[Federal Register Volume 62, Number 198 (Tuesday, October 14, 1997)]
[Notices]
[Pages 53373-53377]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-27042]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-39188; File No. SR-PCX-97-35]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change by the Pacific Exchange, Inc., Relating to the Listing and
Trading of Portfolio Depositary Receipts
October 2, 1997.
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 August 25, 1997, the Pacific Exchange, Inc. (``PCX'' or
``Exchange'') filed with the Securities and Exchange Commission
(``SEC'' or ``Commission'') the proposed rule change as described in
Items I, II and III below, which Items have been prepared by the self-
regulatory organization. The Commission is publishing this notice to
solicit comments on the proposed rule change from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The PCX proposes to adopt new rules relating to the listing and
trading of Portfolio Depositary Receipts (``PDRs'').
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 self-regulatory organization
included statements concerning the purpose of and basis for the
proposed rule change and discussed any comments it received on the
proposed rule change. The text of these statements may be examined at
the places specified in Item IV below. The self-regulatory organization
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 proposes to adopt new Rule 8.300 to accommodate the
trading
[[Page 53374]]
of PDRs, i.e., securities that are interests in a unit investment trust
(``Trust'') holding a portfolio of securities linked to an index. Each
Trust will provide investors with an instrument that (1) closely tracks
the underlying portfolio of securities, (2) trades like a share of
common stock, and (3) pays holders of the instrument periodic dividends
proportionate to those paid with respect to the underlying portfolio of
securities, less certain expenses (as described in the Trust
prospectus).
Under the proposal, the Exchange may list and trade, or trade
pursuant to unlisted trading privileges, PDRs based on one or more
stock indexes or securities portfolios.\3\ PDRs based on each
particular stock index or portfolio will be designated as a separate
series and identified by a unique symbol. The stocks that are included
in an index or portfolio on which PDRs are based will be selected by
the Exchange, or by another person having a proprietary interest in and
authorize use of such index or portfolio, and may be revised as may be
deemed necessary or appropriate to maintain the quality and character
of the index or portfolio.
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\3\ The Commission notes that PCX has not identified a
particular trading product that it seeks to list pursuant to the
proposed listing standards. Prior to trading a particular product,
PCX may have to submit an additional Section 19(b) filing that more
specifically addresses potential issues associated with items such
as the composition, calculation and dissemination of the applicable
index.
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In connection with an initial listing, the Exchange proposes that,
for each Trust of PDRs, the Exchange will establish a minimum number of
PDRs required to be outstanding at the time of commencement of Exchange
trading, and such minimum number will be filed with the Commission in
connection with any required submission under Rule 19b-4 for each
Trust. If the Exchange trades a particular PDR pursuant to unlisted
trading privileges, the Exchange will follow the listing exchange's
determination of the appropriate minimum number.
Because the Trust operates on an open-end type basis, and because
the number of PDR holders is subject to substantial fluctuations
depending on market conditions, the Exchange believes it would be
inappropriate and burdensome on PDR holders to consider suspending
trading in or delisting a series of PDRs, with the consequent
termination of the Trust, unless the number of holders remains severely
depressed during an extended time period. Therefore, twelve months
after the formation of a Trust and commencement of Exchange trading,
the Exchange will consider suspension of trading in, or removal from
listing of, a Trust when, in its opinion, further dealing in such
securities appears unwarranted under the following circumstances:
(a) If the Trust on which the PDRs are based has more than 60 days
remaining until termination and there have been fewer than 50 record
and/or beneficial holders of the PDRs for 30 or more consecutive
trading days; or
(b) if the index on which the Trust is based is no longer
calculated; or
(c) if such other event occurs or condition exists, which, in the
opinion of the Exchange, makes further dealings in such securities on
the Exchange inadvisable.
A Trust will terminate upon removal from Exchange listing and its
PDRs will be redeemed in accordance with provisions of the Trust
prospectus. A Trust may also terminate under such other conditions as
may be set forth in the Trust prospectus. For example, the sponsor of
the Trust (the ``Sponsor''), following notice to PDR holders, will have
discretion to direct that the Trust be terminated if the value of
securities in such Trust falls below a specified amount.
