[Federal Register Volume 61, Number 168 (Wednesday, August 28, 1996)]
[Notices]
[Pages 44370-44376]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-21890]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37589; International Series Release No 1015; File No.
SR-CHX-96-12]
Self-Regulatory Organizations; Chicago Stock Exchange, Inc.;
Order Approving Proposed Rule Change and Notice of Filing and Order
Granting Accelerated Approval of Amendment No. 2 Thereto Relating to
Listing Standards for Investment Company Units
August 21, 1996.
I. Introduction
On March 27, 1996, the Chicago Stock Exchange, Inc. (``CHX'' 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 amend Article XXVIII of its
rules governing the listing requirements of securities on the CHX, as
well as Article XXX of the CHX's rules governing specialists. On April
12, 1996, the CHX filed Amendment No. 1 to the proposal.\3\ Notice of
the proposed rule change and Amendment No. 1 thereto appeared in the
Federal Register on April 23, 1996.\4\ No comments were received by the
Commission. The CHX submitted Amendment No. 2 (``Amendment No. 2'') to
the proposal on August 20, 1996 to address issues related to Exchange
Trading of the Investment Company Units.\5\ This order approves the
proposal, as amended, and solicits comments on Amendment No. 2.
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\1\ 15 U.S.C. Sec. 78s(b)(1) (1988).
\2\ 17 CFR 240.19b-4.
\3\ Amendment No. 1 serves to supersede entirely the Exchange's
initial rule filing. Letter from Charles R. Haywood, Foley Larnder,
to Francois Mazur, Attorney, Office of market Supervision (``OMS''),
Division of Market Regulation (``Division''), Commission, dated
April 11, 1996 (``Amendment No. 1'').
\4\ See Securities Exchange Act Release No. 37121 (April 17,
1996), 61 FR 17932.
\5\ See Letter from David Rusoff, Foley & Lardner, to Michael
Walinskas, SEC, dated August 20, 1996. Specifically, Amendment No. 2
amends Interpretation and Policy .01 of Article XXVIII, Rule 23 to
require that for the Japan Series, 500,000 Units (as defined below)
be outstanding prior to the commencement of trading of a series of
Units on the Exchange.
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II. Description of the Proposal
A. Introduction
The Exchange is proposing 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 (``UIT''), 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 of securities (such as shares of a
UIT that holds shares of an open-end management investment company).
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.\6\ The
Investment Company would then issue Units in a specified aggregate
number in return for a deposit of either: (i) Shares of securities
comprising or otherwise based on the relevant index or portfolio, or
(ii) shares of an Investment Company. In addition to or instead of the
``in-kind'' deposit, the Investment Company might require a cash
deposit. Thus, Units could be structured as series of an open-end
management investment company investing in a portfolio of securities
(``Fund-only structure''). Alternatively, Units could be structured as
UITs that have as their assets shares of an open-end management
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).
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\6\ Telephone Conversation between David T. Rusoff, Foley &
Lardner, and Francois Mazur, Attorney, OMS, Division, Commission, on
April 12, 1996.
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Units would be distributed in ``Creation Transactions.'' To effect
a Creation Transaction in a Fund-only structure, an entity would be
shares from the investment company (``Fund'') in ``Creation Unit'' size
aggregations in exchange for a deposit of a basket of securities
reflecting the securities underlying the Fund and/or a cash deposit. To
effect a Creation Transaction in a Fund/UIT structure, an entity would
buy a Fund share from the open-end management investment company with a
similar deposit and exchange it with the UIT for a Creation Unit.\7\
The owner of a Creation unit could then subdivide the Creation Unit
into a specific number of identical fractional non-redeemable sub-
units, the Units, that would constitute the securities traded. Units
could be recombined into Creation Unit aggregations, and redeemed for
the securities underlying the Fund and/or an amount of cash, either
directly, or indirectly, depending on the structure chosen. The
securities would not be redeemable other than in Creation Unit
aggregations.\8\
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\7\ Id.
\8\ Id.
