[Federal Register Volume 60, Number 152 (Tuesday, August 8, 1995)]
[Notices]
[Pages 40403-40406]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-19522]



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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-36032; International Series Release No. 832; File No. 
SR-NYSE-95-23]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by New York Stock Exchange, Inc. Relating to the Listing of 
Investment Company Units

July 28, 1995.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 
1934, 15 U.S.C. 78s(b)(1) (``Act''), notice is hereby given that on 
June 7, 1995, the New York Stock Exchange, Inc. (``NYSE'' or the 
``Exchange'') filed with the Securities and Exchange 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.

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The NYSE proposes to adopt para. 703.16 of its Listed Company 
Manual (``Manual''), consisting of listing standards for units of 
trading (``Units'') that represent an interest in a registered 
investment company (``Investment Company'') that could be organized as 
a unit investment trust (``UNIT''), an open-end management investment 
company, or a similar entity. The investment company would hold 
securities comprising, or otherwise based on or representing an 
investment in, an index or portfolio of securities. The investment 
company either could hold the securities directly or could hold another 
security representing the index or portfolio securities (such as in a 
UIT that holds shares of an open-end investment company). The Exchange 
also proposes to amend Exchange Rule 460 to permit specialists to whom 
Units have been allocated to purchase and redeem Units, or securities 
that can be subdivided or converted into Units, through a distributor, 
from the issuer of such securities.
    The Exchange initially seeks to list up to nine series of Units, in 
the form of ``CountryBaskets.'' \1\ These CountryBaskets will be 
structured in one of two ways. First, in the ``Fund-only structure,'' 
they could be structured as series of an open-end management investment 
company investing in a portfolio of securities (``Index Securities'') 
included in the corresponding component of the FT-Actuaries World Index 
``FT-AWI'').\2\ Alternatively, in the ``Fund/UIT structure,'' they 
could be structured as UITs that have as their assets shares of an 
open-end investment company holding the underlying Index Securities. 
If, in the future, the Exchange seeks to list Units with respect to 
other indices, it will make an appropriate filing with the Commission 
to provide the authorization to effect such listings.

    \1\ ``CountryBasket,'' ``CountryBaskets'' and ``CB'' are 
trademarks of Deutsche Bank Securities Corporation (``DBSC'').
    \2\ ``FT-Actuaries World Indices,''``FT-Actuaries World Index,'' 
and ``FT-AWI'' are trade and service marks of The Finacial Times 
Limited, and are used under license by Goldman, Sachs & Co. and 
NatWest Securities Limited.

[[Page 40404]]

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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

    The Exchange proposes to list up to nine CountryBasket securities 
(``Securities''). The Securities will be issued either by an open-end 
management investment company or by UITs or similar entities that 
invest in individual series of an index fund.\3\ Each series of such an 
investment company (each a ``Fund'') is designed to provide investment 
results that substantially correspond to the price and yield 
performance of a specific component of the FT-Actuaries World Index. 
The initial nine series of Funds will be based on the following FT-
Actuaries World Indices: Australia; France; Germany; Hong Kong; Italy; 
Japan; South Africa; United Kingdom; and the United States.\4\

    \3\ The specific character or structure of the Securities will 
be determined based on, among other things, the types of exemptive 
relief the product sponsors receive from the Commission with respect 
to issues arising under the Investment Company Act of 1940. The 
manner in which the Securities will be listed and traded on the 
Exchange will be the same regardless of the structure chosen. For 
ease of reference throughout this filing the term ``Fund'' will 
refer either to each series of the open end management investment 
company that will be trading on the Exchange (in a fund-only 
structure) or to each series of the open end management investment 
company that will be underlying a UIT (in a dual Fund/UIT 
structure).
    \4\ The actual components, component capitalization, and 
component weightings for each series were submitted as part of a 
Form N-1A registration statement of The CountryBaskets Index Fund, 
Inc. under the Securities Act of 1933 and the Investment Company Act 
of 1940. Registration Nos. 33-85710; 811-8734.
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The FT-Actuaries World Indices

    DBSC, the adviser to the Funds, has provided the Exchange with the 
following description of the FT-Actuaries World Indices.

