[Federal Register Volume 62, Number 198 (Tuesday, October 14, 1997)]
[Notices]
[Pages 53373-53377]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-27042]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-39188; File No. SR-PCX-97-35]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Pacific Exchange, Inc., Relating to the Listing and 
Trading of Portfolio Depositary Receipts

October 2, 1997.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and rule 19b-4 thereunder,\2\ notice is hereby given that 
on August 25, 1997, the Pacific Exchange, Inc. (``PCX'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission'') the proposed rule change as described in 
Items I, II and III below, which Items have been prepared by the self-
regulatory organization. The Commission is publishing this notice to 
solicit comments on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The PCX proposes to adopt new rules relating to the listing and 
trading of Portfolio Depositary Receipts (``PDRs'').

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the self-regulatory organization 
included statements concerning the purpose of and basis for the 
proposed rule change and discussed any comments it received on the 
proposed rule change. The text of these statements may be examined at 
the places specified in Item IV below. The self-regulatory organization 
has prepared summaries, set forth in sections A, B and C below, of the 
most significant aspects of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange proposes to adopt new Rule 8.300 to accommodate the 
trading

[[Page 53374]]

of PDRs, i.e., securities that are interests in a unit investment trust 
(``Trust'') holding a portfolio of securities linked to an index. Each 
Trust will provide investors with an instrument that (1) closely tracks 
the underlying portfolio of securities, (2) trades like a share of 
common stock, and (3) pays holders of the instrument periodic dividends 
proportionate to those paid with respect to the underlying portfolio of 
securities, less certain expenses (as described in the Trust 
prospectus).
    Under the proposal, the Exchange may list and trade, or trade 
pursuant to unlisted trading privileges, PDRs based on one or more 
stock indexes or securities portfolios.\3\ PDRs based on each 
particular stock index or portfolio will be designated as a separate 
series and identified by a unique symbol. The stocks that are included 
in an index or portfolio on which PDRs are based will be selected by 
the Exchange, or by another person having a proprietary interest in and 
authorize use of such index or portfolio, and may be revised as may be 
deemed necessary or appropriate to maintain the quality and character 
of the index or portfolio.
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    \3\ The Commission notes that PCX has not identified a 
particular trading product that it seeks to list pursuant to the 
proposed listing standards. Prior to trading a particular product, 
PCX may have to submit an additional Section 19(b) filing that more 
specifically addresses potential issues associated with items such 
as the composition, calculation and dissemination of the applicable 
index.
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    In connection with an initial listing, the Exchange proposes that, 
for each Trust of PDRs, the Exchange will establish a minimum number of 
PDRs required to be outstanding at the time of commencement of Exchange 
trading, and such minimum number will be filed with the Commission in 
connection with any required submission under Rule 19b-4 for each 
Trust. If the Exchange trades a particular PDR pursuant to unlisted 
trading privileges, the Exchange will follow the listing exchange's 
determination of the appropriate minimum number.
    Because the Trust operates on an open-end type basis, and because 
the number of PDR holders is subject to substantial fluctuations 
depending on market conditions, the Exchange believes it would be 
inappropriate and burdensome on PDR holders to consider suspending 
trading in or delisting a series of PDRs, with the consequent 
termination of the Trust, unless the number of holders remains severely 
depressed during an extended time period. Therefore, twelve months 
after the formation of a Trust and commencement of Exchange trading, 
the Exchange will consider suspension of trading in, or removal from 
listing of, a Trust when, in its opinion, further dealing in such 
securities appears unwarranted under the following circumstances:
    (a) If the Trust on which the PDRs are based has more than 60 days 
remaining until termination and there have been fewer than 50 record 
and/or beneficial holders of the PDRs for 30 or more consecutive 
trading days; or
    (b) if the index on which the Trust is based is no longer 
calculated; or
    (c) if such other event occurs or condition exists, which, in the 
opinion of the Exchange, makes further dealings in such securities on 
the Exchange inadvisable.
    A Trust will terminate upon removal from Exchange listing and its 
PDRs will be redeemed in accordance with provisions of the Trust 
prospectus. A Trust may also terminate under such other conditions as 
may be set forth in the Trust prospectus. For example, the sponsor of 
the Trust (the ``Sponsor''), following notice to PDR holders, will have 
discretion to direct that the Trust be terminated if the value of 
securities in such Trust falls below a specified amount.
    Trading of PDRs. Dealing in PDRs on the Exchange will be conducted 
pursuant to the Exchange's general agency-auction trading rules. The 
Exchange's general dealing and settlement rules would apply, including 
its rules on clearance and settlement of securities transactions and 
its equity margin rules. Other generally applicable Exchange equity 
rules and procedures would also apply, including, among others, rules 
governing the priority, parity and precedence of orders and the 
responsibilities of specialists.
    With respect to trading halts, the trading of PDRs would be halted, 
along with the trading of all other listed or traded stocks, in the 
event the ``circuit breaker'' thresholds are reached.\4\ PCX does not 
propose to automatically halt trading or delay opening of index-based 
PDRs upon the triggering of futures price limits for the S&P 500 
Composite Price Index, S&P'' 100 Composite Price Stock Index (``S&P'' 
``100 Index'') or Major Market Index (``MMI'') futures contracts. Such 
an event, however, could be considered by the Exchange, along with 
other factors, such as a halt in trading in S&P 100 Index Options 
(``OEX''), S&P 500 Index Options (``SPX''), or Major Market Index 
Options (``XMI''), in deciding whether to halt trading in PDRs.
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    \4\ See Securities Exchange Act Release No. 38221 (January 31, 
1997), 62 FR 5871 (February 7, 1997) & note 7 therein.
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    The Exchange will issue a circular to its Members and Member 
Organizations informing them of Exchange policies regarding trading 
halts in such securities. The circular will make clear that, in 
addition to other factors that may be relevant, the Exchange may 
consider factors such as those set forth in Rule 7.11, the Exchange's 
rule governing trading halts for index options, in exercising its 
discretion to halt or suspend trading. For a PDR based on an index, 
these factors would include whether trading has been halted or 
suspended in the primary market(s) for any combination of underlying 
stocks accounting for 20% or more of the applicable current index group 
value; or whether other unusual conditions or circumstances detrimental 
to the maintenance of a fair and orderly market are present.
    Disclosure. Proposed Rule 8.300(c) requires that Members and Member 
Organizations provide to all purchasers of each series of PDRs a 
written description of the terms and characteristics of such 
securities, in a form approved by the Exchange, not later than the time 
a confirmation of the first transaction in such series of PDRs is 
delivered to such purchaser. In this regard, a Member or Member 
Organization carrying an omnibus account for a non-member broker-dealer 
will be required to inform such non-member than execution of an order 
to purchase PDRs for such omnibus account will be deemed to constitute 
an agreement by the non-member to make such written description 
available to its customers on the same terms as are directly applicable 
to Member or Member Organizations. The written description must be 
included with any sales material on that series of PDRs that a Member 
provides to customers or the public. Moreover, other written materials 
provided by a Member or Member Organization to customers or the public 
making specific reference to a series of PDRs as an investment vehicle 
must include a statement in substantially the following form: ``A 
circular describing the terms and characteristics of [the series of 
PDRs] is available from your broker. It is recommended that you obtain 
and review such circular before purchasing [the series of PDRs]. In 
addition, upon request you may obtain from your broker a prospectus for 
[the series of PDRs].'' Additionally, as noted above, the Exchange 
requires that Members and Member Organizations provide customers with a 
copy of the prospectus for a series of PDRs upon request.