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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 will apply, including its rules on
clearance and settlement of securities transactions and its equity
margin rules. Other generally applicable Exchange equity rules and
procedures also will apply. 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 ``pass-through''
of the voting rights on the actual index securities held by a fund or
directly or indirectly by a trust.
With respect to specialist dealings, Article XXX, Rule 23(a) of the
Exchange's Rules precludes certain business relationships between an
[[Page 44371]]
issuer of an ``exclusive issue'' and the specialist in that exclusive
issue.\9\ Rule 23(a) could be interpreted to prevent a specialist from
engaging in Creation Transactions with the issuer of Units. The
Exchange believes, however, that 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 net
asset value), the Exchange believes that there is no potential for
abuse.
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\9\ Interpretation and Policy .01 of Article XXX, Rule 23
defines ``exclusive issue'' as the stock of any company traded on
the Exchange not otherwise traded on the NYSE, American Stock
Exchange, or NASDAQ/NMS, and, where there exists another market for
such issue, the Exchange has executed 15% or more of the volume in
the issue during the three previous months.
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Therefore, the Exchange proposes amending Article XXX, Rule 23(a)
to permit specialists to engage in these types of transactions if such
transactions would facilitate the maintenance of a fair and orderly
market in Units. Any Creation Transactions in which the specialist
engages, however, will have to be effected through the Distributor (as
defined herein), and not directly with the issuer. This requirement
will make clear that the specialist is purchasing Units in Creation
Unit-size aggregations 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 (``1933
Act'') all investors in Units will receive a prospectus regarding the
Units. Because the Units will be in continuous distribution, the
prospectus delivery requirements of the 1933 Act will apply to all
investors in Units. It is possible, however, that an exemption from the
prospectus delivery requirement may be obtained at some point in the
future with respect to Units listed or traded on the Exchange. In the
event of 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 or traded, as appropriate, and will
file any necessary rule change to provide for such disclosure.
Upon the initial listing of any class of Units or trading of such
Units pursuant to unlisted trading privileges (``UTP''), the Exchange
will issue a circular to its membership explaining the unique
characteristics and risks of this type of security. The circular will,
among other things, inform member organizations of their responsibility
to deliver a prospectus to investors. The circular also will note that
before an Exchange member undertakes to recommend a transaction in
Units, it should make a determination that it is in compliance with
applicable rules of other self-regulatory organizations of which it is
a member, including applicable suitability and know-your-customer
rules.
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 Article IX, Rule 10A are reached.
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.
One existing form of Units are CountryBaskets (``CBs''),\10\ which
are created pursuant to a Fund-only structure. In March 1996, the New
York Stock Exchange (``NYSE'') received Commission approval to list and
trade CountryBaskets.\11\ CHX currently will not list CountryBaskets,
but rather seeks to trade CountryBaskets pursuant to unlisted trading
privileges (``UTP'') once the generic listing standards set forth
herein are approved.
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\10\ CHX understands that ``CountryBaskets'' and ``The
CountryBaskets Index Fund'' are service marks of Deutsche Morgan
Grenfell/C.J. Lawrence,Inc. (``DMG''), the investment adviser to the
fund.
\11\ Securities Exchange Act Release No. 36923 (March 5, 1996),
61 FR 10410.
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Pursuant to Rule 12f-5 under the Act,\12\ prior to trading a
particular class or type of security pursuant to UTP, CHX must have
listing standards comparable to those of the primary exchange on which
the security is listed. The NYSE has adopted listing standards for
Units, and CHX's proposed rule change is designed to create similar
standards for Unit listing and/or trading on CHX. As stated above, CHX
intends to trade CountryBaskets pursuant to UTP upon approval of this
rule filing.
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\12\ 17 CFR 240.12f-5.
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B. CountryBaskets Generally
CountryBaskets are issued as series of an open-end management
investment company that invest in a portfolio of securities (``Index
Securities'') included in a corresponding index.\13\ Each series of the
investment company is designed to provide investment results that
substantially correspond to the price and yield performance of a
corresponding FT/S&P-Actuaries World Index (``Index'' or ``FT/
S&P'').\14\ The nine series of Funds that currently exist are based on
the following Indices: Australia, France, Germany, Hong Kong, Italy,
Japan, South Africa, United Kingdom, and the United States.
