[Federal Register Volume 61, Number 50 (Wednesday, March 13, 1996)]
[Notices]
[Pages 10410-10416]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-5913]



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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-36923; International Series Release No. 946; File No. 
SR-NYSE-95-23]


Self-Regulatory Organizations; New York Stock Exchange, Inc.; 
Order Approving and Notice of Filing and Order Granting Accelerated 
Approval of Amendment Nos. 1 and 2 to a Proposed Rule Change Relating 
to the Listing of Investment Company Units

March 5, 1996.

I. Introduction

    On June 7, 1995, the New York Stock Exchange, Inc. (``NYSE'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'' or ``SEC''), pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to adopt para. 703.16 of its 
Listed Company Manual (``Manual'') and to amend Exchange Rule 460. The 
proposed rule change was published for comment and appeared in the 
Federal Register on August 8, 1995.\3\ On January 24, 1996, the NYSE 
filed Amendment No. 1 to its proposal.\4\ On February 23, 1996, the 
NYSE filed Amendment No. 2 to its proposal.\5\ No comments were 
received by the Commission. This order approves the proposal, as 
amended.

    \1\ 15 U.S.C. Sec. 78s(b)(1) (1988).
    \2\ 17 CFR 240.19b-4 (1994).
    \3\ See Securities Exchange Act Release No. 36032 (July 28, 
1995), 60 FR 40403.
    \4\ In Amendment No. 1, the Exchange provides additional 
information regarding the calculation and dissemination of Index 
values and Index component changes. Amendment No. 1 also effects 
some minor changes relating to the size and value of the securities 
described in the original proposal. Amendment No. 1 specifies that 
the investment company described in its original proposal will be an 
open-end management investment company. Finally, Amendment No. 1 
updates information that was provided in the original proposal. 
Letter from James E. Buck, Senior Vice President and Secretary, 
NYSE, to Jonathan G. Katz, Secretary, Commission, dated January 23, 
1996 (``Amendment No. 1'').
    \5\ In Amendment No. 2, the Exchange makes two technical changes 
to the language it proposes to add to its Rule 460 concerning 
specialist activities. Letter from James E. Buck, Senior Vice 
President and Secretary, NYSE, to Michael Walinskas, Branch Chief, 
Office of Market Supervision (``OMS''), Division of Market 
Regulation (``Division''), Commission, dated February 23, 1996 
(``Amendment No. 2'').
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II. Description of the Proposal

A. Introduction

    The NYSE proposes to adopt para. 703.16 of its Listed Company 
Manual (``Manual''), consisting of listing standards for units of 
trading (``Units'' or ``Fund shares'') that represent an interest in a 
registered investment company (``Investment Company'') that would be 
organized either as an open-end management investment company (``Fund-
only structure''), or as a unit investment trust (``Fund/UIT 
structure''). The Investment Company would hold directly securities 
comprising, or otherwise based on or representing an investment in, an 
index or portfolio of securities (``Fund Basket''). The Investment 
Company either could hold the securities directly, or could hold 
another security representing the index or portfolio securities (such 
as 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 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.'' \6\ These CountryBaskets (or ``CBs'') 
will be based on the Fund-only structure.\7\ Hence, the CBs will be 
structured as a series of an open-end management investment company 
investing directly in a portfolio of securities (``Index Securities'') 
included in the corresponding Financial Times/Standard & Poor's 
Actuaries World Index (``FT/S&P Index'', ``FT/S&P'', or ``Index'').\8\ 
The nine series of Funds will be based on the following FT/S&P Indices: 
Australia; France; Germany; Hong Kong; Italy; Japan; South Africa; 
United Kingdom; and the United States.\9\ If, in the future, the 
Exchange seeks to list Units with respect to other indices, including 
FT/S&P Indices not described herein, it must make an appropriate filing 
with the Commission to provide the authorization to effect such 
listings.\10\

    \6\ ``The CountryBaskets Index Fund'' and ``CountryBaskets'' are 
service marks of Deutsche Morgan Grenfell/C.J. Lawrence Inc. 
(``DMG''), the investment advisor to the Investment Company. DMG has 
filed applications for registration of such service marks with the 
U.S. Patent and Trademark Office. Id.
    \7\ Id.
    \8\ Although the CBs will rely on the Fund-only structure, the 
Exchange represents that reliance on a Fund/UIT structure would not 
materially alter its proposal.
    \9\ The actual components, component capitalization, and 
component weightings for each series as of December 29, 1995, 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.
    \10\ Before the NYSE could trade Units based on indices other 
than the nine indices noted above, it would have to file a rule 
proposal pursuant to Section 19(b) and Rule 19(b)(4) thereunder. 
This filing would be in addition to any other regulatory 
requirements under the Investment Company Act of 1940 or the 
Securities Act of 1933.
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    Each CountryBasket series represents an interest in an open-end 
management investment company (each a ``Fund''),\11\ and is designed to 
provide investment results that substantially correspond to the price 
and yield performance of the specific FT/S&P Index to which it relates. 
Specifically, each series will invest the largest proportion of its net 
assets practicable, and in any event at least 95% of its net assets, in 
the securities of the corresponding FT/S&P Index, and the weighting of 
the portfolio securities of each series will substantially correspond 
to their proportional representation in the relevant FT/S&P Index.