Establishing an Index

    The FT-AWI are jointly compiled by The Financial Times Limited, 
Goldman, Sachs & Co., and NatWest Securities Limited, in conjunction 
with the Institute of Actuaries (together, the ``Consortium''). The aim 
of the Consortium is to create and maintain a series of high quality 
equity indices for use by the global investment community. 
Specifically, the Consortium seeks to establish and maintain the FT-AWI 
so that with respect to their corresponding markets, they are 
comprehensive, consistent, flexible, accurate, investible, and 
representative.
    The World Index Policy Committee (``WIPC'') makes all policy 
decisions concerning the FT-AWI, including: objectives; selection 
criteria; liquidity requirements; calculation methodologies; and the 
timing and disclosure of additions and deletions. The WIPC makes those 
decisions in a manner that is consistent with the stated aims and 
objectives of the Consortium. In general, the WIPC aims for a minimum 
of 70 percent coverage of the aggregate value of all domestic exchange-
listed stocks in every country, region and sector in which it maintains 
an index.
    The WIPC consists of: One representative of each Consortium member; 
one member nominated by each of the parties as representing an actual 
or prospective main user group of the World Indices; a Chairman and 
additional member who are members of the Institute of Actuaries or the 
Facility of Actuaries.
    A country must satisfy the following criteria for the WIPC to 
include it in the FT-Actuaries World Indices: (1) Direct equity 
investment by non-nationals must be permitted; (2) accurate and timely 
data must be available; (3) no significant exchange controls should 
exist that would prevent the timely repatriation of capital or 
dividends; (4) significant international investor interest in the local 
equity market must have been demonstrated; and (5) adequate liquidity 
must exist.
    Securities in the FT-AWI are subject to the following 
``investibility screens'': (1) Securities comprising the bottom five 
percent of any market's capitalization are excluded; (2) securities 
must be eligible to be owned by foreign investors; (3) 25 percent or 
more of the full capitalization of eligible securities must be publicly 
available for investment and not in the hands of a single party or 
parties ``acting in concert''; and (4) securities that fail to trade 
for more than 15 business days within each of two consecutive quarters 
are excluded.
    The WIPC seeks to select constituent stocks that capture 85 percent 
of the equity that remains available in any market (known as the 
``investible universe'') after applying the investibility screens. 
Securities are selected with regard to economic sector and market 
capitalization to make the FT-AWI component highly representative of 
the overall economic sector make-up and market capitalization 
distribution of the investible universe of a market.

Maintaining an Index

    The WIPC may add securities to the FT-AWI for any of the following 
reasons: (1) The addition would make the economic sector make-up and 
market capitalization distribution of the FT-AWI component more 
representative of its investible universe; (2) a non-constituent 
security has gained in importance and replaces an existing constituent 
security under the rules of review established by the WIPC; (3) the FT-
AWI component represents less than its targeted percentage of the 
capitalization of its investible universe (usually in cases where the 
investible universe has grown faster than the corresponding FT-AWI 
component); (4) a new, eligible security becomes available whose total 
capitalization is one percent or more of the current capitalization of 
the relevant FT-AWI component; (5) an existing constituent ``spin off'' 
a part of its business and issues new equity to the existing 
shareholders; or (6) changes in investibility factors lead to a stock 
becoming eligible for inclusion and that stock now qualifies on other 
grounds.
    The WIPC may adjust the FT-AWI for any of the following reasons: 
(1) The component comprises too high a percentage of its representative 
universe; (2) a review by the WIPC shows that a constituent security 
has declined in importance and should be replaced by a non-constituent 
security; (3) the deletion of a security that has declined in 
importance would make the FT-AWI component more representative of the 
economic make-up of its investible universe; (4) circumstances 
regarding investibility and free float change, causing the constituent 
security to fail the FT-AWI screening criteria; (5) an existing 
constituent security is acquired by another entity; or (6) the stock 
has been suspended from trading for a period of more than ten working 
days. Generally, but not in all cases, changes resulting from review by 
the WIPC occur at the end of a calendar quarter. Changes resulting from 
merger or ``spin-off'' activity will be effectuated as soon as 
practicable.

[[Page 40405]]


Calculation and Dissemination of an Index

    The FT-AWI are calculated through widely accepted mathematical 
formulae, with the effect that the indices are weighted arithmetic 
averages of the price relatives of the constituents--as produced solely 
by changes in the marketplace--adjusted for intervening capital 
changes. The FT-AWI are base-weighted aggregates of the initial market 
capitalization, the price of each issue being weighted by the number of 
shares outstanding, modified to reflect only those shares outstanding 
that are eligible to be owned by foreign investors.
    For each constituent security, the implied annual dividend is 
divided by 260 (an accepted approximation for the number of business 
days in a calendar year). This dividend is then reinvested daily 
according to standard actuarial calculations. Distributions affect 
adjustments to the base capital or the price per share in accordance 
with prescribed FT-AWI standards. The indices' values and related 
performance figures for various periods of time are calculated daily 
and are disseminated to the public.\5\