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\13\ The information describing the structure and mechanics of
CountryBaskets has been restated from File No. SR-NYSE-95-23. See
Securities Exchange Act Release No. 36923, supra note 11.
\14\ According to Amendment No. 1 to SR-NYSE-95-23, the Indices
are a continuation of the FT-Actuaries World Indices, which were
jointly founded by The Financial Times Limited (``FT''), Goldman,
Sachs & Co. (``Goldman''), and NatWest Securities Limited
(``NatWest,'' and each a ``Founding Member''). In May 1995, Standard
& Poor's (``S&P''), a division of The McGraw-Hill Companies, Inc.,
joined FT and Goldman as co-publishers of the predecessor to the
Indices. As part of the new arrangement, NatWest withdrew from the
management of those Indices, but continues to be recognized as a
Founding Member. The Indices are now jointly owned by S&P, FT and
Goldman. Following a transition period, FT and S&P will jointly
calculate the Indices. In November 1995, FT transferred its
ownership rights in the Indices to FT-SE International, a new
company jointly owned by the 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 U.S. Index.
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C. Distribution of Units
Units are distributed through Creation Transactions. To effect a
Creation Transaction, 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 such shares.
Units in Creation Unit-size aggregations 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 aggregation
of Fund shares represents securities with approximately $2 to $9.5
million in market value. The Creation Unit is disaggregated into the
individual Units that trade on an Exchange, currently the NYSE.\15\ For
the nine initial CountryBasket securities, there are the following
number of Units per Creation Unit:
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\15\ If a Fund/UIT structure instead had been used, a
``Redeemable Unit'' would represent the functional equivalent of the
Creation Unit. The owner of a Redeemable Unit could separate it into
a specific number of identical fractional non-redeemable sub-units
that would constitute the Units traded on the Exchange. In the case
of the Germany CountryBasket series, for example, there would be
100,000 Units per Redeemable Unit. These 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 Units would not be redeemable
other than in the Creation Unit aggregations.
[[Page 44372]]
Australia..................................................... 100,000
France........................................................ 100,000
Germany....................................................... 100,000
Hong Kong..................................................... 100,000
Italy......................................................... 100,000
Japan......................................................... 250,000
South Africa.................................................. 100,000
United Kingdom................................................ 100,000
United States................................................. 100,000
D. Exchange Trading of Units
The Exchange will require that there be at least 300,000 tradable
Units outstanding before trading can begin.\16\ The Exchange will
consider the suspension of trading of a series of Units if:
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\16\ For the Japan series, 500,000 worth of DBs, representing
two Creation Units, will be required to be outstanding prior to
commencing trading. See Amendment No. 2.
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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 no longer is calculated or available; or
there occurs another event that makes further dealings in
the Units on the Exchange inadvisable.\17\
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\17\ The Commission notes 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 Units could become a
surrogate for trading in a single or a few unregistered stocks. See
Securities Exchange Act Release No. 36923, supra note 11. In the
unlikely event, however, that this were to occur, the Commission
would expect the CHX to suspend trading in the securities to ensure
compliance with the Act.
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E. The FT/S&P-Actuaries World Indices
Deutsche Bank Securities Corporation, formerly investment adviser
to the Funds, provided the NYSE with certain information describing the
FT/S&P-Actuaries World Indices, contained within NYSE filing SR-NYSE-
95-23, as amended.
1. Establishing an Index
The FT/S&P are jointly compiled by The Financial Times Limited,
Goldman, Sachs & Co., and Standard & Poor's, a division of The McGraw-
Hill Companies, Inc., in conjunction with the Institute of Actuaries
(together, the ``Consortium'').\18\ 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/S&P so that with respect to their
corresponding markets, they are comprehensive, consistent, flexible,
accurate, investible, and representative.
