of securities required to be deposited to the Trust in 
connection with issuance of that series of Trust Issued Receipts; the 
amount of any dividend equivalent payment or cash distribution to 
holders of that series of Trust Issued Receipts, net asset value, or 
other information relating to the creation, redemption or trading of 
that series of Trust Issued Receipts.
    (3) Prospectus. Members and member organizations shall provide to 
all purchasers of newly issued Trust Issued Receipts a prospectus for 
the series of Trust Issued Receipts. 
    (4) Reserved. 
    (5) Designation. The Exchange may list and trade 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 
Exchange or its agent, a wholly-owned subsidiary of the Exchange, or by 
such other person as shall have a proprietary interest in such Trust 
Issued Receipts.
    (6) Initial and Continued Listing. Trust Issued Receipts will be 
listed and traded on the Exchange subject to application of the 
following criteria:
    (A) Initial Listing. For each Trust, the Exchange will establish a 
minimum number of Trust Issued Receipts required to be outstanding at 
the time of commencement of trading on the Exchange.
    (B) Continued Listing. Following the initial twelve month period 
after formation of a Trust and commencement of trading on the Exchange, 
the Exchange will consider the suspension of trading in or removal from 
listing of a Trust upon which a series of Trust Issued Receipts is 
based under any of the following circumstances:
    (i) if the Trust has more than 60 days remaining until termination 
and there are fewer than 50 record and/or beneficial holders of Trust 
Issued Receipts for 30 or more consecutive trading days;
    (ii) if the Trust has fewer than 50,000 receipts issued and 
outstanding;
    (iii) if the market value of all receipts issued and outstanding is 
less than $1,000,000; or
    (iv) if such other event shall occur or condition exists which in 
the opinion of the Exchange, makes further dealings on the Exchange 
inadvisable.
    (C) Upon termination of a Trust, the Exchange requires that Trust 
Issued Receipts issued in connection with such Trust be removed from 
Exchange listing. 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.
    (7) 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.
    (8) Trustee. The Trustee must be a trust company or banking 
institution having substantial capital and surplus and the experience 
and facilities for handling corporate trust business. In cases where, 
for any reason, an individual has been appointed as trustee, a 
qualified trust company or banking institution must be appointed co-
trustee.
    (9) Voting. Voting rights shall be as set forth in the Trust 
prospectus.
    (10) Limitation of Liability. Neither the Exchange, the Reporting 
Authority nor any agent of the Exchange shall have any liability for 
damages, claims, losses or expenses caused by any errors, omissions, or 
delays in calculating or disseminating any current basket or portfolio 
value, the current value of the portfolio of securities required to be 
deposited to the Trust; the amount of any dividend equivalent payment 
or cash distribution to holders of Trust Issued Receipts; net asset 
value; or other information relating to the creation, redemption or 
trading of Trust Issued Receipts, resulting from any negligent act or 
omission by the Exchange, or the Reporting Authority, or any agent of 
the Exchange, or any act, condition or cause beyond the reasonable 
control of the Exchange or its agent, or the Reporting Authority, 
including, but not limited to, an act of God; fire; flood; 
extraordinary weather conditions; war; insurrection; riot; strike; 
accident; action of government; communications or power failure; 
equipment or software malfunction; or any error, omission or delay in 
the reports of transactions in

[[Page 840]]

one or more underlying securities. The Exchange makes no warranty, 
express or implied, as to results to be obtained by any person or 
entity from the use of Trust Issued Receipts or any underlying basket 
or portfolio of securities or data included therein and the Exchange 
makes no express or implied warranties, and disclaims all warranties of 
merchantability or fitness for a particular purpose with respect to 
Trust Issued Receipts or any underlying basket or portfolio of 
securities or data included therein. This limitation of liability shall 
be in addition to any other limitation contained in the Exchange's 
Articles of Incorporation or By-laws or elsewhere in the Rules.
    (11) Listing Fees and Other Rules. The Exchange may, in its 
discretion, waive listing fees for any issuer of Trust Issued Receipts 
listed on the Exchange pursuant to Rule 803(j). The provisions of Rules 
847, 849, 850 and 851 do not apply to trusts issuing Trust Issued 
Receipts listed on the Exchange pursuant to Rule 803(j), or to the 
trustees or the sponsors thereof. In addition, consideration of the 
suspension of trading in or removal from listing of any Trust Issued 
Receipts pursuant to Rule 810 will be made pursuant to the criteria set 
forth in section 6(B) of this Rule 802(j) rather than the specific 
criteria set forth in subsections (1) through (5) of Rule 810(a).
* * * * *

