Federal Register / Vol. 66, No. 26 / Wednesday, February 7, 2001 / Notices 9401

12 17 CFR 200.30–3(a)(12).

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

2 17 CFR 240.19b–4.

3See Letter from Carla Behnfeldt, Director, New

Product Development Group, Phlx, to Nancy

Sanow, Esq., Assistant Director, Division of Market

Regulation (‘‘Division’’), Commission, dated

January 22, 2001 (‘‘Amendment No. 1’’).

Amendment No. 1 adds language to the rule text

and the purpose section of the filing that clarifies

Phlx’s prospectus delivery requirements under the

Securities Act of 1933. In addition, Amendment No.

1 adds representations by the Exchange in the

purpose section of the filing regarding factors

affecting (1) the trading prices of Index Fund

Shares, (2) the minimum number of creation units,

and (3) minimum trading variations. 4See Amendment No. 1, supra note 3.

For the Commission, by the Division

of Market Regulation, pursuant to

delegated authority.12

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 01–3157 Filed 2–6–01; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–43912; File No. SR-Phlx–

00–91]

Self-Regulatory Organizations; Notice

of Filing and Order Granting

Accelerated Approval of Proposed

Rule Change by the Philadelphia Stock

Exchange, Inc., Relating to Index Fund

Shares

January 31, 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 December

4, 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 III below, which Items

have been prepared by the Phlx. On

January 23, 2001, the Phlx filed an

amendment to the proposed rule

change.3 The Commission is publishing

this notice to solicit comments on the

proposed rule changes from interested

persons and to approve the proposal on

an accelerated basis.

I. Self-Regulatory Organization’s

Statement of the Terms of Substance of

the Proposed Rule Change

The Phlx proposes to adopt listing

standards and trading rules for Index

Fund Shares, including generic listing

standards, which would permit the Phlx

to trade a series of Index Fund Shares

pursuant to Rule 19b–4(e) under the

Act. The text of the proposed rule

change is available at the Phlx or the

Commission.

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

Phlx included statements concerning

the purpose of and basis for the

proposed rule change. The text of these

statements may be examined at the

places specified in Item III below. The

Phlx 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

I. Purpose

a. Listing Requirements for Index

Fund Shares. The Phlx proposes to

adopt new listing and delisting

requirements to accommodate the

trading of Index Fund Shares, securities

issued by an open-end management

investment company (‘‘Fund’’) that seek

to provide investment results that

correspond generally to the price and

yield performance of a specified

underlying index (‘‘Index Fund

Shares’’). The listing standards will

permit the Exchange to trade Index

Fund Shares either by listing or

pursuant to unlisted trading privileges

(‘‘UTP’’).

Index Fund Shares will be issued by

an entity registered with the

Commission as an open-end

management investment company, and

which may be organized as a series fund

providing for the creation of separate

series of securities, each with a portfolio

consisting of some or all of the

component securities of a specified

securities index. Issuances of Index

Fund Shares by a Fund will be made

only in minimum size aggregations or

multiples therof (‘‘Creation Units’’). The

size of the applicable Creation Unit size

aggregation will be set forth in the

Fund’s prospectus, and will vary from

one series of Index Fund Shares to

another, but generally will be of

substantial size (e.g., value in excess of

$450,000 per Creation Unit). It is

expected that a Fund will issue and sell

Index Fund Shares through a principal

underwriter on a continuous basis at the

net asset value per share next

determined after an order to purchase

Index Fund Shares in Creation Unit size

aggregations is received in proper form.

Index Fund Shares will be traded on the

Exchange like other equity securities,

and Phlx equity trading rules will apply

to the trading of Index Fund Shares.

The Phlx expects that Creation Unit

size aggregations of Index Fund Shares

generally will be issued in exchange for

the ‘‘in kind’’ deposit of a specified

portfolio of securities, together with a

cash payment representing, in part, the

amount of dividends accrued up to the

time of issuance. The Phlx anticipates

that such deposits will be made

primarily by institutional investors,

arbitragers, and the Phlx specialist.

Redemption of Index Fund Shares

generally will be made ‘‘in kind,’’ with

a portfolio of securities and or cash

exchanged for Index Fund Shares that

have been tendered for redemption.

Issuances or redemptions also could

occur for cash under specified

circumstances (e.g., if it is not possible

to effect delivery of securities

underlying the specific series in a

particular foreign country) and at other

times in the discretion of the Fund.

The Phlx expects that a Fund will

make available on a daily basis a list of

the names and the required number of

shares of each of the securities to be

deposited in connection with the

issuance of Index Fund Shares of a

particular series in Creation Unit size

aggregations, as well as information

relating to the required cash payment

representing, in part, the amount of

accrued dividends.