Trading of PDRs. Dealing in PDRs on the Exchange will be conducted
pursuant to the Exchange's general agency-auction trading rules. The
Exchange's general dealing and settlement rules would apply, including
its rules on clearance and settlement of securities transactions and
its equity margin rules. Other generally applicable Exchange equity
rules and procedures would also apply, including, among others, rules
governing the priority, parity and precedence of orders and the
responsibilities of specialists.
With respect to trading halts, the trading of PDRs would be halted,
along with the trading of all other listed or traded stocks, in the
event the ``circuit breaker'' thresholds are reached.\4\ PCX does not
propose to automatically halt trading or delay opening of index-based
PDRs upon the triggering of futures price limits for the S&P 500
Composite Price Index, S&P'' 100 Composite Price Stock Index (``S&P''
``100 Index'') or Major Market Index (``MMI'') futures contracts. Such
an event, however, could be considered by the Exchange, along with
other factors, such as a halt in trading in S&P 100 Index Options
(``OEX''), S&P 500 Index Options (``SPX''), or Major Market Index
Options (``XMI''), in deciding whether to halt trading in PDRs.
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\4\ See Securities Exchange Act Release No. 38221 (January 31,
1997), 62 FR 5871 (February 7, 1997) & note 7 therein.
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The Exchange will issue a circular to its Members and Member
Organizations informing them of Exchange policies regarding trading
halts in such securities. The circular will make clear that, in
addition to other factors that may be relevant, the Exchange may
consider factors such as those set forth in Rule 7.11, the Exchange's
rule governing trading halts for index options, in exercising its
discretion to halt or suspend trading. For a PDR based on an index,
these factors would include whether trading has been halted or
suspended in the primary market(s) for any combination of underlying
stocks accounting for 20% or more of the applicable current index group
value; or whether other unusual conditions or circumstances detrimental
to the maintenance of a fair and orderly market are present.
Disclosure. Proposed Rule 8.300(c) requires that Members and Member
Organizations provide to all purchasers of each series of PDRs a
written description of the terms and characteristics of such
securities, in a form approved by the Exchange, not later than the time
a confirmation of the first transaction in such series of PDRs is
delivered to such purchaser. In this regard, a Member or Member
Organization carrying an omnibus account for a non-member broker-dealer
will be required to inform such non-member than execution of an order
to purchase PDRs for such omnibus account will be deemed to constitute
an agreement by the non-member to make such written description
available to its customers on the same terms as are directly applicable
to Member or Member Organizations. The written description must be
included with any sales material on that series of PDRs that a Member
provides to customers or the public. Moreover, other written materials
provided by a Member or Member Organization to customers or the public
making specific reference to a series of PDRs as an investment vehicle
must include a statement in substantially the following form: ``A
circular describing the terms and characteristics of [the series of
PDRs] is available from your broker. It is recommended that you obtain
and review such circular before purchasing [the series of PDRs]. In
addition, upon request you may obtain from your broker a prospectus for
[the series of PDRs].'' Additionally, as noted above, the Exchange
requires that Members and Member Organizations provide customers with a
copy of the prospectus for a series of PDRs upon request.
[[Page 53375]]
Two existing PDRs, SPDRs, and MidCap SPDRs, are traded on the
American Stock Exchange (``Amex'').\5\ The Exchange is not asking for
permission to list SPDRs or MidCap SPDRs at this time, but rather with
trade SPDRs and MidCap SPDRs pursuant to unlisted trading privileges
once the generic listing standards set forth herein are approved.
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\5\ SPDRs and MidCap SPDRs are defined and discussed more fully
below.
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Pursuant to Rule 12f-5 under the Act, in order to trade a
particular class or type of security pursuant to unlisted trading
privileges, the Exchange must have rules providing for transactions in
such class or type of security. The Amex has enacted listing standards
for PDRs, and the Exchange's proposed rule change is designed to create
similar standards for PDR listing and/or trading on the PCX. As stated
above, the Exchange proposes to trade SPDRs and MidCap SPDRs pursuant
to unlisted trading privileges upon arrival of this rule filing.