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 listing criteria and additional trading 
half criteria to allow the Exchange to list trust issued receipts, and 
to trade currently issued HOLDRs,\6\ a series of trust issued receipts, 
pursuant to UTP. The Exchange represents that trust issued receipts 
provide investors with a flexible, cost-effective way to purchase, hold 
and transfer the securities of one or more specified companies.
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    \6\ Currently-issued, HOLDRs includes Biotech, Broadband, 
Business to Business, Internet, Internet Architecture, Internet 
Infrastructure, Market 2000+, Pharmaceutical, Regional Bank, 
Semiconductor, Software, Telecom and Utilities HOLDRs, all of which 
are listed on the American Stock Exchange LLP (``Amex''). Within the 
next few weeks, the Exchange will file an amendment to the proposed 
listing standards to accommodate a change in the HOLDRs product 
related to the composition of the portfolio. The prospectus for 
Market 2000+ HOLDRs describes this change. Telephone conversation 
between John Dayton, Assistant Secretary and Counsel, Phlx, and 
Heather Traeger, Attorney, Division, Commission, on December 21, 
2000.
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    a. Trust Issued Receipts Generally. Description. Trust issued 
receipts are negotiable receipts which are issued by a trust 
representing securities of issuers that have been deposited and are 
held on behalf of the holders of the trust issued receipts. Trust 
issued receipts allow investors to hold securities investments from a 
variety of companies throughout a particular industry in a single, 
exchange-listed and traded instrument that represents their beneficial 
ownership of each of the deposited securities. Holders of trust issued 
receipts maintain beneficial ownership of each of the deposited 
securities evidence by trust issued receipts. Holders may cancel their 
trust issued receipts at any time to receive the deposited securities.
    Beneficial owners of the receipts have the same rights, privileges 
and obligations as they would have if they beneficially owned the 
deposited securities outside of the trust issued receipt program. For 
example, holders of the receipts have the right to instruct the trustee 
to vote the deposited securities evidenced by the receipts; receive 
reports, proxies and other information distributed by the issuers of 
the deposited securities to their security holders; and receive 
dividends and other distributions if any are declared and paid by the 
issuers of the deposited securities to the trustee.
    Creation of a Trust. Trust issued receipts will be issued by a 
trust created pursuant to a depository trust agreement. After the 
initial offering, the trust may issue additional receipts on a 
continuous basis when an investor deposits the requisite securities 
with the trust. An investor in trust issued receipts will be permitted 
to withdraw his or her deposited securities upon delivery to the 
trustee of one or more round-lots of 100 trust issued receipts and to 
deposit such securities to receive trust issued receipts.
    b. Criteria for Initial and Continued Listing. The Exchange 
believes that the listing criteria proposed in its new rule are 
generally consistent with the ``Other Securities'' criteria currently 
found Phlx Rule 803(f) as well as the trust issued receipt listing 
criteria currently used by the Amex,\7\ the Chicago Stock Exchange, 
Inc. (``CHX''),\8\ and the Boston Stock Exchange, Inc. (``BSE'').\9\
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    \7\ See Securities Exchange Act Release No. 41892 (September 21, 
1999), 64 FR 52559 (September 29, 1999) (SR-Emex-99-20).
    \8\ See Securities Exchange Act Release No. 42056 (October 22, 
1999), 64 FR 58870 (November 1, 1999) (SR-CHX-99-22).
    \9\ See Securities Exchange Act Release No. 42347 (January 13, 
2000), 64 FR 4451 (January 27, 2000) (SR-BSE-99-15).
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    Under the proposal rule, if trust issued receipts are to be listed 
on the Exchange, the Exchange will establish a minimum number of trust 
issued receipts required to be outstanding at the time trading 
commences on the Exchange and will include that number in any required 
submission to the Commission.
    With respect to continued listing, the proposed rule provides that 
the Exchange will consider the suspension of trading in, or removal 
from listing of, a trust upon which a series of trust issued receipts 
is based in certain circumstances. More specifically, following the 
initial twelve month period after formation of a trust and commencement 
of trading on the Exchange, the Exchange will consider the suspension 
of trading in or removal from listing of a trust upon which a series of 
trust issued receipts is based if: (1) The trust has more than sixty 
days remaining until termination and there are fewer than fifty record 
and/or beneficial holders of trust issued receipts for thirty 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 $1,000,000; or (4) such other event shall 
occur or condition exists which in the opinion of the Exchange, makes 
further dealings on the Exchange inadvisable.
    These criteria are designed to eliminate less liquid products while 
maintaining the flexibility to avoid delisting trust issued receipts 
(leading to a possible termination of the trust) because of relatively 
brief fluctuations in market conditions that may cause the number of 
holders to vary.
    The Exchange will not, however, be required to suspend or delist 
from trading, based on the proposed rule, any trust issued receipts for 
a period of one