    \5\ The responsibility for collecting, calculating, and 
transmitting the index data is split between Goldman Sachs and 
NatWest Securities.
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    The FT-AWI are valued in the terms of local currency, U.S. dollars, 
and U.K. pounds sterling, thereby allowing the effect of currency value 
on the index value to be measured. Changes to the indices are announced 
as soon as possible, and on Mondays the Financial Times publishes a 
list of changes to each index implemented during the previous week, if 
any. The FT-AWI are calculated once a day on weekdays when one or more 
of the constituent markets are open; the indices are syndicated and 
published in the financial sections of several newspapers worldwide. 
FT-AWI data also may be purchased electronically.

Distribution of the Securities

    The Securities will be distributed in transactions with the Fund 
through ``Creation Transactions.'' To effect a Creation Transaction in 
the Fund-only structure, a person would buy Fund shares from the Fund 
at their net asset value (``NAV'') next computed. The sales will be in 
``Creation Unit'' size aggregations in exchange for a deposit 
(``Deposit'') of Index Securities (a ``Fund Basket'') and a specified 
amount of cash sufficient to equal the NAV of such shares.
    Securities in Creation Unit size aggregations only may be redeemed, 
at NAV, generally for an in-kind distribution of Index Securities 
comprising the Fund shares, plus a cash payment. A Creation Unit size 
of Fund shares will represent securities with approximately $2 to $5 
million in market value. The Creation Unit would be disaggregated into 
the individual Securities that would trade on the Exchange. For the 
nine initial CountryBasket Securities, there would be the following 
number of Securities per Creation Unit:

Australia....................................................     75,000
France.......................................................    100,000
Germany......................................................    100,000
Hong Kong....................................................     75,000
Italy........................................................     75,000
Japan........................................................    100,000
South Africa.................................................     75,000
United Kingdom...............................................    100,000
United States................................................    100,000
                                                                        

    To effect a Creation Transaction in the Fund/UIT structure, a 
person would buy a Fund Share (or fractional share) in exchange for the 
Deposit. Each UIT would invest solely in shares of a specified series 
of the Fund, and would offer one ``redeemable unit of beneficial 
interest'' (a ``Redeemable Unit'') in exchange for each Fund share or 
fractional share. The Redeemable Unit would be the functional 
equivalent of the Creation Unit in the Fund-only structure.
    The owner of a Redeemable Unit could separate that unit into a 
specific number of identical fractional non-redeemable subunits that 
would constitute the Securities traded on the Exchange. As with the 
Fund-only structure, for example, in the case of the Germany 
CountryBasket Trust there would be 100,000 Securities per Redeemable 
Unit. These Securities could be recombined into Redeemable Units and 
then redeemed, at NAV, for the appropriate number of Fund shares. In 
turn, the Fund shares could be redeemed for the Index Securities and 
cash. The Securities would not be redeemable other than in Creation 
Unit aggregations.
    Regardless of the structure used, there may be an initial 
distribution period of Fund shares lasting from one to a few weeks. 
During this period, the principal underwriter or distributor 
(``Distributor'') directly or through soliciting dealers would accept 
subscriptions to purchase Fund shares. In the dual Fund/UIT structure, 
orders also would be accepted to exchange Fund shares for Redeemable 
Units and to separate such units into tradeable Securities. Therefore, 
the offering would be continuous.

Exchange Trading of Units

    The proposed listing criteria provide flexible standards for the 
listing of Units. Before commencing trading, the Exchange will require 
that there be at least 300,000 tradeable Units outstanding, 
representing, for the nine series encompassed by this filing, at least 
three or four Creation Units. The Exchange will consider the suspension 
of trading and the delisting of a series of Units if:
     After the first year of trading, there are fewer than 50 
record or beneficial holders of the Units for 30 or more consecutive 
trading days;
     The value of the underlying index or portfolio of 
securities is no longer calculated or available; or
     There occurs another event that makes further dealings in 
the Units on the Exchange inadvisable.
    Dealing in Units 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 (see NYSE Rules 45 
through 296). Other Exchange equity rules and procedures, such as the 
Exchange's equity margin rules, would apply.\6\ Unless the prospectus 
for a specific Security states otherwise, the Units trading on the 
Exchange will have one vote per share; however, as with other 
securities issued by registered investment companies, there will not be 
a ``passthrough'' of the voting rights on the actual index securities 
held by a fund or directly or indirectly by a trust.