    \11\ The product sponsors have obtained exemptive relief from 
the Commission with respect to issues arising under the Investment 
Company Act of 1940 permitting them to adopt the Fund-only 
structure. See Investment Company Act Release No. 21802; 
International Series Release No. 943, March 5, 1996. The Commission 
notes that the manner in which the Units would be listed and traded 
on the Exchange would be the same regardless of the structure 
chosen.
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B. The FT/S&P Indices

    Deutsche Bank Securities Corporation (CountryBaskets advisor and 
DMG's predecessor firm), provided the Exchange with the following 
description of the FT/S&P Indices: \12\

    \12\ The following description reflects organizational ownership 
and name changes that have occurred since the Exchange filed its 
original proposal. See Amendment No. 1, supra note 4.
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1. Establishing an Index
    The FT/S&P Indices are compiled jointly by The Financial Times 
Limited (``FT''), Goldman, Sachs & Co.

[[Page 10411]]
(``Goldman''), and S&P in conjunction with the Institute of Actuaries 
(together, the ``Consortium'').\13\ 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 each FT/S&P so that with respect to the market 
it is designed to reflect, the FT/S&P is comprehensive, consistent, 
flexible, accurate, investible, and representative.

    \13\ The Indices are successors to the FT-Actuaries World 
Indices, which were founded jointly by FT, Goldman, and NatWest 
Securities Limited. In May 1995, S&P joined FT and Goldman as co-
publisher of the predecessor to the Indices. As part of the new 
agreement, NatWest withdrew from the management of those Indices. 
The Indices are owned jointly by FT, S&P and Goldman. Following a 
transition period, FT and S&P jointly will calculate the Indices. In 
November 1995, FT transferred its ownership rights in the Indices to 
FT-SE International, a new company owned jointly by FT and the 
London Stock Exchange. By the end of 1996, it is expected that FT-SE 
International will assume responsibility for calculating the 
European and Asia-Pacific Indices, and S&P will calculate the United 
States Index. Id.
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    The World Index Policy Committee (``WIPC'') makes all policy 
decisions concerning the FT/S&P Indices, 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 FT/S&P.\14\

    \14\ 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.
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    The following criteria must be met for a market's securities to be 
eligible for inclusion in an FT/S&P Index: (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 an FT/S&P 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/S&P component highly representative of 
the overall economic sector make-up and market capitalization 
distribution of the investible universe of a market.
2. Maintaining an Index
    The WIPC may add securities to an FT/S&P Index for any of the 
following reasons: (1) the addition would make the economic sector 
make-up and market capitalization distribution of the FT/S&P 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/
S&P 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/S&P 
component); (4) a new, eligible security becomes available whose total 
capitalization is one percent or more of the current capitalization of 
the relevant FT/S&P component; (5) an existing constituent ``spins 
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 composition of an FT/S&P 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/S&P 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/S&P 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.
3. Calculation and Dissemination of an Index
    The FT/S&P Indices 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/S&P Indices 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/S&P standards. The Indices' values and related 
performance figures for various periods of time are calculated daily by 
FT/S&P and are disseminated to the public in the manner as described 
below.
    The FT/S&P Indices are valued in 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. The FT/S&P Indices 
are calculated once a day on weekdays when one or more of the 
constituent markets are open; and also are syndicated and published in 
the financial sections of several newspapers worldwide. FT/S&P Indices 
data also may be purchased electronically.
    DMG has arranged for Telesphere Corporation (formerly Telekurs 
(North America) Inc.) (``Telesphere'') to calculate ``indicative 
values'' for the nine Indices upon which CountryBaskets are based on a 
more frequent basis.\15\ The Exchange will