[[Page 841]]

year after the initial listing of such trust issued receipts for 
trading on the Exchange. Notwithstanding, in the first year and 
thereafter, if the number of companies represented by the deposited 
securities drops to less than nine, and each time thereafter the number 
of companies is reduced, the Exchange will consult with the Commission 
to confirm the appropriateness of continued listing of the trust issued 
receipts.
    c. Exchange Rules Applicable to the Trading of Trust Issued. 
Receipts. Trust issued receipts are considered ``securities'' under the 
Rules of the Exchange and are subject to all applicable trading rules, 
including the provisions of Phlx 2001A, ITS Trade-Throughs and Locked 
Markets, which addresses trade-throughs for ITS securities, as well as 
rules governing priority, parity and precedence of orders, market 
volatility-related trading halt provisions and responsibilities of the 
assigned specialist firm.\10\ Exchange equity margin rules will apply.
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    \10\ If trust issued receipts are traded only in round lots (or 
round lot multiples), the Exchange's rules relating to odd lot 
executions will not apply.
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    Trust issued receipts will trade in the appropriate minimum 
variation, pursuant to Phlx Rule 125. If the trust issued receipts are 
also traded on the Amex, those receipts will trade at a minimum 
variation of \1/16\ of $1.00 for trust issued receipts selling at or 
above $.25 and \1/32\ of $1.00 for those selling below $.25. If the 
trust issued receipts are traded on any other exchange or are 
exclusively listed on the Phlx, different minimum variations may apply. 
In addition, the Exchange notes that due to industry-wide changes in 
minimum price variations, trading in trust issued receipts are expected 
to be converted from fractions to decimals.\11\
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    \11\ The Exchange notes that Semiconductor HOLDRs are 
participating in the Decimal Pilot Program and therefore, if traded 
on the Exchange, will trade in the appropriate minimal variation.
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    The Exchange's surveillance procedures for trust issued receipt 
will be similar to the procedures used for Trust Shares and will 
incorporate and rely upon existing Phlx surveillance systems.
    Prior to the commencement of trading of each new trust issued 
receipt, the Exchange will distribute a circular to its members and 
member organizations alerting them to the unique characteristics of 
trust issued receipts, including the fact that trust issued receipts 
are not individually redeemable. The circular will also confirm that 
trust issued receipts are subject to the Exchange's rule relating to 
trading halts in certain Exchange traded funds (Phlx Rule 136) and 
other criteria set forth in proposed Phlx Rule 136(b).\12\ The circular 
will advise members that, in exercising the discretion described in 
proposed Phlx Rule 136(b), appropriate Exchange officials may consider 
a variety of factors, including the extent to which trading is not 
occurring in an underlying security and whether other unusual 
conditions or circumstances detrimental to the maintenance of a fair 
and orderly market are present.\13\
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    \12\ The Phlx confirmed the Phlx Rule 133 should be changed to 
Phlx Rule 136, and that proposed Phlx Rule 133, Supplementary 
Material .05, should be changed to proposed Phlx Rule 136(b) in 
accordance with the changes made in Amendment No. 2, supra note 4. 
Telephone conversation between John Dayton, Assistant Secretary and 
Counsel, Phlx , and Sapna C. Patel, attorney, Division, Commission, 
