[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