[Federal Register Volume 61, Number 143 (Wednesday, July 24, 1996)]
[Notices]
[Pages 38503-38505]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-18714]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37452; International Series Release No. 1006; File No. 
SR-PSE-96-15]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change and Amendment No. 1 Thereto by the Pacific Stock Exchange, Inc. 
Relating to Investment Company Units

July 17, 1996.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on June 3, 1996, the Pacific 
Stock Exchange Incorporated (``PSE'' or ``Exchange'') filed with the 
Securities and Exchange Commission (``Commission'') the proposed rule 
change as described in Items I, II, and III below, which Items have 
been prepared by the self-regulatory organization. On July 2, the PSE 
filed Amendment No. 1 to its proposal.\2\ 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) (1988).
    \2\ Amendment No. 1 clarifies that the PSE seeks to trade 
CountryBaskets pursuant to unlisted trading privileges. Letter from 
Michael D. Pierson, Senior Attorney, Regulatory Policy, PSE, to 
Francois Mazur, Attorney, Division of Market Regulation, Commission, 
dated July 1, 1996 (``Amendment No. 1'').
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to establish listing standards for Investment 
Company Units (``Units''), and to trade Units known as 
``CountryBaskets'' (``CBs'') pursuant to unlisted trading privileges 
(``UTP'').

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 adopt new rules relating to listing 
standards for Units. Units represent an interest in a registered 
investment company (``Investment Company'' or ``Fund'') that could be 
organized as a unit investment trust (``UIT''), an open-end management 
investment company, or a similar entity. Under the proposed rules, the 
Investment Company would be required either to: (i) Hold securities 
comprising or otherwise based on or representing an interest in an 
index or portfolio of securities, or (ii) hold securities in another 
registered investment company. The Investment Company would then issue 
Units in a specified aggregate number in return for a deposit either 
of: (i) Shares of securities comprising or otherwise based on the 
relevant index or portfolio, or (ii) shares of a registered investment 
company. In addition to or instead of the ``in-kind'' deposit, the 
Investment Company might require a cash deposit. Thus, Units could 
represent an interest in series of an open-end management investment 
company investing in a portfolio of securities (``Fund-only 
structure''). Alternatively, Units could represent an interest in UITs 
that have as their assets shares of an open-end investment company 
holding a portfolio of securities (``Fund/UIT structure''). Unit 
holders would receive periodic cash payments corresponding to the 
regular cash dividends or distributions declared with respect to the 
securities held by the Investment Company (after subtracting applicable 
expenses and charges.)
    The Exchange also proposes to trade, pursuant to UTP, Units known 
as ``CountryBaskets'' or ``CBs.'' These securities were approved 
recently for listing on the New York Stock Exchange, Inc. 
(``NYSE'').\3\ The nine series of CBs are based on the following 
Financial Times/Standard & Poor's Actuaries World (``FT/S&P'') Indices: 
Australia; France; Germany; Hong Kong; Italy; Japan; South Africa; 
United Kingdom; and the United States. The Exchange notes that pursuant 
to Rule 12f-5 under the Act,\4\ prior to trading a particular class or 
type of security pursuant to UTP, the Exchange must have listing 
standards comparable to those of the primary exchange on which the 
security is listed. Hence, the PSE's proposed listing standards for 
Units are similar to the listing standards for Units adopted by the 
NYSE.\5\
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    \3\ See Exchange Act Release No. 36923 (March 5, 1996), 61 FR 
10410.
    \4\ 17 CFR 240.12f-5.
    \5\ Amendment No. 1, supra note 2.
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1. 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 PSE proposal sets forth listing 
standards applicable both to a Fund-only structure and a Fund/UIT 
structure. The nine CB series the PSE proposes to trade 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. Sales occur in ``Creation United'' 
size aggregations in exchange for a deposit (``Deposit'') of a basket 
of securities reflecting the securities underlying the Fund (``Index 
Securities'') and a specified amount of cash sufficient to equal the 
NAV of Fund shares.\6\ Creation Unit size

[[Page 38504]]

holdings then can be disaggregated into tradeable Units and sold 
separately or in lots on the Exchange.
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    \6\ 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 could be recombined into ``Redeemable Units,'' equivalent in 
size to Creation Units and redeemed at NAV, generally for the Index 
Securities represented by the Redeemable Unit, plus a cash payment. An 
individual Unit will not be redeemable. For the Australia, France, 
Germany, Hong Kong, Italy, South Africa, United Kingdom, Germany, Hong 
Kong, Italy, South Africa, United Kingdom, and United States 
CountryBasket series, there are 100,000 CBs per Creation Unit. For the 
Japan series, there are 250,000 CBs per Creation Unit. With the 
exception of the Japan series, a Creation Unit size aggregation of Fund 
shares represents securities with approximately $2 to $5 million in 
market value. A Creation Unit size aggregation of Fund shares for the 
Japan series has an approximate value of $9.5 million.\7\
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    \7\ Id. The large size of round lots in Japan, and the 
requirement that all purchases in that market be in round lots, 
requires that a Creation Unit be structured so that the Index 
Securities consist 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.\8\ Thereafter, Fund 
shares could be purchased throughout the life of the product. 
Therefore, the offering will be continuous.
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    \8\ 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.
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2. Exchange Trading of Units
    Units, including CBs, are deemed equity securities subject to PSE 
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, for which 
500,000 tradeable Units, representing two Creation Units, will be 
required to be outstanding prior to commencing trading. The Exchange 
will consider the suspension of trading and the delisting of a series 
of Units, including CBs, 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.\9\ The Exchange's 
general dealings and settlements rulers will apply.\10\ Other Exchange 
equity rules and procedures, such as the Exchange's equity margin 
rules, also will apply.\11\ 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.
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    \9\ See PSE Rule 5 (Equities).
    \10\ Id.
    \11\ See Rules 2.16(a) et seq.
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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. 
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.
3. Specialists
    Any Creation Transactions in which the specialist engages will have 
to be effected through the Distributor, and not directly with the 
issuer. 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.
4. Disclosure
    With respect to investor disclosure, the Exchange notes that, 
pursuant to the requirements of the Securities Act of 1933 (``1933 
Act''), all investors in Units, including CountryBaskets, will receive 
a prospectus. Because the Units will be in continuous distribution, the 
prospectus delivery requirements of the 1933 Act will apply to all 
investors in Units, including those engaging in secondary market 
purchases on the PSE in CBs. The prospectus and all marketing material 
will refer to Units 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.
    Upon the 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 9.1(a) (``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.
5. Trading Halts
    Trading of Units would be halted, along with the trading of all 
other listed stocks, in the event the ``circuit breaker'' thresholds 
were reached.\12\ 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 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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    \12\ The Exchange's ``circuit breaker'' policies were approved 
in Exchange Act Release No. 26268 (December 16, 1988), 53 FR 51942.
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    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act, in general, and Section 6(b)(5), in particular, in 
that it 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.

(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.

[[Page 38505]]

(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 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, 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 Section, 450 Fifth Street NW., 
Washington, D.C. 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-PSE-96-15 and should be submitted by August 14, 1996.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\13\
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    \13\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-18714 Filed 7-23-96; 8:45 am]
BILLING CODE 8010-01-M