[[Page 10412]]
disseminate these indicative values in U.S. dollars through the 
facilities of the Consolidated Tape Association (``CTA''). In 
calculating indicative values, Telesphere will use the most currently-
available stock price information for the constituent stocks in an 
Index (based on home currency prices) and disseminate the indicative 
values in prevailing U.S. dollars. Telesphere also will use the same 
pricing algorithm and methodology used by the FT/S&P calculators in 
calculating the indicative values. These values will be disseminated 
every 30 seconds during the regular NYSE trading hours of 9:30 a.m. to 
4:00 p.m. Eastern time.\16\

    \15\ See Amendment No. 1, supra note 4. ``Indicative value'' is 
a value calculated by Telesphere, and is not the official value for 
the Indices calculated by FT/S&P. This, however, is not meant to 
imply it is an estimate or not an accurate reflection of the value 
of the Indices. As noted below, Telesphere will use the same pricing 
algorithm and methodology as used by FT/S&P to calculate indicative 
values, as well as the most currently available stock prices. 
Therefore, the indicative value should be an accurate reflection of 
the value of the Indices. Id.
    \16\ Id. While the indicative values will not be the official 
values of the Indices (which will continue to be calculated and 
disseminated once each day), the Exchange believes that these values 
will provide investors with accurate, timely information on the 
values of the Indices. While some market participants may be able to 
perform these calculations for their own trading purposes during the 
business day, many participants lack sufficient resources to do so. 
The Exchange believes that providing standardized information 
through CTA facilities will help to ensure that all investors have 
equal access to this market information. Id.
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    Owning to the differences in trading hours in the markets for the 
stocks underlying the Indices, the calculation of the indicative values 
will be implemented as follows:

     Pacific Rim. Australia, Hong Kong, and Japan. There is 
no overlap between the NYSE trading hours and the home-country 
trading hours. Thus, the indicative values always will reflect the 
closing prices of the underlying securities on the most recently-
completed trading day, but will be updated every 30 seconds to 
reflect changes in exchange rates.
     Europe. France, Germany, Italy, and the United Kingdom. 
There is some overlap between NYSE trading hours and home-country 
trading hours. Thus, the 30-second updates for these Indices will 
reflect changes in both current stock-price information and currency 
exchange rates while the relevant market is open; it will reflect 
only changes in exchange rates once the home-market closes.
     United States. Each 30-second update will reflect the 
current price of U.S. component stocks.
     South Africa. During Eastern Standard Time, there is no 
overlap between NYSE and South African trading hours. During Eastern 
Daylight Time, there is a half-hour overlap. Thus, during Standard 
Time, the disseminated Index values will reflect the closing South 
African prices. During Eastern Daylight Time, there will be a real-
time feed of stock prices from the Johannesburg Stock Exchange 
allowing a real-time calculation of the indicative value of the 
Index at 30-second intervals during the half-hour overlap.\17\

    \17\Id.
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    The Exchange states that if Telesphere no longer were to calculate 
the indicative values of the Indices, DMG would seek to find another 
entity to provide such values on substantially the same basis as 
Telesphere. If this were to occur, the Exchange states that it will 
consult with Division of Market Regulation staff to ensure that the 
staff finds any proposed new arrangement acceptable. If the staff were 
to find the new arrangements unacceptable, the Exchange would take 
appropriate action to address the staff's concerns, including the 
possibility of delisting the securities.
    Changes to an FT/S&P Index made during a calendar quarter are noted 
at the foot of the tables containing the Indices that are published 
daily in the Financial Times Newspaper (``FT newspaper'') publication. 
Consistent with the FT newspaper's publication policy, these changes 
also are shown in the FT newspaper prior to the actual date of 
implementation (unless for reasons beyond the control of the FT 
newspaper this is not possible). Decisions regarding the addition of 
new eligible constituent stocks that are unrelated to existing stocks 
in an FT/S&P Index, or weighting changes to existing constituent 
stocks, are announced in the FT newspaper at least four working days 
before they are implemented. Monday editions of the FT newspaper also 
show all constituent changes made during the previous week, together 
with base values for each Index. Changes to be made in an Index at the 
end of a calendar quarter are published as soon as is practicable 
following the quarterly meeting of the WIPC, but before the quarter-
end.

C. Creation and Redemption of the Securities

    Consistent with the proposed listing standards. Units, including 
CBs, will be distributed in transactions with the Fund (``Creation 
Transactions''). As noted above, the NYSE proposal sets forth listing 
standards applicable to both a Fund-only structure and a Fund/UIT 
structure. The nine CB series the NYSE proposes to trade will rely on 
the Fund-only structure. To effect a Creation transaction using the 
Fund-only structure, a person buys 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 Fund shares.\18\ Creation 
Unit size holdings then can be disaggregate and sold separately or in 
lots on the Exchange.