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\18\ In Amendment No. 1 to SR-NYSE-95-23, the NYSE stated that
certain modifications had occurred to the Indices. The CHX's filing
has incorporated the additional information, and operates under the
assumption that the original information detailed in SR-NYSE-95-23
continues to be accurate to the extent not modified by the NYSE's
amendment.
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The World Index Policy Committee (``WIPC'') makes all policy
decisions concerning the FT/S&P, 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, and 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/S&P-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/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 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 a given FT/S&P 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 the FT/S&P 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);
(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; (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 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 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. Dissemination of Changes to the Constituent Stocks in the Indices
Changes to an Index made during a calendar quarter are noted at the
foot of the tables containing the Indices that are published daily in
the FT. Consistent with the FT publication policy, these changes also
are shown prior to the actual day of implementation (unless for reasons
beyond the control of FT this is not possible). Decisions regarding the
addition of new eligible constituent stocks that are unrelated to
existing stocks in an Index, or weighting changes
[[Page 44373]]
to existing constituent stocks, are announced in the FT at least four
working days before they are implemented. Monday editions of the FT
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 World Indices Policy
Committee, but before the quarter-end.
4. Calculation and Dissemination of an Index
The FT/S&P 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 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
and are disseminated to the public.
The FT/S&P 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. 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/S&P are calculated once a day on weekdays when one or more of
the constituents markets are open; the Indices are syndicated and
published in the financial sections of several newspapers worldwide.
FT/S&P data also may be purchased electronically.
F. Indicative Values
Recognizing the importance of having current information on the
value of the Indices, DMG has arranged for Telesphere Corporation
(formerly Telekurs (North America) Inc.) (``Telesphere'') to calculate
``indicative values'' for the nine Indices on which CountryBaskets are
based. CHX understands that the NYSE provides for the dissemination of
these indicative values through the facilities of the Consolidated Tape
Association (``CTA'').
In calculating ``indicative values,'' Telesphere uses the most
currently available stock price information for the constituent stocks
in an Index (based on home currency prices) and prevailing currency
exchange rates to translate the Index value into U.S. dollars.
Telesphere also uses the same pricing algorithm and methodology as the
Index calculators in calculating the indicative values. These values
are disseminated every 30 seconds by the NYSE during regular trading
hours of 9:30 A.M. to 4:00 P.M. Eastern time. Because trading hours in
the markets for the stocks underlying the Indices differ, the
calculation of the indicative values are effected 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 reflect the closing prices of
the underlying securities on the most recently completed trading day,
but are 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 reflect
changes in both current stock price information and currency exchange
rates while the relevant market is open; it reflects only changes in
exchange rates once the home-market closes.
United States. Each 30-second update reflects 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 Savings Time there is a half-hour overlap. Thus, during
Standard Time, the disseminated Index values reflect the closing South
African prices. During Daylight Savings Time, there is a real-time feed
of stock prices from the Johannesburg Stock Exchange and there is a
real-tie calculation of the indicative value of the index at 30-second
intervals during the half-hour overlap.
While these indicative values are not the official values of the
Indices (which continue to be calculated and disseminated once each
day), the Exchange believes that these values provide investors with
accurate, timely information on the values of the Indices. Providing
standardized information through CTA facilities should help ensure that
all investors have equal access to this market information. 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. Of course, it cannot be guaranteed that
the indicative value will at all times be a completely accurate
reflection of the value of the underlying Index.\19\
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\19\ In the unlikely event that Telesphere determines that it no
longer will calculate the indicative value of the Indices, according
to the NYSE, DMG will seek to find another entity to provide such
values on substantially the same basis as Telesphere. If this were
to occur, the NYSE has represented that it will consult with the
staff of the Division to ensure that the staff finds any proposed
new arrangements acceptable, including the possibility of ending
trading in the securities.
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Although the CHX operates under Central Time, its trading hours
coincide with those of the NYSE. Therefore, the time zone difference
will not affect the ability to trade CountryBaskets on the CHX with
full price information.