A Fund may make periodic

distributions of dividends from net

investment income, including net

foreign currency gains, if any, in an

amount approximately equal to

accumulated dividends on securities

held by the Fund during the applicable

period, net of expenses and liabilities

for such period. A Fund may also

distribute its capital gains, if any. The

Exchange notes that the trading prices of

Index Fund Shares may differ in varying

degrees from their daily NAV and can

be affected by market forces such as

supply and demand, economic

conditions and other factors.4

Index Fund Shares will be registered

in book entry form through The

Depository Trust Company (‘‘DTC’’),

which means no stock certificates will

be issued. Trading in Index Fund Shares

on the Exchange may be effected until

either 4:00 p.m. or 4:15 p.m. each

business day.

Criteria for Initial and Continued

Listing. The Phlx believes that the

listing criteria proposed in its new rule

are generally consisted with the listing

standards for Index Fund Shares

currently used by the American Stock

9402 Federal Register / Vol. 66, No. 26 / Wednesday, February 7, 2001 / Notices

5The Amex’s listing criteria were approved by

the Commission on March 8, 1996. See Securities

Exchange Act Release No. 36947 (March 8, 1996),

61 FR 10606 (March 14, 1996). Pursuant to Rule

12f–5 under the Act, to trade a particular class or

type of security pursuant to UTP, the Exchange

must have rules providing for transactions in such

class or type of security. The Amex has enacted

listing standards for Index Fund Shares, and the

Phlx’s proposed rule change is designed to create

similar standards for Index Fund Shares listed and/

or trading on the Phlx.

6See Securities Exchange Act Release No. 43717

(December 13, 2000), 65 FR 80976 (December 22,

2000).

7See Amendment No. 1, supra note 3.

8Phlx Rule 746 will also apply to the trading of

Index Fund Shares. That rule provides that every

member is required either personally or through a

general partner or an officer who is a holder of

voting stock in his organization to use due diligence

to learn the essential facts relative to every

customer and to every order or account accepted by

his organization.

9 17 CFR 240.19b–4(e).

10See Securities Exchange Act Release No. 40761

(December 8, 1998), 63 FR 70952 (December 22,

1998).

11Thirteen stocks is the minimum number to

permit qualification as a regulated investment

company under Supchapter M of the Internal

Revenue Code. Under Subchapter M of the Internal

Revenue Code, for a fund to qualify as a regulated

investment company, the securities of a single

issuer can account for no more than 25% of a fund’s

total assets, and at least 50% of a fund’s total assets

must be comprised of cash (including government

securities) and securities of single issuers whose

securities account for less than 5% of such fund’s

total assets.

12See Amendment No. 1, supra note 3.

13 Id.

Exchange (‘‘Amex’’),5 and are similar to

the recently approved listing standards

for Trust Shares.6

Initial Listing. If Index Fund Shares

are to be listed on the Exchange, the

Phlx will establish a minimum number

of Index Fund Shares that must be

outstanding at commencement of

trading, and such minimum number

will be included in any required

submission under Rule 19b–4. The

Exchange anticipates that a minimum of

two creation units in any series of Index

Fund Shares will be required to be

outstanding before trading can begin.7

Continued Listing. In connection with

continued listing, the Phlx will consider

the suspension of trading in, or removal

from listing of, an Index upon which a

series of Index Fund Shares is based

when any of the following

circumstances arise: (1) There are fewer

than 50 beneficial holders of the series

of Index Fund Shares for 30 or more

consecutive trading days; (2) the value

of the index or portfolio of securities on

which the series of Index Fund Shares

is based is no longer calculated or

available; or (3) such other event shall

occur or condition exists which, in the

opinion of the Phlx, makes further

dealings on the Exchange inadvisable.

The Phlx will not, however, be required

to suspend or delist from trading, based

on the above factors, any Index Fund

Shares for a period of one year after the

initial listing of such Index Fund Shares

for trading on the Exchange. The Phlx

will require that Index Fund Shares be

removed from listing upon termination

of the Fund that issued such shares.

b. Exchange Rules Applicable to the

Trading of Index Fund Shares. Index

Fund Shares are considered ‘‘securities’’

under the rules of the Phlx and are

subject to all applicable trading rules,

including the provisions of Phlx Rule

2001A, ITS ‘‘Trade-Throughs’’ and

‘‘Locked Markets,’’ which prohibit

Exchange members from initiating

trade-throughs for Intermarket Trading

System securities, as well as rules

governing priority, parity and

precedence of orders, market volatilityrelated trading halt provisions and

responsibilities of the assigned

specialist firm.8 Similarly, the Phlx’s

equity margin rules will apply. The Phlx

will maintain written surveillance

procedures to surveil trading in Index

Fund Shares.

