[Federal Register Volume 66, Number 26 (Wednesday, February 7, 2001)]
[Notices]
[Pages 9401-9406]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-3156]


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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.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See 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.
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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\
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    \4\ See Amendment No. 1, supra note 3.
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    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

[[Page 9402]]

Exchange (``Amex''),\5\ and are similar to the recently approved 
listing standards for Trust Shares.\6\
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    \5\ The 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.
    \6\ See Securities Exchange Act Release No. 43717 (December 13, 
2000), 65 FR 80976 (December 22, 2000).
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    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\
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    \7\ See Amendment No. 1, supra note 3.
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    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 volatility-
related 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.
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    \8\ Phlx 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.
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    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.
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    \9\ 17 CFR 240.19b-4(e).
    \10\ See Securities Exchange Act Release No. 40761 (December 8, 
1998), 63 FR 70952 (December 22, 1998).
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    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.
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    \11\ Thirteen 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.
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    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.
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    \12\ See Amendment No. 1, supra note 3.
    \13\ Id.
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    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

[[Page 9403]]

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].''
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    \14\ 15 U.S.C. 77e(5)(b)(2).
    \15\ See Amendment No. 1, supra note 3.
    \16\ 15 U.S.C. 80a-24(d).
    \17\ See supra note 3.
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    A member or member organization carrying on omnibus account for a 
non-member broker-dealer is required to inform such non-member that 
execution of an order to purchase a series of Index Fund Shares for 
such omnibus account will be deemed to constitute agreement by the non-
member to make such written description available to its customers on 
the same terms as are directly applicable to members and member 
organizations under this rule.
    Upon request of a customer, a member or member organization shall 
also provide a prospectus for the particular series of Index Fund 
Shares.
    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.
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    \18\ 15 U.S.C. 78F(b)(5).
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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

[[Page 9404]]

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.
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    \19\ 15 U.S.C. 78f(b)(5).
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    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\
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    \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).
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    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 market-makers, 
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\
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    \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).
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    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 Act\22\ 
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 non-member 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.
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    \22\ 15 U.S.C. 80a-1, et seq.
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    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,

[[Page 9405]]

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.
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    \23\ See Securities Exchange Act Release No. 40761, 63 FR 70952 
(December 22, 1998).
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    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 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. 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\
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    \24\ 15 U.S.C. 78f(b)(5).
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    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

[[Page 9406]]

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.
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    \25\ See 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).
    \26\ 15 U.S.C. 78s(b).
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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.
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    \27\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\28\
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    \28\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-3156 Filed 2-6-01; 8:45 am]
BILLING CODE 8010-01-M