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.\20\ The
Commission believes that the Exchange's proposal to establish listing
standards for Units and to trade CountryBaskets pursuant to UTP will
provide investors with a convenient way to participate in domestic and
foreign securities markets. The Exchange's proposal should help to
provide investors with increased flexibility in satisfying their
investments 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.\21\ 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
[[Page 44374]]
customers, issuers, brokers, or dealers.\22\ The Commission also
believes that the Exchange's proposal is consistent with Section 12(f)
of the Act \23\ relating to trading securities pursuant to UTP.
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\20\ 15 U.S.C. 78f(b)(5) (1988).
\21\The Commission notes that unlike typical open-end management
investment companies, where investors have the right to redeem their
fund shares on a daily basis, investors in Units only could redeem
Units in Creation Unit size aggregations.
\22\ 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.
\23\ 15 U.S.C. Sec. 78s(l) (1994).
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The CHX seeks to trade CBs pursuant to UTP. In approving the NYSE's
proposal to list and trade CBs, the Commission noted that 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. The Commission also stated that it believes that CBs
will provide investors with several advantages over standard open-end
management investment companies specializing in such stocks, and in
particular, investors will be able to trade CBs continuously throughout
the business day in secondary market transactions at negotiated
prices.\24\ In contrast, Investment Company Act Rule 22c-1 \25\ limits
holders and prospective holders of open-end management 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. Thus, the Commission stated that 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.
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\24\ Because of potential arbitrage opportunities, the
Commission believes that CBs should 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.
\25\ 17 CFR 270.22c-1. 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 management 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.\26\ 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, in
approving the CHX's proposal to trade CBs, the Commission believes that
the unique nature of CBs requires that certain product design,
disclosure, trading, and other issues be addressed.
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\26\ 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
As stated in the approval of the NYSE's proposal to list and trade
CBs,\27\ the Commission believes that the 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.
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\27\ Securities Exchange Act Release No. 36923, supra note 11.
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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 substantially correspond to their proportional representation in
the corresponding FT/S&P Index.\28\ This will help to ensure that an
investment in CBs is substantially similar to an investment in the
securities comprising the related FT/S&P Index.
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\28\ 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.
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B. Disclosure
The Commission believes that the Exchange's 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.\29\ As noted above, all Unit investors, including
investors purchasing CBs in the secondary market at the CHX pursuant to
UTP, will receive a prospectus regarding the product. Because Units,
including CBs trading on the CHX pursuant to UTP, 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 CHX. The
prospectus will address the special characteristics of a particular
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.
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\29\ The CHX states that it may, in the future, seek to obtain
an exemption from the prospectus delivery requirement with respect
to Units trading 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 or
extension of unlisted trading privileges to 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 will note that before an Exchange member
undertakes to recommend a transaction in Units, it should make a
determination that it is in compliance with applicable rules of other
self-regulatory organizations of which it is a member, including
applicable suitability and know-your-
[[Page 44375]]
customer rules. 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.
C. Trading of CBs
The Commission finds that adequate rules and procedures exist to
govern the trading of Units, including the trading of CBs by the CHX
pursuant to UTP. In this regard, the Commission notes that Units are
deemed equity securities subject to CHX rules applicable to the trading
of equity securities. Accordingly, the Exchange's existing general
rules that currently 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 CHX Article IX, Rule 10A); 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
lending securities.\30\ The CHX also will consider suspending trading
in a series of Units if it deems that an event or condition exists that
makes further dealings on the Exchange inadvisable.
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\30\ See CHX Rules, Parts II & III passim.
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In addition, the Exchange has proposed specific listing and
delisting criteria to accommodate the trading of 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 suspending trading in CBs traded on the Exchange pursuant to
UTP, if an event were to occur that made further dealings in such
securities inadvisable. This will give the Exchange flexibility to
suspend trading and delist Units, if circumstances warrant such action.
For example, as noted above, suspending trading in CBs might be
appropriate if Telesphere no longer were able to calculate indicative
values, and no acceptable alternative arrangements could be found.\31\
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 suspending trading
in CBs so as to ensure compliance with the Act.\32\ 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.