Because the Exchange is not itself listing SPDRs and MidCap SPDRs,
but will merely be trading these securities pursuant to unlisted
trading privileges, the Exchange will not independently ensure
conformity of SPDRs and MidCap SPDRs to PCX listing standards. Instead,
the Exchange will rely on the primary market to determine whether SPDRs
and MidCap SPDRs meet the relevant listing standards. If at a later
time the Exchange desires to list SPDRs and MidCap SPDRs, the Exchange
will request SEC approval for that listing in a separate proposed rule
change filed pursuant to Section 19(b) of the Act, the Exchange will
independently ensure that SPDRs and MidCap SPDRs conform to the
Exchange's own listing standards.
The remainder of this section of the filing merely provides
background information on SPDRs and MidCap SPDRs. The information,
taken mostly from SR-AMEX-94-52 and SR-AMEX-92-18, describes the
structure and mechanics of SPDRs and MidCap SPDRs.
SPDRs and MidCap SPDRs Generally. On December 11, 1992, the
Commission approved Amex Rules 1000 et seq.\6\ to accommodate trading
on the Amex of PDRs generally. The Sponsor of each series of PDRs
traded on the Amex is PDR Services Corporation, a wholly-owned
subsidiary of the Amex. The PDRs are issued by a Trust in a specified
minimum aggregate quantity (``Creation Unit'') in return for a deposit
consisting of specified numbers of shares of stock plus a cash amount.
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\6\ See Securities Exchange Act Release No. 31591 (December 11,
1992), 57 FR 60253 (December 18, 1992).
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The first Trust to be formed in connection with the issuance of
PDRs was based on the S&P 500 Composite Stock Price Index (``S&P''
Index), known as Standard & Poor's Depositary Receipts (``SPDRs'').
SPDRs have been trading on Amex since January 29, 1993. The second
Trust to be formed in connection with the issuance of PDRs was based on
the S&P MidCap 400 Index,\7\ known as Standard & Poors MidCap 400
Depositary Receipts (``MidCap SPDRs'').\8\ The Sponsor of the two
Trusts has entered into trust agreements with a trustee in accordance
with Section 26 of the Investment Company Act of 1940. PDR
Distributors, Inc. (``Distributor'') acts as underwriter of both SPDRs
and MidCap SPDRs on an agency basis. The Distributor is a registered
broker-dealer, a member of the National Association of Securities
Dealers, Inc., and a wholly-owned subsidiary of Signature Financial
Group, Inc.
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\7\ The S&P MidCap 400 Index is a capitalization-weighted index
of 400 actively traded securities that includes issues selected from
a population of 1,700 securities, each with a year-end market-value
capitalization of between $200 million and $5 billion. The issues
included in the Index cover a broad range of major industry groups,
including industrials, transportation, utilities, and financials.
\8\ See Securities Exchange Act Release No. 35534 (March 24,
1995), 60 FR 16686 (March 31, 1995).
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SPDRs. It is anticipated that the term of the SPDR Trust will be 25
years.\9\ The Trustee of the SPDR Trust will have the right to vote any
of the voting stocks held by the Trust, and will vote such stocks of
each issuer in the same proportion as all other voting shares of that
issuer voted.\10\ Therefore, SPDR holders will not be able to directly
vote the shares of the issuers underlying the SPDRs.
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\9\ The SPDR Trust may terminate at an earlier time under
certain circumstances, as provided in the prospectus.
\10\ The Trustee will abstain from voting if the stocks held by
the Trust cannot be voted in proportion as all other shares of the
securities are voted.
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The Trust will issue SPDRs in exchange for ``Portfolio Deposits''
of all of the S&P 500 Index securities weighted according to their
representation in the Index.\11\ An investor making a Portfolio Deposit
into the Trust will receive a ``Creation Unit'' composed of 50,000
SPDRs.\12\ The price of SPDRs will be based on a current bid/offer
market.\13\ SPDRs will not be redeemable individually, but may be
redeemed in Creation Unit size (i.e., 50,000 SPDRs). Specifically, a
Creation Unit may be redeemed for an-in-kind distribution of securities
identical to a Portfolio Deposit.\14\ PDR Distribution Services, Inc.,
a registered broker-dealer, will act as underwriter of SPDRs on an
agency basis.