    \18\ Id. If the alternative Fund/UIT structure were used, a 
person would effect a Creation Transaction by buying 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 sub-units 
that would constitute the Units traded on the Exchange. These 
tradeable Units 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 tradeable Units would not be redeemable other than in 
Creation Unit aggregations.
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    Units must be combined into Creation Unit size aggregations in 
order to be redeemed at NAV, which generally will be satisfied with an 
in-kind distribution of Index Securities comprising the Fund shares, 
plus a cash payment. An individual Unit will not be redeemable. For the 
Australia, France, Germany, Hong Kong, Italy, South Africa, United 
Kingdom, United States CountryBasket series, there will be 100,000 CBs 
per Creation Unit. For the Japan series, there will be 250,000 CBs per 
Creation Unit. With the exception of the Japan series, a Creation Unit 
size aggregation of Fund shares will represent securities with 
approximately $2 to $5 million in market value. A Creation Unit size 
aggregation of Fund shares for the Japan series will have an 
approximate value of $9.5 million.\19\

    \19\ Id. According to the Exchange, the large size of round lots 
in Japan, and the requirement that all purchases in that market be 
in round lots, required that a Creation Unit be structured so that 
the Fund Basket consists of round lots of each of the Index 
Securities, including the lowest-weighted securities, resulting in 
the large size of the Creation Unit. Otherwise, effective arbitrage 
between the Japan CountryBasket and the Index Securities might be 
impracticable. Id.
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    There may be an initial distribution period of Fund shares lasting 
from one to a few weeks during which the principal underwriter or 
distributor (``Distributor'') directly or through soliciting dealers 
will accept subscriptions to purchase Fund shares.\20\ Thereafter, Fund 
shares could be purchased throughout the life of the product. 
Therefore, the offering will be continuous.

    \20\ If the alternate dual Fund/UIT structure were used, orders 
also would be accepted to exchange Fund shares for Redeemable Units 
and to separate such Units into tradeable Units.

[[Page 10413]]

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D. Exchange Trading of Units

    Units, including CBs, are deemed equity securities subject to NYSE 
rules applicable to the trading of equity securities. Before commencing 
trading in CBs, the Exchange will require that there be at least 
300,000 tradeable Units outstanding, representing at least three 
Creation Units for each series, except for the Japan series.\21\ The 
Exchange will consider the suspension of trading and the delisting of a 
series of Units, including CBs, if:

    \21\ For the Japan series, 500,000 worth of CBs, representing 
two Creation Units, will be required to be outstanding prior to 
commencing trading.
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     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.\22\

    \22\ The Commission notes that the requirements that the fund 
must invest at least 95% of its net assets in the securities of the 
appropriate Index and that the weighting of the portfolio securities 
of each series will substantially correspond to their proportional 
representation in each Index, helps to reduce concerns that the CBs 
could become a surrogate for trading in a single or a few 
unregistered stocks. In the unlikely event, however, that this were 
to occur, the Commission would expect the NYSE to delist the 
securities to ensure compliance with the Act.
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    Dealing in Units on the Exchange will be conducted pursuant to the 
Exchange's general agency-auction trading rules.\23\ The Exchange's 
general dealings and settlements rules will apply.\24\ Other Exchange 
equity rules and procedures, such as the Exchange's equity margin 
rules, would apply.\25\ Unless the prospectus for a specific Investment 
Company 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 ``pass-through'' 
of the voting rights on the actual index securities held directly by a 
fund or indirectly by a trust.

    \23\ E.g., Rule 51--Hours for Business (9:30 a.m.-4:00 p.m.) and 
Rule 62--Variations (one-eighth variations).
    \24\ See NYSE Rules 45 to 296.
    \25\ With respect to margin, the Exchange is 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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    While equity securities traded on the Exchange must be 
certificated, the Exchange proposes that Units trade either in 
certificated form or solely through the use of a global certificate. 
The use of a 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.

E. Specialists

    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 Units 
from the issuer. Therefore, the Exchange proposes to amend its 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 Units. Any Creation Transactions in which the specialist 
engages, however, will have to be effected through the Distributor, and 
not directly with the issuer. The Exchange believes that this 
requirement will make clear that the specialist is purchasing Units in 
Creation Unit size aggregations only to facilitate normal specialist 
trading activity. Finally, the specialist only will be able to purchase 
and redeem Units on the same terms and conditions as any other 
investor, and only at NAV.