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\31\ See supra note 19.
\32\ See note 17, supra.
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D. Indicative Indices
The Commission believes that given that the NYSE is disseminating
the indicative values for the nine Indices upon which CBs are based,
investors are provided with timely and accurate information concerning
the value of the FT/S&P. The Commission understands that the
information is disseminated through the facilities of the CTA and will
reflect currently-available stock price information. Moreover, it is
calculated based upon the same pricing algorithm and methodology used
by the FT/S&P calculators and is disseminated every 30 seconds during
the regular NYSE trading day.\33\ In addition, since it is expected
that the market value of the CBs will closely track the performance of
the applicable FT Index,\34\ the Commission believes that the
indicative values provide investors with adequate information to
determine the intra-day value of a given CB series.\35\
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\33\ See Securities Exchange Act Release No. 36923, supra note
11.
\34\ See Form N-1A, supra note 28. Each CB series is 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 should substantially correspond to
their proportional representation in the relevant FT/S&P Index. Id.
\35\ In addition, each series calculates its NAV per share at
the close of the regular trading session for the NYSE on each day
that the NYSE 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 Exchange's rule proposal
does not address any other requirements or obligations under the
federal securities laws that may be applicable.\36\
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\36\ The Commission notes that with respect to CBs, broker
dealers and other persons are 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 CHX'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.\37\
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\37\ Letter from J. Craig Long, Foley & Lardner, to Sharon
Lawson, Senior Special Counsel, OMS, Division, dated June 22, 1996.
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G. Scope of the Commission's Order
The Commission is approving in general the Exchange's proposed
listing and delisting standards for Units representing an interest in
an Investment Company that would hold a Fund Basket, and specifically
the Exchange proposal to trade the nine series of CountryBaskets
described herein pursuant to UTP. The Commission notes that Rule 12f-5
under the Act requires that a national securities exchange not extend
unlisted trading privileges to any security unless it has in effect a
rule or rules providing for transactions in the class or type of
security to which the exchange extends unlisted trading privileges.\38\
The Commission believes that the Exchange's proposed listing standards
for Units are consistent with this requirement and will allow the CHX
to trade, pursuant to UTP, the nine CBs currently trading on the NYSE.
Other similarly structured products would require review by the
Commission pursuant to Section 19(b) of the Act prior to being listed
on the CHX or
[[Page 44376]]
traded pursuant to UTP. Moreover, CBs based on FY/S&P Indices not
described herein, would require consultation with the Commission as to
whether a filing pursuant to Section 19(b) of the Act is required prior
to being listed on the Exchange, or traded pursuant to UTP.
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\38\ 17 CFR 240.12f-5.
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The Commission finds good cause for approving Amendment No. 2 prior
to the thirtieth day after the date of publication of notice of filing
thereof in the Federal Register. Amendment No. 2 amends Interpretation
and Policy .01 of Article XXVIII, Rule 23 to require that the Japan
Series have a minimum of 500,000 CBs outstanding prior to the
commencement of trading on the Exchange. As discussed above, CHX must
have listing standards comparable to those of the primary exchange on
which the security is traded. The Commission notes that this Amendment
brings CHX's listing standards into conformity with those of the NYSE.
Accordingly, the Commission does not believe Amendment No. 2 raises any
new or unique regulatory issues. Therefore, the Commission believes it
is consistent with Sections 6(b)(5) and 19(b)(2) of the Act to approve
Amendment No. 2 to the proposal on an accelerated basis.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning Amendment No. 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. 552, will be available for inspection and
copying at 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
CHX. All submissions should refer to the file number in the caption
above and should be submitted by September 18, 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,\39\ that the proposed rule change (File No. SR-CHX-96-12), as
amended is approved.
\39\ 15 U.S.C. 78s(b)(2) (1988).
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For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\40\
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\40\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-21890 Filed 8-27-96; 8:45 am]
BILLING CODE 8010-01-M