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\11\ A Portfolio Deposit also will include a cash payment equal
to a pro rata portion of the dividends accrued on the Trust's
portfolio securities since the last dividend payment by the Trust,
plus or minus an amount designed to compensate for any difference
between the net asset value of the Portfolio Deposit and the S&P 500
Index caused by, among other things, the fact that a Portfolio
Deposit cannot contain fractional shares.
\12\ The Trust is structured so that the net asset value of an
individual SDPR should equal one-tenth of the value of the S&P 500
Index.
\13\ The Amex has designated \1/64\'s as the minimum fraction
for trading in SPDRs. The Exchange has proposed this same minimum
variation for the trading of SPDRs on the PCX.
\14\ An investor redeeming a Creation Unit will receive Index
securities and cash identical to the Portfolio Deposit required of
an investor wishing to purchase a Creation Unit on that particular
day. Since the Trust will redeem in kind rather than for cash, the
Trustee will not be forced to maintain cash reserves for
redemptions. This should allow the Trust's resources to be committed
as fully as possible to tracking the S&P 500 Index, enabling the
Trust to track the Index more closely than other basket products
that must allocate a portion of their assets for cash redemption.
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MidCap SPDRs. All orders to create MidCap SPDRs in Creation Unit
Size aggregations (which has been set at 25,000) must be placed with
the Distributor, and it will be the responsibility of the Distributor
to transmit such orders to the Trustee.
To be eligible to place orders to create MidCap SPDRs as described
below, an entity or person either must be a participant in the
Continuous Net Settlement (``CNS'') system of the National Securities
Clearing Corporation (``NSCC'') or a Depositary Trust Company (``DTC'')
participant. Upon acceptance of an order to create MidCap SPDRs, the
Distributor will instruct the Trustee to initiate the book-entry
movement of the appropriate number of MidCap SPDRs to the account of
the entity placing the order. MidCap SPDRs will be maintained in book-
entry form at DTC.
Payment with respect to creation orders placed through the
Distributor will be made by: (1) The ``in-kind'' deposit with the
Trustee of a specified portfolio of securities that is formulated to
mirror, to the extent practicable, the component securities of the
underlying index or portfolio, and (2) a cash payment sufficient to
enable the Trustee to make a distribution to the holders of beneficial
interests in the Trust on the next dividend payment date as if all the
securities had been held for the entire accumulation period for the
distribution (``Dividend Equivalent Payment''), subject to certain
adjustments. The securities and cash accepted by the
[[Page 53376]]
Trustee are referred to, in the aggregate, as a ``Portfolio Deposit.''
It is anticipated that the term of the MidCap SPDR Trust will be 25
years.
Issuance of MidCap SPDRs. Upon receipt of a Portfolio in payment
for a creation order placed through the Distributor as described above,
the Trustee will issue a specified number of MidCap SPDRs, which
aggregate number is referred to as a ``Creation Unit.'' The Amex
anticipates that a Creation Unit will be made up of 25,000 MidCap
SPDRs.\15\ Individual Mid Cap SPDRs can then be traded in the secondary
market like other equity securities. Portfolio Deposits are expected to
be made primarily by institutional investors, arbitragers, and the
Exchange specialist.
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\15\ PDRs may be created in other than Creation Unit size
aggregations in connection with the DTC Dividend Reinvestment
Service (``DRS'').
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The Trustee or Sponsor will make available: (1) On a daily basis, a
list of the names and required number of shares for each of the
securities in the current Portfolio Deposit; (2) on a minute-by-minute
basis throughout the day, a number representing the value (on a per
MidCap SPDR basis) of the securities portion of a Portfolio Deposit in
effect on such date; and (3) on a daily basis, the accumulated
dividends, less expenses, per outstanding Mid Cap SPDR.
The Amex has set the minimum fractional trading variation for
MidCap SPDRs at \1/64\ of $1.00. The Exchange is proposing this same
minimum variation for MidCap SPDRs.