F. Disclosure

    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 Units, including CountryBaskets, will 
receive a prospectus. Because the Units will be continuous 
distribution, the prospectus delivery requirements of the 1933 Act will 
apply to all investors in Units, including secondary market purchases 
on the NYSE in CBs. The prospectus and all marketing material will 
refer to CBs by using the term ``investment company.'' The term 
``mutual fund'' will not be used at any time. The term ``open-end 
investment company'' will be used in the prospectus only to the extent 
required by Item 4 of Investment Company Act Form N-1A. In addition, 
the cover page of the prospectus will include a distinct paragraph 
stating that CBs will not be individually redeemable.\26\

    \26\ See Form N-1A, supra note 9.
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    Upon the initial listing of any class of Units, including CBs, the 
Exchange also will 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 such Units. The circular also will 
inform member organizations of their responsibility to deliver a 
prospectus to investors.

G. Trading Halts

    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 were 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 that series of 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.

III. Discussion

    The Commission finds that the proposed rule change is consistent 
with the requirements of the Act and the rules and regulations 
thereunder applicable to a national securities exchange and, in 
particular, the requirements of Section 6(b)(5) of the Act.\27\ The 
Commission believes that the Exchange's proposal to list and trade 
Units, and specifically CB securities, will provide investors with a 
convenient way of participating in domestic and foreign securities 
markets. The Exchange's proposal should help to provide investors with 
increased flexibility in satisfying their investment needs by allowing 
them to purchase and sell at negotiated prices throughout the business 
day securities that replicate the performance of several portfolios of 
stocks.\28\ Accordingly, the Commission finds that the Exchange's 
proposal will facilitate transactions in securities, remove impediments 
to and perfect the mechanism of a free and open market and a national 
market system, and, in general, protect investors and the public 
interest, and is not designed to permit unfair discrimination between 
customers, issuers, brokers, or dealers.\29\

    \27\ 15 U.S.C. 78f(b)(5) (1988).
    \28\ The Commission notes that unlike typical open-end 
investment companies, where investors have the right to redeem their 
fund shares on a daily basis, investors in Units only could redeem 
Units, including CBs, in Creation Unit size aggregations.
    \29\ Pursuant to Section 6(b)(5) of the Act, the Commission must 
predicate approval of exchange trading for new products upon a 
finding that the introduction of the product is in the public 
interest. Such a finding would be difficult with respect to a 
product that served no investment, hedging or other economic 
function, because any benefits that might be derived by market 
participants would likely be outweighed by the potential for 
manipulation, diminished public confidence in the integrity of the 
markets, and other valid regulatory concerns.

[[Page 10414]]

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    The estimated cost of an individual CB security, approximately $20 
to $50, should make it attractive to individual retail investors who 
wish to hold a security replicating the performance of a portfolio of 
foreign or domestic stocks. Moreover, the Commission believes that CBs 
will provide investors with several advantages over standard open-end 
investment companies specializing in such stocks. In particular, 
investors will be able to trade CBs continuously throughout the 
business day in secondary market transactions at negotiated prices.\30\ 
In contrast, Investment Company Act Rule 22c-1 \31\ limits holders and 
prospective holders of open-end investment company shares to purchasing 
or redeeming securities of the fund based on the net asset value of the 
securities held by the fund as designated by the board of directors. 
Accordingly, CBs should allow investors to: (1) respond quickly to 
market changes through intra-day trading opportunities; (2) engage in 
hedging strategies not currently available to retail investors; and (3) 
reduce transaction costs for trading a portfolio of securities.

    \30\ Because of potential arbitrage opportunities, the 
Commission believes that CBs will not trade at a material discount 
or premium in relation to their net asset value. The mere potential 
for arbitrage should keep the market price of CBs comparable to 
their net asset values; therefore, arbitrage activity likely will 
not be significant. In addition, the Fund will redeem in-kind, 
thereby enabling the Fund to invest virtually all of its assets in 
securities comprising the FT/S&P Indices.
    \31\ 17 CFR 270.22c-1 (1994). Investment Company Act Rule 22c-1 
generally provides that a registered investment company issuing a 
redeemable security, its principal underwriter, and dealers in that 
security may sell, redeem, or repurchase the security only at a 
price based on the net asset value next computed after receipt of an 
investor's request to purchase, redeem, or resell. The net asset 
value of an open-end investment company generally is computed once 
daily Monday through Friday as designated by the investment 
company's board of directors. The Commission granted CBs an 
exemption from this provision to allow them to trade in the 
secondary market at negotiated prices. See Investment Company Act 
Release No. 21802; International Series Release No. 943, March 5, 
1996.
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    Although the value of CBs will be based on the value of the 
securities and cash held in the Fund, CBs are not leveraged 
instruments.\32\ In essence, CBs are equity securities that represent 
an interest in a portfolio of stocks designed to reflect substantially 
the applicable FT/S&P Index. Accordingly, it is appropriate to regulate 
CBs in a manner similar to other equity securities. Nevertheless, the 
Commission believes that the unique nature of CBs raise certain product 
design, disclosure, trading, and other issues that must be addressed.