December 14, 2000.
    \13\ Id.
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    d. Disclosure to Customers. The Exchange will require its members 
to provide all purchasers of newly issued trust issued receipts with a 
prospectus for that series of trust issued receipts. Exchange members 
will be informed of this requirement through the informational circular 
on each HOLDRs product to be delivered prior to the commencement of 
trading. The Exchange believes that delivery of this information will 
apprise investors of the terms, characteristics, and risks of trading 
trust issued receipts.
    e. Trading of Currently-Issued HOLDRs. As noted above, upon 
approval of the Exchange's listing standards for trust issued receipts, 
the Exchange intends to begin trading various series of trust issued 
receipts, specifically currently-issued HOLDRs, pursuant to UTP.\14\ 
All currently issued HOLDRs are listed on the Amex.
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    \14\ See supra note 6.
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    The Exchange requests approval to trade currently-issued HOLDRs on 
a UTP basis when it determines it is advisable to do so. Currently-
issued HOLDRs will be subject to all Exchange trading rules applicable 
to securities trading on a UTP basis with the following exceptions. 
Currently-issued HOLDRs may be acquired, held or transferred only in 
round-lot amounts (or round-lot multiples) of 100 receipts. Thus, upon 
implementation of the appropriate systems feature, orders for less than 
a round-lot will be rejected, while orders for greater than a round-
lot, but not a round-lot multiple, will be executed to the extent of 
the largest round-lot multiple, rejecting the remaining odd-lot.\15\ In 
addition, transactions in currently-issued HOLDRs have received an 
exemption from the short sale rule; therefore, they will not be subject 
to that restriction on the Exchange.\16\ Transactions in trust issued 
receipts may be effected until 4:00 p.m.\17\
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    \15\ For example, an order for 50 Trust Issued Receipts will be 
rejected, while an order for 1,050 Trust Issued Receipts will be 
executed in part (1,000) and rejected in part (50).
    \16\ The Exchange understands that the Commission has provided 
an exemption from the short sale rule, Rule 10a-1 under the act, for 
transactions in HOLDRs. See SEC Exemption Letter, 1999 WL 1038048 
(S.E.C.). The Exchange will issue a notice to its members detailing 
the terms of the exemption prior to any trading in HOLDRs.
    \17\ See Amendment No. 1, supra note 3. Amendment No. 1 
indicates the Phlx Rule 101, Supplementary Material .02 states that 
equities on the Exchange's Equity Floor trade until 4:00 p.m. unless 
otherwise announced by the Exchange. The Exchange has confirmed that 
it will make the appropriate filing with the Commission should it 
decide to change this time. Telephone conversation between John 
Dayton, Assistance Secretary and Counsel, Phlx, and Sapna C. Patel, 
Attorney, Division, Commission, December 14, 2000.
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2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with section 6 of the Act \18\ in general, and in particular, with 
section 6(b)(5),\19\ in that it is designed to promote just and 
equitable principle of trade, 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. The Exchange 
believes that trading of currently-issued HOLDRs on a UTP basis should 
add additional liquidity and provide investors with another choice of 
venue to conduct trading in these products.
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    \18\ 15 U.S.C. 78f(b).
    \19\ 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 inappropriate burden on competition.