Redemption of MidCap SPDRs. Mid Cap SPDRs in Creation Unit size
aggregations will be redeemable in kind by tendering them to the
Trustee. While holders may sell MidCap SPDRs in the secondary market at
any time, they must accumulate at least 25,000 (or multiples thereof)
to redeem them through the Trust. MidCap SPDRs will remain outstanding
until redeemed or until the termination of the Trust. Creation Units
will be redeemable on any business day in exchange for a portfolio of
the securities held by the Trust identical in weighting and composition
to the securities portion of a Portfolio Deposit in effect on the date
a request is made for redemption, together with a ``Cash Component''
(as defined in the Trust prospectus), including accumulated dividends,
less expenses, through the date of redemption. The number of shares of
each of the securities transferred to the redeeming holder will be the
number of shares of each of the component stocks in a Portfolio Deposit
on the day a redemption notice is received by the Trustee, multiplied
by the number of Creation Units being redeemed. Nominal service fees
may be charged in connection with the creation and redemption of
Creation Units. The Trustee will cancel all tendered Creation Units
upon redemption.
Distributions for MidCap SPDRs. The MidCap SPDR Trust will pay
dividends quarterly. The regular quarterly ex-dividend date for MidCap
SPDRs will be the third Friday in March, June, September, and December,
unless that day is a New York Stock Exchange holiday, in which case the
ex-dividend date will be the preceding Thursday. Holders of MidCap
SPDRs on the business day preceding the ex-divident date will be
entitled to receive an amount representing dividends accumulated
through the quarterly dividend period preceding such ex-dividend date
net of fees and expenses for such period. The payment of dividends will
be made on the last Exchange business day in the calendar month
following the ex-dividend date (``Dividend Payment Date''). On the
Dividend Payment Date, dividends payable for those securities with ex-
dividend dates falling within the period from the ex-dividend date most
recently preceding the current ex-dividend date will be distributed.
The Trustee will compute on a daily basis the dividends accumulated
within each quarterly dividend period. Dividend payments will be made
through DTC and its participants to all such holders with funds
received from the Trustee.
The MidCap SPDR Trust intends to make the DTC DRS available for use
by MidCap SPDR holders through DTC participant brokers for reinvestment
of their cash proceeds. The DTC DRS is also available to holders of
SPDRs. Because some brokers may choose not to offer the DTC DRS, an
interested investor would have to consult his or her broker to
ascertain the availability of dividend reinvestment through that
broker. The Trustee will use the cash proceeds of MidCap SPDR holders
participating in the reinvestment to obtain the Index securities
necessary to create the requisite number of SPDRs.\16\ Any cash
remaining will be distributed pro rata to participants in the dividend
reinvestment.
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\16\ The creation of PDRs in connection with the DTC DRS
represents the only circumstances under which PDRs can be created in
other than Creation Unit size aggregations.
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2. Basis
The proposed rule change is consistent with Section 6(b)(5) of the
Act \17\ in that it fosters cooperation and coordination with persons
engaged in regulating, clearing, settling, processing information with
respect to, and facilitating transactions in securities, removes
impediments to and perfects the mechanism of a free and open market and
a national market system and protects investors and the public
interest.
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\17\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition that is not necessary or appropriate
in furtherance of the purposes of the Act.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
Written comments on the proposed rule change were neither solicited
nor received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 35 days of the date of publication of this notice in the
Federal Register or within such longer period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will--
A. By order approve such rule change, or
B. Institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing. Persons making written submissions
should file six copies thereof with the Secretary, Securities and
Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549.
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and all written communications relating to the proposed
rule change between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for inspection and copying in the
Commission's Public Reference Room, 450 Fifth Street, N.W., Washington,
D.C. 20549. Copies of such
[[Page 53377]]
filing will also be available for inspection and copying at the
principal office of the PCX. All submissions should refer to File No.
SR-PCX-97-35 and should be submitted by October 31, 1997.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\18\
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\18\ 17 CFR 200.30(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-27042 Filed 10-10-97; 8:45 am]
BILLING CODE 8010-01-M