    \32\ In contrast, proposals to list exchange-traded derivative 
products that contain a built-in leverage feature or component raise 
additional regulatory issues, including heightened concerns 
regarding manipulation, market impact, and customer suitability. See 
e.g., Securities Exchange Act Release No. 36165 (August 29, 1995), 
60 FR 46653 (relating to the establishment of uniform listing and 
trading guidelines for stock index, currency, and currency index 
warrants).
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A. CountryBaskets Generally

    The Commission believes that the proposed CBs are reasonably 
designed to provide investors with an investment vehicle that 
substantially reflects in value the Index it is designed upon, and, in 
turn, the performance of the specified U.S. or foreign market. In this 
regard, the Commission notes that the WIPC imposes specific criteria in 
its selection of index countries and components. For a market to be 
eligible for inclusion in an FT/S&P Index, it must allow direct equity 
investment by non-nationals, make timely and accurate data available, 
impose no significant exchange controls, demonstrate significant 
international investment interest, and be sufficiently liquid. For a 
security to be included in a given index, it may not be in the bottom 
5% of a market's capitalization, it must be eligible to be owned by 
foreigners, 25% of its full capitalization must be publicly available 
for investment, and it may not fail to trade for more than 15 business 
days within each of two consecutive quarters. The aim of component 
selection is to make Index components highly representative of the 
over-all economic sector make-up and market capitalization of a given 
market. The Commission believes that these criteria should serve to 
ensure that the underlying securities of these indices are well 
capitalized and actively traded.
    The Commission also notes that the CB series' investment policies 
require that at least 95% of a CB series' investments be in the equity 
securities that are the constituent securities of the relevant FT/S&P 
Index. In addition, the weighting of the portfolio securities of each 
series will substantially correspond to their proportional 
representation in the corresponding FT/S&P Index.\33\ This will help to 
ensure that an investment in CBs will be substantially similar to an 
investment in the securities comprising the related FT/S&P Index.

    \33\ See Form N-1A, supra note 9.
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B. Disclosure

    The Commission believes that the NYSE proposal should ensure that 
investors have information that will allow them to be adequately 
apprised of the terms, characteristics, and risks of trading Units, 
including CBs.\34\ As noted above, all Unit investors, including 
investors in CBs, will receive a prospectus regarding the product. 
Because Units, including CBs, will be in continuous distribution, the 
prospectus delivery requirements of the Securities Act of 1933 will 
apply both to initial investors, and to all investors purchasing such 
securities in the secondary market at the NYSE. The prospectus will 
address the special characteristics of a popular Unit, including a 
statement regarding that Unit's redeemability, and method of creation. 
With respect to CBs, the prospectus will state specifically that CBs 
individually are not redeemable.

    \34\ The Exchange states that it may, in the future, seek to 
obtain an exemption from the prospectus delivery requirement, either 
with respect to CBs or other Units listed on the Exchange. In the 
event it obtains such an exemption, the Exchange will discuss with 
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.
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    The Commission also notes that upon the initial listing of any 
class of Units, including CBs, the Exchange will issue a circular to 
its members explaining the unique characteristics and risks of this 
type of security. The circular also will note Exchange members' 
responsibilities under Exchange Rule 405 (``know your customer rule'') 
regarding transactions in such Units. Exchange Rule 405 generally 
requires that members use due diligence to learn the essential facts 
relative to every customer, every order, and every cash or margin 
account accepted or carried by members.\35\ The circular also will 
address members' responsibility to deliver a prospectus to all 
investors as well as highlight the characteristics of purchases in 
Units, including CBs, including that they only are redeemable in 
Creation Unit size aggregations.

    \35\ NYSE Rule 405(1).
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C. Trading of CBs

    The Commission finds that adequate rules and procedures exist to 
govern the trading of Units, including CBs. In this regard, the 
Commission notes that Units are deemed equity securities subject to 
NYSE rules applicable to the trading of equity securities. Accordingly, 
the Exchange's existing general Dealings and Settlements Rules that 
currently

[[Page 10415]]
apply to the trading of equity securities also will apply to Units, 
including CBs. These rules include those governing: the auction market 
(including trading halt provisions pursuant to Rule 80B); priority, 
parity and precedence of orders; members dealing for their own 
accounts; specialist, odd-lot broker, and registered trader 
responsibilities; handling of orders and reports; publications of 
transactions and changes; comparisons and exchange of contracts; 
marking to the market; settlement of contracts; dividends, interests, 
and rights; reclamations; closing contracts; and liquidation of 
securities loans and borrowings.\36\ The NYSE also will consider 
halting trading in any series of Units if it deems doing so necessary 
to maintain a fair and orderly market in that series of Units.\37\