c. Standards to Permit Trading, Either

by Listing or Pursuant to UTP, of Index

Fund Shares Pursuant to Rule 19b–4(e)

under the Act. The Phlx proposes to

adopt generic listing and delisting

standards to permit the Exchange to

approve for trading, pursuant to Rule

19b–4(e) under the Act,9 a series of

Index Fund Shares. Rule 19b–4(e)

permits self-regulatory organizations

(‘‘SROs’’) to list and trade new

derivative products that comply with

existing SRO trading rules, procedures,

surveillance programs and listing

standards, without submitting a

proposed rule change under Section

19(b) of the Act.10 Accordingly, the Phlx

proposes a series of Index Fund Shares

for listing or trading, either by listing or

pursuant to UTP, pursuant to Rule 19b–

4(e) under the following criteria:

Upon the initial listing of a series of

Index Fund Shares, component stocks

that in the aggregate account for at least

90% of the weight of the underlying

index or portfolio must have a

minimum market value of at least $75

million. In addition, the component

stocks representing at least 90% of the

weight of the index or portfolio must

have a minimum monthly trading

volume during each of the last six

months of at least 250,000 shares.

The most heavily weighted

component stocks in an underlying

index or portfolio cannot exceed 25% of

he weight of the index or portfolio, and

the five most heavily weighted

component stocks cannot together

exceed 65% of the weight of the index

or portfolio. The underlying index or

portfolio must include a minimum of 13

stocks.11 All securities in an underlying

index or portfolio must be listed on a

national securities exchange or The

Nasdaq Stock Market (including the

Nasdaq SmallCap Market). Any series of

Index Fund Shares must meet these

eligibility criteria as of the data of the

initial deposit of securities and cash

into the trust or fund.

The index underlying a series of

Index Fund Shares will be calculated

based on either the market

capitalization, modified market

capitalization, price, equal-dollar or

modified equal-dollar weighting

methodology. In addition, if the index is

maintained by a broker-dealer, the

broker-dealer shall erect a ‘‘fire wall’’

around the personnel who have access

to information concerning changes and

adjustments to the index and the index

shall be calculated by a third party who

is not a broker-dealer.

The current index value will be

disseminated every 15 second over the

Consolidated Tape Association’s

Network B. The Reporting Authority

will disseminate for each series of Index

Fund Shares an estimate, updated every

15 seconds, of the value of a share of

each series. This may be based, for

example, upon current information

regarding the required deposit of

securities plus any cash amount to

permit creation of new shares of the

series or upon the index value.

A minimum of 100,000 shares of a

series of Index Fund Shares is required

to be outstanding at commencement of

trading. Trading will occur between

9:30 a.m. and either 4 p.m. or 4:15 p.m.

for each series of Index Fund Shares, as

specified by the Exchange. The

minimum variation may vary among

different series of Index Fund Shares,

but will be set at 1/16, 1/32 or 1/64 of

$1.00 (as established by the Exchange

for Index Fund Shares trading in

fractions) and $.01 (for Index Fund

Shares trading in decimals).12 The

Exchange will utilize existing

surveillance procedures for Index Fund

Shares that it trades pursuant to Rule

19b–4(e).13 The provisions of Phlx’s

proposed Rule 803(1) will apply to all

series of Index Fund Shares.

d. Notice to Members. Prior to the

commencement of trading in Index

Fund Shares, the Phlx will issue a

circular to members highlighting the

characteristics of purchases in Index

Fund Shares. The circular will discuss

the special characteristics and risks of

trading this type of security.

Specifically, the circular, among other

Federal Register / Vol. 66, No. 26 / Wednesday, February 7, 2001 / Notices 9403

14 15 U.S.C. 77e(5)(b)(2).

15See Amendment No. 1, supra note 3.

16 15 U.S.C. 80a–24(d).

17See supra note 3. 18 15 U.S.C. 78F(b)(5). 19 15 U.S.C. 78f(b)(5).

issues, will discuss what Index Fund

Shares are, how they are created and

redeemed, the requirement that

members and member firms deliver a

prospectus to investors purchasing

Index Fund Shares prior to or

concurrently with the confirmation of a

transaction, applicable Phlx rules,

dissemination information, trading

information, and the applicability of

suitability rules.

In addition, the circular will inform

members of the Exchange’s policies

about trading halts in such securities.