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

    The Exchange did not receive any written comments on 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 and Amendments No. 1 and No. 2 are consistent with the Act. 
Persons making written submissions should file six copies thereof with 
the Secretary, Securities and Exchange Commission, 450 Fifth Street, 
NW., Washington, DC 20549-0609. Copies of the submission,

[[Page 842]]

all subsequent amendments, all written statements with respect to the 
proposed rule change that are filed with the Commission, and all 
written communications relating to the proposed rule change between the 
Commission and any person, other than those that may be withheld from 
the public in accordance with the provisions of 5 U.S.C. 552, will be 
available for inspection and copying at the Commission's Public 
Reference Room. Copies of such filing will also be available for 
inspection and copying at the principal office of the Exchange. All 
submissions should refer to File No. SR-Phlx-00-31 and should be 
submitted by January 25, 2001.

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

A. Generally

    The Commission finds that the proposed rule change is consistent 
with the requirements of section (b)(5) of the Act \20\ and the rules 
and regulations thereunder applicable to a national securities 
exchange. Specifically, the Commission finds, as it did in the Amex, 
the CHX, and the BSE orders approving the listing and trading of trust 
issued receipts and Internet HOLDRs,\21\ that the proposed establishing 
listing standards for trust issued receipts and to trade Internet 
HOLDRs will provide investors with a convenient and less expensive way 
of participating in the securities market. The proposal should advance 
the public interest by providing investors with increased flexibility 
in satisfying their investment needs by allowing them to purchase and 
sell a single security replicating the performance of a broad portfolio 
of stocks at negotiated prices throughout the business day. 
Accordingly, the Commission finds that the proposal will facilitate 
transactions in securities, 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, and is not 
designed to permit unfair discrimination between customers, issuers, 
brokers, or dealers.\22\
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    \20\ Id.
    \21\ See supra note 9 (approving listing and trading of trust 
issued receipts and Internet HOLDRs on the BSE pursuant to UTP); see 
supra note 8 (approving listing and trading of trust issued receipts 
and Internet HOLDRs on the CHX pursuant to UTP); and see supra note 
7 (approving listing and trading of trust issued receipts and 
Internet HOLDRs on the Amex).
    \22\ In approving this rule, the Commission notes that it has 
also considered the proposed rule's impact on efficiency, 
competition, and capital formation. 15 U.S.C. 78c(f).
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    As noted in the Amex approval order, the Commission believes that 
trust issued receipts will provide investors with an alternative to 
trading a broad range of securities on an individual basis, and will 
give investors the ability to trade trust issued receipts representing 
a portfolio of securities continuously throughout the business day in 
secondary market transactions at negotiated prices. Trust issued 
receipts will 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 representing a portfolio of securities that 
the investor owns beneficially; (3) engage in hedging strategies 
similar to those used by institutional investors; (4) reduce 
transaction costs for trading a portfolio of securities; and (5) retain 
beneficial ownership of the securities underlying the trust issued 
receipts.
    Although trust issued receipts 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 trusts. Accordingly, the level of risk involved in the 
purchase or sale of trust issued receipts is similar to the risk 
involved in the purchase or sale of traditional common stock, with the 
exception that the pricing mechanism for trust issued receipts is based 
on a basket of securities.\23\ Nevertheless, the Commission believes 
that the unique nature of trust issued receipts raises certain product 
design, disclosure, trading, and other issues.
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    \23\ The Commission has concerns about continued trading of the 
trust issued receipts whether listed or pursuant to UTP, if the 
number of component securities falls to a level below nine 
securities, because the receipts may no longer adequately reflect a 
cross-section of the selected industry. Accordingly, the Phlx has 
agreed to consult the Commission concerning continued trading, once 
the trust has fewer than nine component securities, and for each 
subsequent loss of a security thereafter. Telephone conversion 
between John Dayton, Assistant Secretary and Counsel, Phlx, and 
Heather Traeger, Attorney, Division, Commission, November 29, 2000.
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B. Trading of Trust Issued Receipts--Listing and UTP