    \36\ NYSE Rules 45-298.
    \37\ For example, the NYSE has stated that it 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.
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    In addition, the NYSE has developed specific listing and delisting 
criteria for Units. These criteria should help to ensure that a minimum 
level of liquidity will exist in each series of Units to allow for the 
maintenance of fair and orderly markets. The delisting criteria also 
allows the Exchange to consider the suspension of trading and the 
delisting of a series of Units, including CBs, if an event were to 
occur that made further dealings in the securities inadvisable. This 
will give the Exchange flexibility to delist Units, including CBs, if 
circumstances warrant such action. For example, as noted above, 
delisting of CBs might be appropriate if Telesphere no longer were able 
to calculate indicative values, and no acceptable alternative 
arrangements could be found. In addition, as noted above, in the 
unlikely event that CBs become a surrogate for trading a single or few 
securities, such an event could raise issues pursuant to the Act that 
would require delisting of CBs so as to ensure compliance with the 
Act.\38\ Accordingly, the Commission believes that the rules governing 
the trading of Units provide adequate safeguards to prevent 
manipulative acts and practices and to protect investors and the public 
interest.

    \38\ See note 22, supra.
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D. Indicative Indices

    The Commission believes that the indicative values the Exchange 
proposes to have disseminated for the nine Indices upon which CBs are 
based will provide investors with timely and accurate information 
concerning the value of the FT/S&P. The Exchange represents that the 
information will be disseminated through the facilities of the CTA and 
will reflect currently-available stock price information. Moreover, it 
will be calculated based upon the same pricing algorithm and 
methodology used by the FT/S&P calculators and will be disseminated 
every 30 seconds during the regular NYSE trading day.\39\ In addition, 
since it is expected that the market value of the CBs will closely 
track the performance of the applicable FT Index,\40\ the Commission 
believes that the indicative values will provide investors with 
adequate information to determine the intra-day value of a given CB 
series.\41\

    \39\ Amendment No. 1, supra note. 4.
    \40\ See Form N-1A, supra note 9. Each CB series will be 
required to invest the largest proportion of its assets as is 
practicable, and in any event at least 95% of its net assets, in the 
securities of the corresponding FT/S&P Index, and the weighting of 
the portfolio securities of each CB series will substantially 
correspond to their proportional representation in the relevant FT/
S&P Index.
    \41\ In addition, each series will calculate its NAV per share 
at the close of the regular trading session for the NYSE on each day 
that the Exchange is open for business. NAV generally will be based 
on the last quoted sales price on the securities exchange or 
national securities market on which a given series' component 
securities are quoted. Id.
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E. Specialists

    The Commission finds that it is consistent with the Act to allow a 
specialist registered in a security issued by an Investment Company to 
purchase or redeem the listed security from the issuer as appropriate 
to facilitate the maintenance of a fair and orderly market in that 
security. The Commission believes that such market activities should 
enhance liquidity in such securities and facilitate a specialist's 
market-making responsibilities. In addition, because the specialist 
only will be able to purchase and redeem Units on the same terms and 
conditions as any other investor (and only at NAV), and Creation 
Transactions must occur through the distributor and not directly with 
the issuer, the Commission believes that concerns regarding potential 
abuse are minimized. As noted below, the Exchange's existing 
surveillance procedures also should ensure that such purchases are only 
for the purpose of maintaining fair and orderly markets, and not for 
any other improper or speculative purposes. Finally, the Commission 
notes that its approval of this aspect of the NYSE's rule proposal does 
not address any other requirements or obligations under the federal 
securities laws that may be applicable.\42\

    \42\ Broker dealers and other persons will be cautioned in the 
prospectus and/or the Fund's statement of additional information 
that some activities on their part may, depending on the 
circumstances, result in their being deemed statutory underwriters 
and subject them to the prospectus delivery and liability provisions 
of the Securities Act of 1933.
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F. Surveillance

    The Commission believes that the NYSE's existing surveillance 
procedures should be adequate to address any concerns associated with 
specialists purchasing and redeeming Creation Units. The Exchange has 
represented that its existing surveillance procedures should allow it 
to identify situations where specialists purchase or redeem Creation 
Units to ensure compliance with the rule.\43\