First, the circular will advise that

trading will be halted in the event the

market volatility trading halt parameters

set forth in Phlx Rule 133 have been

reached. Second, the circular will

advise that, in addition to other factors

that may be relevant, the Phlx may

consider factors such as the extent to

which trading is not occurring in a

deposited security(s) and whether other

unusual conditions or circumstances

detrimental to the maintenance of a fair

and orderly market are present.

e. Disclosure. The Phlx will provide

all purchasers of newly-issued Index

Fund Shares with a Fund prospectus.

Because the Units will be in continuous

distribution, the prospectus delivery

requirements of Section 5(b)(2) of the

Securities Act of 1933 (‘‘Securities

Act’’) 14 will apply to all investors in

Index Fund Shares, including secondary

market purchases on the Phlx in Index

Fund Shares.15 With respect to series of

Index Fund Shares that are the subject

of an order by the SEC exempting such

series from certain prospectus delivery

requirements under Section 24(d) of the

Investment Company Act of 1940 (the

‘‘1940 Act’’)16 and that are not otherwise

subject to prospectus delivery

requirements under the Securities Act,17

the Phlx will inform members and

member organizations regarding

disclosure obligations with respect to a

particular series of Index Fund Shares

by means of a circular prior to

commencement of trading in such

series. For these exempted series, the

Phlx requires that members and member

organizations provide to all purchasers

of a series of Index Fund Shares a

written description of the terms and

characteristics of such securities, in a

form prepared by the open-end

management investment company

issuing such securities, not later than

the time a confirmation of the first

transaction in such series is delivered to

such purchaser. In addition, members

and member organizations shall include

such a written description with any

sales material relating to a series of

Index Fund Shares that is provided to

customers or the public. Any other

written materials provided by a member

or member organization to customers or

the public making specific reference to

a series of Index Fund Shares as an

investment vehicle must include a

statement in substantially the following

form: ‘‘A circular describing the terms

and characteristics of [the series of

Index Fund Shares] has been prepared

by the [open-end management

investment company name] and is

available from your broker or the Phlx.

It is recommended that you obtain and

review such circular before purchasing

[the series of Index Fund Shares]. In

addition, upon request you may obtain

from your broker a prospectus for [the

series of Index Fund Shares].’’

A member or member organization

carrying on omnibus account for a nonmember broker-dealer is required to

inform such non-member that execution

of an order to purchase a series of Index

Fund Shares for such omnibus account

will be deemed to constitute agreement

by the non-member to make such

written description available to its

customers on the same terms as are

directly applicable to members and

member organizations under this rule.

Upon request of a customer, a member

or member organization shall also

provide a prospectus for the particular

series of Index Fund Shares.

f. Minimum Variation. Index Fund

Shares will trade in the appropriate

minimum variation, pursuant to Phlx

Rule 125. For Index Fund Shares traded

pursuant to UTP, the minimum

variation for any series of Index Fund

Shares will be the minimum variation

established by the primary market for

such series. The Phlx proposes that the

minimum fractional change for Index

Fund Shares on the Phlx will be 1⁄16, 1⁄32, or 1⁄64 of $1.00 depending on the

series of Index Fund Shares. In addition,

the Phlx is proposing to set its

minimum variation at $.01 for Index

Fund Shares trading in decimals.

g. Limitation of Exchange Liability.

The Phlx proposes a provision limiting

potential liability of the Exchange, the

Reporting Authority, and any agent of

the Phlx in connection with Index Fund

Shares.

2. Statutory Basis

The Phlx believes that the proposed

rule change is consistent with section

6(b)(5) of the Act 18 in that it is designed

to promote just and equitble prinicples

of trade, to foster cooperation and

coordination with persons engaged in

regulating securities translations, 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.

B. Self-Regulatory Organization’s

Statement on Burden on Competition

The Phlx 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 Phlx has neither solicited nor

received 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, as amended, is consistent with

the Act. Persons making written

submissions should file six copies

thereof with the Secretary, Securities

and Exchange Commission, 450 Fifth

Street, NW, Washington, DC 20549–

0609. Copies of the submission, all

subsequent amendments, all written

statements with respect to the proposed

rule change that are filed with the

Commission, and all written

communications relating to the

proposed rule change between the

Commission and any person, other than

those that may be withheld from the

public in accordance with the

provisions of 5 U.S.C. 5552, will be

available for inspection and copying in

the Commission’s Public Reference,

Room. Copies of such filing will also be

available for inspection and copying at

the principal office of the Phlx. All

submissions should refer to File No.

SR–Phlx–00–91 and should be

submitted by February 28, 2001.