    The Commission finds that the Phlx's proposal contains adequate 
rules and procedures to govern the trading of trust issued receipts 
whether by listing or pursuant to UTP. Trust issued receipts are equity 
securities that will be subject to the full panoply of Phlx rules 
governing the trading of equity securities on the Phlx, including, 
among others, rules governing the priority, parity and precedence of 
orders, responsibilities of the specialist, account opening and 
customer suitability requirements, and the election of a stop or limit 
order.\24\
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    \24\ Trading rules pertaining to the availability of odd-lot 
trading do not apply because trust issued receipts only can be 
traded in round-lots.
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    In addition, the Phlx had developed specific listing and delisting 
criteria for trust issued receipts that will help to ensure that a 
minimum level of liquidity will exist for trust issued receipts to 
allow for the maintenance of fair and orderly markets. The delisting 
criteria also allows the Phlx to consider the suspension of trading and 
the delisting of a trust issued receipt if an event occurred that made 
further dealings in such securities inadvisable. This will give the 
Phlx flexibility to delist trust issued receipts if circumstances 
warrant such action. The Phlx's proposal also provides procedures to 
halt trading in trust issued receipts in certain enumerated 
circumstances.
    Moreover, in approving this proposal, the Commission notes the 
Exchange's belief that trust issued receipts will not trade at a 
material discount or premium in relation to the overall value of the 
trusts' assets because of potential arbitrage opportunities. The 
Exchange represents that the potential for arbitrage should keep the 
market price of a trust issued receipt comparable to the overall value 
of the deposited securities.
    Furthermore, the Commission believes that the Exchange's proposal 
to trade trust issued receipts in minimum fractional increments of \1/
16\ of $1.00 is consistent with the Act.\25\ The Commission believes 
that such trading should enhance market liquidity, and should promote 
more accurate pricing, tighter quotations, and reduced price 
fluctuations. The Commission also believes that such trading should 
allow customers to receive the best possible execution of their 
transactions in trust issued receipts.
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    \25\ The Exchange notes, however, that due to industry-wide 
changes in minimum price variations, trading in trust issued 
receipts are expected to be converted from fractions to decimals. 
More specifically, the Exchange notes that semiconductor HOLDRs are 
participating in the Decimal Pilot Program and therefore, if traded 
on the Exchange, will trade in the appropriate minimal variation.
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    Finally, the Phlx will apply surveillance procedures for trust 
issued receipts that will be similar to the procedures used for Trust 
Shares and will incorporate and rely upon existing Phlx surveillance 
procedures governing equities. The Commission believes that these 
surveillance procedures are adequate to address concerns associated

[[Page 843]]

with listing and trading trust issued receipts, including any concerns 
associated with purchasing and redeeming round-lots of 100 receipts. 
Accordingly, the Commission believes that the rules governing the 
trading of trust issued receipts provide adequate safeguards to prevent 
manipulative acts and practices and to protect investors and the public 
interest.

C. Disclosure and Dissemination of Information

    The Commission believes that the Exchange's proposal will ensure 
that investors have information that will allow them to be adequately 
apprised of the terms, characteristics, and risks of trading trust 
issued receipts. The prospectus will address the special 
characteristics of a particular trust issued receipt basket, including 
a statement regarding its redeemability and method of creation. The 
Commission notes that all investors in trust issued receipts who 
purchase in the initial offering will receive a prospectus. In 
addition, anyone purchasing a trust issued receipt directly from the 
trust (by delivering the underlying securities to the trust) will also 
receive a prospectus. Finally, all Phlx member firms who purchase trust 
issued receipts from the trust for resale to customers must deliver a 
prospectus to such customers.
    The Commission also notes that upon the initial listing of any 
trust issued receipts, the Exchange will issue a circular to its 
members explaining the unique characteristics and risks of this type of 
security. The circular also will note the Exchange members' prospectus 
delivery requirements, and highlight the characteristics of purchases 
in trust issued receipts. The circular also will inform members of 
Exchange policies regarding trading halts in issued receipts.