    \43\ Letter from Robert J. McSweeney, Senior Vice President, 
Market Surveillance, NYSE, to Sharon Lawson, Assistant Director, 
OMS, Division, Commission, dated January 22, 1996.
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    The Commission also notes that certain concerns are raised when a 
broker-dealer, such as Goldman, is involved in the development and 
maintenance of a stock index upon which a product such as Units, in 
this case CBs, is based.\44\ The Commission believes that adequate 
safeguards exist to address this concern. All stock additions and 
deletions, whether by vote of the WIPC or according to the rules 
governing day-to-day index maintenance, are announced in the FT 
newspaper. No information about changes may be discussed outside the 
WIPC or the staff responsible for maintaining the Indices at Goldman 
until such a public announcement is made. Following the announcement, 
Goldman may forward information about changes to other areas of the 
firm and to its clients. In addition, this restriction is enforced 
internally

[[Page 10416]]
through Goldman's policies and procedures that prevent employees either 
from using proprietary information (such as non-public information 
involving changes to the Indices) for personal benefit or to share it 
with others.\45\ The Commission believes that these provisions should 
help to address concerns raised by Goldman's involvement in the 
management of the Indices.

    \44\ Letter from Paul A. Merolla, Associate General Counsel, 
Goldman, to Francois Mazur, Attorney, OMS, Division, Commission, 
dated February 15, 1996 (``Goldman Letter''). Currently, the FT/S&P 
Indices are jointly compiled by FT-SE International and Goldman in 
conjunction with the Institute of Actuaries and the Faculty of 
Actuaries. FT-SE International and Goldman each has primary 
responsibility for data collection and calculation of one-half of 
the markets in the Indices. With respect to the nine Indices upon 
which CBs are based, Goldman has primary responsibility for the 
U.S., France and South Africa Indices, while FT-SE International has 
primary responsibility for the Australia, Germany, Hong Kong, Italy, 
Japan, and United Kingdom Indices. By mid-1996, Goldman expects that 
primary responsibility for the U.S. series will shift to S&P, while 
primary responsibility for the remaining Indices will shift to FT-SE 
International. Id.
    Goldman is, and expects to remain, a member of the WIPC. The 
WIPC is responsible for making policy decisions concerning the 
Indices, including construction techniques and changes to the 
constituent securities of the Indices. Id.
    \45\ Id.
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G. Scope of the Commission's Order

    The Commission is approving in general the Exchange's proposed 
listing standards for Units representing an interest in an Investment 
Company that would hold a Fund Basket, and specifically the nine series 
of CountryBaskets described herein. Other similarly structured 
products, including CBs based on FT/S&P Indices not described herein, 
would require review by the Commission pursuant to Section 19(b) of the 
Act prior to being traded on the Exchange.
    The Commission finds good cause for approving Amendment Nos. 1 and 
2 prior to the thirtieth day after the date of publication of notice of 
filing thereof in the Federal Register. Amendment No. 1 details the 
calculation and dissemination of Index changes and Index component 
changes. In addition, Amendment No. 1 describes certain minor 
modifications to the Exchange's proposal since it originally was 
published for comment. Amendment No. 2 effects two minor word changes 
to the proposal's amending of NYSE Rule 460.
    The Commission believes that Amendment Nos. 1 and 2 effect only 
technical changes that do not materially affect the character and scope 
of the Exchange's original proposal. Accordingly, the Commission 
believes that Amendment Nos. 1 and 2 raise no new or unique regulatory 
issues. Therefore, the Commission believes it is consistent with 
Sections 6(b)(5) and 19(b)(2) of the Act \46\ to approve Amendment Nos. 
1 and 2 to the proposal on an accelerated basis.

    \46\ 15 U.S.C. Secs. 78f(b)(5) and 78s(b)(2) (1988).
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning Amendment Nos. 1 and 2. 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. Sec. 552, will be available for inspection and 
copying in the Commission's Public Reference Section, 450 Fifth Street, 
N.W., Washington, D.C. 20549. Copies of such filing will also be 
available for inspection and copying at the principal office of the 
NYSE. All submissions should refer to File No. SR-NYSE-95-23 and should 
be submitted by April 3, 1996.

V. Conclusion

    For the reasons discussed above, the Commission finds that the 
proposal, as amended, is consistent with the Act, and, in particular, 
Section 6 of the Act.
    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\47\ that the proposed rule change (File No. SR-NYSE-95-23), as 
amended, is approved.

    \47\ 15 U.S.C. Sec. 78s(b)(2) (1988).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\48\

    \48\ 17 CFR 200.30-3(a)(12) (1994).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-5913 Filed 3-12-96; 8:45 am]
BILLING CODE 8010-01-M