IV. Commission’s Findings and Order

Granting Accelerated Approval of

Proposed Rule Change

The Commission finds that the

proposed rule change, as amended, is

consistent with the requirements of the

Act and the rules and regulations

thereunder applicable to a national

securities exchange, and, in particular,

with the requirements of section

6(b)(5).19 Specifically, the Commission

finds that the proposals to provide

standards to permit listing and trading

9404 Federal Register / Vol. 66, No. 26 / Wednesday, February 7, 2001 / Notices

20 15 U.S.C. 78f(b)(5). In approving this rule, the

Commission notes that it has considered the

proposed rule’s impact on efficiency, competition,

and capital formation. 15 U.S.C. 78c(f).

21 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). 22 15 U.S.C. 80a–1, et seq.

of Index Fund Shares will provide

investors with a convenient and less

expensive way of participating in the

securities markets. 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 or to a large

extent representing the performance of

several portfolios of stocks at negotiated

prices throughout the business day.

In addition, the proposal to provide

generic standards to permit listing and

trading of Index Fund Shares pursuant

to Rule 19b–4(e) furthers the intent of

that rule by facilitating commencement

of trading in these securities without the

need for notice and comment and

Commission approval under section

19(b) of the Act. Thus, by establishing

generic standards, the proposal should

reduce the Exchange’s regulatory

burden, as well as benefit the public

interest, by enabling the Exchange to

bring qualifying products to the market

more quickly. Accordingly, the

Commission finds that the Exchange’s

proposal will promote just and equitable

principles of trade, foster cooperation

and coordination with persons engaged

in regulating, clearing, settling,

processing information with respect to,

and facilitating transactions in

securities, and, in general, protect

investors and the public interest

consistent with section 6(b)(5) of the

Act 20

The Commission believes that the

proposal to list and trade Index Fund

Shares 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 a

product representing an interest in a

portfolio of securities designed to reflect

substantially the applicable underlying

index. Index Fund Shares will allow

investors to: (1) Respond quickly to

market changes through intra-day

trading opportunities (2) engage in

hedging strategies similar to those used

by institutional investors; and (3) reduce

transactions costs for trading a portfolio

of securities. Although Index Fund

Shares are not leveraged instruments,

and therefore do not possess any of the

attributes of stock index options, their

prices will be derived and based on the

value of the securities and the cash held

in the Fund. Accordingly, the level of

risk involved in the purchase or sale of

these Index Fund Shares is similar to

the risk involved in the purchase or sale

of traditional common stock, with the

exception that the pricing mechanism

for these Index Fund Shares is based on

a portfolio of securities.

The Commission finds that the Phlx’s

proposal contains adequate rules and

procedures to govern the trading of

Index Fund Shares. Under Phlx rules,

Index Fund Shares are subject to the full

panoply of rules governing the trading

of equity securities on the Phlx,

including, among others, rules and

procedures governing the priority,

parity and precedence of orders,

responsibilities of all types of marketmakers, trading halts, disclosures to

members, margin requirements, and

customer suitability requirements.

Further, the Commission notes that the

Phlx will use surveillance procedures

that incorporate and rely upon existing

Phlx surveillance procedures governing

equities, and the Commission believes

that these procedures are adequate

under the Act. In addition, the rules we

are approving today contain specific

listing and delisting criteria for Index

Fund Shares that will help to ensure

that the markets for Index Fund Shares

will be deep and liquid to allow for the

maintenance of fair and orderly markets.

The Commission believes that these

criteria should serve to ensure that the

underlying securities of an Index Fund

Shares series are well capitalized and

actively traded, and that new series of

Index Fund Shares do not contain

features that are likely to impact

adversely the U.S. securities markets.

In addition, the Exchange has

designated that a minimum of two

creation units will be required to be

outstanding at start-up of trading. The

Commission believes this minimum

number is sufficient to help to ensure

that a minimum level of liquidity will

exist at the start of trading. Furthermore,

the Commission finds that registering

the Index Fund Shares in book-entry

form through DTC, managing the

distribution of dividends from net

investment income, if any, and

distributing capital gains, if any, are

characteristics of Index Fund Shares

that are consistent with the Act and

should allow for the maintenance of fair

and orderly markets and perfect the

mechanism of a free and open market

pursuant to section 6(b)(5) of the Act.21

Furthermore, the Commission

believes that the Exchange’s proposal to

trade Index Fund Shares in minimum

fractional increments of 1/16, 1/32 or 1/

64 of $1.00 or .01 for Index Fund Shares

trading in decimals is consistent with

the Act. 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 Index Fund Shares.