    \6\ With respect to margin, the Exchange will be requesting that 
the Commission's Division of Market Regulation grant ``no action'' 
relief with respect to section 11(d)(1) of the Act, as amended, and 
Rules 11d1-1 and 11d1-2 thereunder with respect to the extension of 
credit to customers on a security that is part of a new issue.
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    With respect to specialist dealings, Exchange Rule 460 precludes 
certain business relationships between an issuer and the specialist in 
the issuer's securities. This could be interpreted to prevent a 
specialist from entering into Creation Transactions or redeeming 
Securities or Redeemable Units from the issuer. However, such market 
activities could enhance liquidity in the Units and facilitate the 
specialist's market-making responsibilities. In addition, since the 
specialist will be able to engage in Creation Transactions and 
redemptions only according to the same terms and conditions as every 
other investor (and only at NAV), the Exchange believes that there is 
no potential for abuse.

[[Page 40406]]

    The Exchange is thus proposing amendments to Rule 460 to permit 
specialists to engage in these types of transactions if such 
transactions would facilitate the maintenance of a fair and orderly 
market in the Security. However, any Creation Transactions in which the 
specialist engages will have to be effected through the Distributor, 
and not directly with the issuer. This requirement will make clear that 
the specialist is purchasing Units in Creation Unit size only to 
facilitate normal specialist trading activity.
    With respect to investor disclosure, the Exchange notes that, 
pursuant to the requirements of the Securities Act of 1933, as amended 
(``1933 Act''), all investors in CountryBaskets will receive a 
prospectus regarding the Securities. Because the Securities will be in 
continuous distribution, the prospectus delivery requirements of the 
1933 Act will apply to all investors in CountryBaskets. However, it is 
possible that an exemption from the prospectus delivery requirement may 
be obtained at some point in the future, either with respect to these 
Securities or other Units listed on the Exchange. In the event of such 
an exemption, the Exchange will discuss with the Commission staff the 
appropriate level of disclosure that should be required with respect to 
the Units being listed, and will file any necessary rule change to 
provide for such disclosure.
    Upon the initial listing of any class of Units, the Exchange will 
also issue a circular to its membership explaining the unique 
characteristics and risks of this type of security. That circular, 
among other things, will inform member organizations of their 
responsibilities under Exchange Rule 405 (``know your customer rule'') 
with respect to transactions in the Securities. The circular also will 
inform member organizations of their responsibility to deliver a 
prospectus to investors.
    With respect to trading halts, the trading of Units would be 
halted, along with the trading of all other listed stocks, in the event 
the ``circuit breaker'' thresholds of Exchange Rule 80B are reached. In 
addition, the Exchange will consider halting the trading in any series 
of Units if necessary to maintain a fair and orderly market in the 
Units. For example, the Exchange would consider halting the trading in 
a series of Units if trading has been halted or suspended in the 
primary market for stocks representing a significant percentage (such 
as 20 percent) of the value of the underlying stock index or portfolio.
    Finally, while equity securities traded on the Exchange must be 
certificated, the Exchange is proposing that Units trade either in 
certificated form or solely through the use of a global certificate. 
The use of the global certificate would have to be consistent with 
para. 501.02(B) of the Manual, which imposes conditions on the use of 
global certificates for bonds. Permitting the use of global 
certificates would be consistent with expediting the processing of 
transactions in Units and would minimize the costs of engaging in 
transactions in these securities.
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act. Specifically, the Exchange believes that its proposal 
is consistent with the objectives of Section 6(b)(5) of the Act in that 
it is designed to prevent fraudulent and manipulative acts and 
practices, to promote just and equitable principles of trade, to foster 
cooperation and coordination with persons engaged in regulating, 
clearing, settling, processing information with respect to, and 
facilitating transactions in securities, 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 proposed rule change does not impose any burden on competition 
that is not necessary or appropriate in furtherance of the purposes of 
the 1934 Act.

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

    The Exchange has not solicited, and does not intend to solicit, 
comments on this proposed rule change. The Exchange has not received 
any unsolicited written comments from members or other interested 
parties.

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 proposed 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, NW., Washington, DC 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 Section, 450 Fifth Street, NW., 
Washington, DC 20549. Copies of such filing will also be available for 
inspection and copying at the principal office of the above-mentioned 
self-regulatory organization. All submissions should refer to File No. 
SR-NYSE-95-23 and should be submitted by August 29, 1995.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\7\

    \7\ 17 CFR 200.30-3(a)(12) (1994).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-19522 Filed 8-7-95; 8:45 am]
BILLING CODE 8010-01-M