D. Accelerated Approval

    The Phlx has requested that the Commission find good cause for 
approving the proposed rule change and Amendments No. 1 and No. 2 to 
the thirtieth day after the date of publication of notice in the 
Federal Register. The Commission believes that the Exchange's proposal 
to trade trust issued receipts, and specifically the existing series of 
HOLDRs \26\ pursuant to UTP privileges, will provide investors with a 
convenient and less expensive way of participating in the securities 
markets. The Commission believes that the proposed rule change should 
produce added benefits to investors through the increased competition 
between other market centers trading the product. Specifically, the 
Commission believes that by increasing the availability of trust issued 
receipts, and in particular Internet HOLDRs, as an investment tool, the 
Phlx's proposal should help provide investors with increased 
flexibility in satisfying their investment needs, by allowing them to 
purchase and sell a single security replicating the performance of a 
broad portfolio of stocks at negotiated prices throughout the business 
day. The Commission notes, however, that notwithstanding approval of 
the listing standards for trust issued receipts, other similarly 
structured products, including trust issued receipts based on other 
industries, will require review by the Commission prior to being traded 
on the Exchange. Additional series cannot be listed by the Exchange 
prior to contacting Division staff. In addition, the Phlx may be 
required to submit a rule filing prior to trading a new issue or series 
on the Exchange.
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    \26\ See supra note 6.
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    As noted above, the Commission has approved the listing and trading 
of trust issued receipts, including various series of HOLDRs, at the 
Amex, the CHX, and the BSE, under rules that are substantially similar 
to Phlx Rule 803(j). The trading requirements of trust issued receipts 
at the Phlx will be substantially similar to the trading requirements 
of trust issued receipts at the Amex, the CHX, and the BSE. The 
Commission published those rules in the Federal Register for the full 
notice and comment period. No comments were received on the proposed 
rules, and the Commission found them consistent with the Act.\27\ The 
Commission does not believe that trading of this product raises novel 
regulatory issues that were not addressed in the previous filing.
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    \27\ See supra note 21.
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    The Commission also finds good cause for approving Amendments No. 1 
and No. 2 prior to the thirtieth day after notice of the Amendments is 
published in the Federal Register pursuant to section 19(b)(2) of the 
Act.\28\ Amendment No. 1 makes technical changes to the proposed rule 
text, deletes proposed Phlx Rule 803(j)(4) because the 4:00 p.m. 
deadline until which trust issued receipts can trade is already 
mentioned in current Phlx Rule 101, Supplementary material .02, and 
indicates that the Phlx is reserving Phlx Rule 803(j)(4) for future 
use. Amendment No. 2 renumbers proposed Phlx Rule 133, Supplementary 
Material .05 as proposed Phlx Rule 136(b) to place this proposed rule 
in the appropriate section of the Phlx Rules. Phlx Rule 136 was created 
in a separate Phlx filing and relates to trading halts in certain 
exchange traded funds. In Amendment No. 2, the Phlx also clarifies 
certain changes to the rule text made in Amendment No. 1. The 
Commission finds that accelerated approval of Amendments No. 1 and No. 
2 is appropriate in order to permit the Phlx to establish accurate and 
orderly rules regarding the listing and trading of trust issued 
receipts.
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    \28\ 15 U.S.C. 78s(b)(2).
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    Accordingly, the Commission finds good cause for approving the 
proposed rule change and Amendments No. 1 and No. 2 prior to the 
thirtieth day after the date of publication of notice in the Federal 
Register.
    It is Therefore Ordered, pursuant to section 19(b)(2) of the 
Act,\29\ that the proposed rule change (SR-Phlx-00-31) and Amendments 
No. 1 and No. 2 are hereby approved on an accelerated basis.
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    \29\ Id.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\30\
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    \30\ 17 CFR 200.30-3(a)(12).
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Jonathan G. Katz,
Secretary.
[FR Doc. 01-157 Filed 1-3-01; 8:45 am]
BILLING CODE 8010-01-M