The Exchange represents that the

Reporting Authority will disseminate

for each Fund of Index Fund Shares an

estimate, updated every 15 seconds, of

the value of a share of each Fund. The

Commission believes that the

information the Exchange proposes to

have disseminated will provide

investors with timely and useful

information concerning the value of

each Fund.

In addition, the Commission believes

that the Index Fund Shares proposal

contains several provisions that will

ensure that investors are adequately

apprised of the terms, characteristics,

and risks of trading Index Fund Shares.

Index Fund Shares will be subject to a

prospectus delivery requirement or, for

series that have been granted relief from

the prospectus delivery requirements of

the 1940 Act22 and are not otherwise

subject to prospectus delivery

requirements under the Securities Act, a

product description delivery

requirement. The requirement extends

to a member or member organization

carrying an omnibus account for a nonmember broker-dealer, who must notify

the non-member to make the product

description available to its customers on

the same terms as are directly applicable

to members and member organizations.

Finally, a member or member

organization must deliver a prospectus

to a customer upon request.

The Commission also notes that upon

the initial listing of any Index Fund

Shares under the generic standards, the

Exchange will issue a circular to its

members explaining the unique

characteristics and risks of this

particular type of security. The circular

also will note the Exchange members’

prospectus or product description

delivery requirements, and inform

members of their responsibilities under

Phlx rules in connection with customer

transactions in these securities.

Rule 19b–4(e) under the Act provides

that the listing and trading of a new

derivative securities product by an SRO

shall not be deemed a proposed rule

change, pursuant to paragraph (c)(1) of

Rule 19b–4; if the Commission has

approved, pursuant to Section 19(b) of

the Act, the SRO’s trading rules,

Federal Register / Vol. 66, No. 26 / Wednesday, February 7, 2001 / Notices 9405

23See Securities Exchange Act Release No. 40761,

63 FR 70952 (December 22, 1998).

24 15 U.S.C. 78f(b)(5).

25See Securities Exchange Act Release No. 36947

(March 8, 1996), 61 FR 10606 (March 14, 1996);

Securities Exchange Act Release No. 42988 (June

28, 2000), 65 FR 42041 (July 7, 2000).

procedures and listing standards for the

product class that include the new

derivative securities product and the

SRO has a surveillance program for the

product class.23 The Commission

believes that the Phlx’s proposal to

adopt generic listing standards for Index

Fund Shares and applying Rule 19b–

4(e) should fulfill the intended objective

of that rule by allowing those series of

Index Fund Shares that satisfy those

standards to start trading, without the

need for notice and comment and

Commission approval. The Exchange’s

ability to rely on Rule 19b–4(e) for these

products potentially reduces the time

frame for bringing these securities to the

market and thus enhances investors’

opportunities. The Commission notes

that while the proposal reduces the

Exchange’s and the Commission’s

regulatory burden, the Commission will

maintain regulatory oversight over any

products listed under the generic

standards through regular inspection

oversight.

The Commission previously

concluded that Index Fund Shares it

previously approved for listing under

existing rules governing those securities

would allow investors to: (1) Respond

quickly to market changes through intraday trading opportunities; (2) engage in

hedging strategies similar to those used

by institutional investors; and (3) reduce

transactions costs for trading a portfolio

of securities. The Commission believes,

for the reasons set forth below, that the

product classes that satisfy the proposed

generic standards for Index Fund Shares

and, therefore, can be listed under Rule

19b–4(e) without prior Commission

approval, should produce the same

benefits to the Phlx and to investors.

The Commission finds that the

Exchange’s proposal contains adequate

rules and procedures to govern the

listing and trading of Index Fund Shares

under Rule 19b–4(e). All series of Index

Fund Shares listed under the generic

standards will be subject to the full

panoply of Phlx rules and procedures

that now govern the trading of existing

securities on the Phlx. Accordingly, any

new series of Index Fund Shares listed

and traded under Rule 19b–4(e) will be

subject to Phlx rules governing the

trading of equity securities, including,

among others, rules and procedures

governing trading halts, disclosures to

members, responsibilities of the

specialist, account opening and

customer suitability requirements, and

margin.

In addition, the Phlx has developed

specific listing criteria for series of

Index Fund Shares qualifying for rule

19b–4(e) treatment that will help to

ensure that a minimum level of liquidity

will exist to allow for the maintenance

of fair and orderly markets. Specifically,

the Exchange has designated that a

minimum of 100,000 shares of a series

of Index Fund Shares will be required

to be outstanding as of the start of

trading. The Commission believes that

this minimum number of securities is

sufficient to establish a liquid Exchange

market at the commencement of trading.

The Exchange has also established

that upon initial listing, component

stocks that in the aggregate account for

at least 90% of the weight of the index

or portfolio must have a minimum

market value of at least $75 million.

Further, the component stocks in the

index must have a minimum monthly

trading volume during each of the last

six months of at least 250,000 shares for

stocks representing at least 90% of the

weight of the index or portfolio. The

most heavily weighted component stock

cannot exceed 25% of the weight of the

index or portfolio, and the five most

heavily weighted component stocks

cannot exceed 65% of the weight of the

index or portfolio. The index or

portfolio must include a minimum of 13

stocks, and all securities in an

underlying index or portfolio must be

listed on a national securities exchange

or the Nasdaq Stock Market. Moreover,

any series seeking to list under the

generic standards must meet these

eligibility criteria as of the date of the

initial deposit of securities and cash

into the trust or fund. The Commission

believes that these criteria should serve

to ensure that the underlying securities

of these indexes and portfolios are well

capitalized and actively traded, which

will help to ensure that U.S. securities

markets are not adversely affected by

the listing and trading of new series of

Index Fund Shares under Rule 19b–4(e).

These listing criteria also will make

certain that new series of Index Fund

Shares do not contain features that are

likely to impact adversely the U.S.

securities markets. Accordingly, the

Commission finds that these criteria are

consistent with section 6(b)(5) of the

Act, because they serve to prevent

fraudulent or manipulative acts,

promote just and equitable principles of

trade, remove impediments to and

perfect the mechanism of a free and

open market and a national market

system, and protect investors and the

public interest.

In addition, as previously noted, all

series of Index Fund Shares listed under

the generic standards will be subject to

the existing continued listing criteria for

these securities. This requirement

allows the Phlx to consider the

suspension of trading and the delisting

of a series if an event occurred that

makes further dealings in such

securities inadvisable. The Commission

believes that this will give the Phlx

flexibility to delist Index Fund Shares if

circumstances warrant such action.

The Phlx will rely upon its existing

surveillance procedures for supervision

of trading in index Fund Shares. The

Exchange also will file Form 19b–4(e)

with the Commission within five

business days of commencement of

trading a series under the generic

standards, and will comply with all

Rule 19b–4(e) recordkeeping

requirements. The Commission believes

that these surveillance procedures are

adequate to address concerns associated

with listing and trading Index Fund

Shares under the generic standards.

Accordingly, the Commission believes

that the rules governing the trading of

such securities provide adequate

safeguards to prevent manipulative acts

and practices and to protect investors

and the public interest, consistent with

Section 6(b)(5) of the Act.24

The Commission also notes that

certain concerns are raised when a

broker-dealer is involved in both the

development and maintenance of a

stock index upon which a product such

as Index Fund Shares is based. The

proposal would require that in such

circumstances, the broker-dealer must

have procedures in place to prevent the

misuse of material, non-public

information regarding changes and

adjustments to the index, and the index

shall be calculated by a third party who

is not a broker-dealer. The Commission

believes that these requirements should

help address concerns raised by a

broker-dealer’s involvement in the

management of such an index.

The Commission finds good cause for

approving the proposed rule change

(SR–Phlx–00–91), as amended, prior to

the thirtieth day after the date of

publication of notice thereof in the

Federal Register. The Commission notes

that the proposed rule change is based

on Amex Rule 1000A et seq., and is

similar to Boston Stock Exchange rules

relating to Index Fund Shares, which

the Commission approved in the past.25

The Commission also observes that the

proposed rule change concerns issues

that previously have been the subject of

a full comment period pursuant to

9406 Federal Register / Vol. 66, No. 26 / Wednesday, February 7, 2001 / Notices

26 15 U.S.C. 78s(b).

27 15 U.S.C. 78s(b)(2).

28 17 CFR 200.30–3(a)(12).

section 19(b) of the Act.26 The

Commission does not believe that the

proposed rule change raises novel

regulatory issues that were not

addressed in the previous filings.

Further, the changes in Amendment No.

1 clarify: (1) The trading prices of Index

Fund Shares; (2) the minimum number

of creation units; (3) the minimum

trading variations; and (4) the

prospectus delivery requirements.

Accordingly, the Commission finds that

there is good cause, consistent with

section 6(b)(5) of the Act, to approve the

amended proposal on an accelerated

basis.

V. Conclusion

It is therefore ordered, pursuant to

section 19(b)(2) of the Act,27 that the

proposed rule change (SR–Phlx–00–91),

as amended, is hereby approved on an

accelerated basis.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.28

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 01–3156 Filed 2–6–01; 8:45 am]

BILLING CODE 8010–01–M

SOCIAL SECURITY ADMINISTRATION

Supplemental Security Income for the

Aged, Blind and Disabled (SSI)

Program Demonstration Project;

Treatment of Cash Received and

Conserved To Pay for Medical or

Social Services

AGENCY: Social Security Administration

(SSA).

ACTION: Notice.

SUMMARY: The Commissioner of Social

Security is extending the application of

an existing SSA demonstration project

which tests how certain altered

resources counting rules might apply in

the SSI program. The SSI program is

authorized by title XVI of the Social

Security Act (the Act). The rules to be

tested apply to the treatment of cash

received and conserved to pay for

medical or social services.

Cash received to pay for medical or

social services is not counted as income

to the beneficiary when received.

Conserved cash received for medical or

social services (which is not a

reimbursement for these services

already paid for by the beneficiary) is

not counted as a resource for the

calendar month after the month of

receipt, so long as it remains separately

identifiable from other resources.

Beginning with the second calendar

month following the month of receipt,

cash received for the payment of

medical or social services becomes a

countable resource used in the

determination of SSI eligibility.

On November 2, 1998, the

Commissioner of Social Security

published a Notice in the Federal

Register (63 FR 58802), which waives

the rules for counting as resources

conserved cash received for medical or

social services for Cash and Counseling

demonstration participants for five

years. All participants in Arkansas,

Florida and New Jersey who are

members of a test group receive

personal assistance services. Personal

assistance services are help with the

basic activities of daily living, including

bathing, dressing, transferring, toileting,

and eating, and/or instrumental

activities of daily living such as

housekeeping, meal preparation,

shopping, laundry, money management

and medication management.

Consumers of personal assistance

services who participate in the

demonstration are empowered by

purchasing the services they require

(including medical and social services)

to perform the activities of daily living.

In order to accomplish the objective of

the demonstration project, cash

allowances and information services are

provided directly to persons with

disabilities to enable them to choose

and purchase services from providers

that they feel would best meet their

needs. Participants are also free to

engage a fiscal intermediary to assist

with proper disbursement of these cash

allowances.

This Notice extends the temporary

resources counting rules for Cash and

Counseling participants to participants

in Oregon’s similar Independent

Choices demonstration project. All

participants in the Independent Choices

demonstration project are consumers of

personal assistance services.

Medicaid is the predominant source

of public financing for personal

assistance services programs for the

aged, blind and disabled. The Secretary

of the Department of Health and Human

Services (DHHS) will exercise her

authority under section 1115 of the Act

to waive certain Medicaid provisions to

permit the State of Oregon to exercise its

Independent Choices demonstration.

Medicaid beneficiaries who participate

in this demonstration will be given cash

to purchase the services they need from

traditional and nontraditional providers,

as they deem appropriate. Assistance

will be available to help these

beneficiaries effectively use funds

allotted for personal assistance services.

Many of the Medicaid beneficiaries

who will participate in the Independent

Choices demonstration are SSI

beneficiaries or belong to coverage

groups using eligibility methodologies

related to those of the SSI program

under title XIX of the Act. Under the

Cash and Counseling demonstration

project, the Commissioner of Social

Security is testing the appropriateness

of current SSI rules which require

counting cash received for the purchase

of medical or social services as

resources if retained for more than one

month after the month of receipt. This

extension of the waiver of these SSI

resources counting rules will help SSA

obtain a larger test group of beneficiaries

making provider hiring and payment

decisions without a fiscal intermediary.

Oregon will encourage participants to

make their own fiscal decisions about

providers. SSA will use these additional

data for the evaluation of its policies on

excluding cash received to purchase

medical or social services. This SSA test

will also assist the Secretary of DHHS in

testing the possibility of providing

greater autonomy to the consumers of

personal assistance services by

empowering them to purchase the

services they require (including medical

and social services) to perform their

activities of daily living. In order to do

so, the Commissioner has exercised his

authority under section 1110(b) of the

Act and waived SSI resources counting

of cash received and conserved for

future purchases of medical and social

services.

The extension of this waiver of SSI

resources counting rules will apply to

participants in Oregon’s Independent

Choices demonstration project for the

duration of their participation. Cash

provided to participants for purchase of

medical or social services must be

conserved in a form that is separately

identifiable from other resources that

may be countable or excludable under

title XVI of the Act. The cash received

for medical or social services and

conserved towards payment for those

services by SSI beneficiaries who

participate in this demonstration will

not be included in SSI countable

resources only for so long as the

individual continues to participate in

the Independent Choices demonstration

project.

Existing SSI resource-counting rules

are suspended only where application

of such rules would adversely affect

participation by SSI beneficiaries in the

Independent Choices demonstration

project.