[[Page 53375]]

    Two existing PDRs, SPDRs, and MidCap SPDRs, are traded on the 
American Stock Exchange (``Amex'').\5\ The Exchange is not asking for 
permission to list SPDRs or MidCap SPDRs at this time, but rather with 
trade SPDRs and MidCap SPDRs pursuant to unlisted trading privileges 
once the generic listing standards set forth herein are approved.
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    \5\ SPDRs and MidCap SPDRs are defined and discussed more fully 
below.
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    Pursuant to Rule 12f-5 under the Act, in order to trade a 
particular class or type of security pursuant to unlisted trading 
privileges, the Exchange must have rules providing for transactions in 
such class or type of security. The Amex has enacted listing standards 
for PDRs, and the Exchange's proposed rule change is designed to create 
similar standards for PDR listing and/or trading on the PCX. As stated 
above, the Exchange proposes to trade SPDRs and MidCap SPDRs pursuant 
to unlisted trading privileges upon arrival of this rule filing.
    Because the Exchange is not itself listing SPDRs and MidCap SPDRs, 
but will merely be trading these securities pursuant to unlisted 
trading privileges, the Exchange will not independently ensure 
conformity of SPDRs and MidCap SPDRs to PCX listing standards. Instead, 
the Exchange will rely on the primary market to determine whether SPDRs 
and MidCap SPDRs meet the relevant listing standards. If at a later 
time the Exchange desires to list SPDRs and MidCap SPDRs, the Exchange 
will request SEC approval for that listing in a separate proposed rule 
change filed pursuant to Section 19(b) of the Act, the Exchange will 
independently ensure that SPDRs and MidCap SPDRs conform to the 
Exchange's own listing standards.
    The remainder of this section of the filing merely provides 
background information on SPDRs and MidCap SPDRs. The information, 
taken mostly from SR-AMEX-94-52 and SR-AMEX-92-18, describes the 
structure and mechanics of SPDRs and MidCap SPDRs.
    SPDRs and MidCap SPDRs Generally. On December 11, 1992, the 
Commission approved Amex Rules 1000 et seq.\6\ to accommodate trading 
on the Amex of PDRs generally. The Sponsor of each series of PDRs 
traded on the Amex is PDR Services Corporation, a wholly-owned 
subsidiary of the Amex. The PDRs are issued by a Trust in a specified 
minimum aggregate quantity (``Creation Unit'') in return for a deposit 
consisting of specified numbers of shares of stock plus a cash amount.
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    \6\ See Securities Exchange Act Release No. 31591 (December 11, 
1992), 57 FR 60253 (December 18, 1992).
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    The first Trust to be formed in connection with the issuance of 
PDRs was based on the S&P 500 Composite Stock Price Index (``S&P'' 
Index), known as Standard & Poor's Depositary Receipts (``SPDRs''). 
SPDRs have been trading on Amex since January 29, 1993. The second 
Trust to be formed in connection with the issuance of PDRs was based on 
the S&P MidCap 400 Index,\7\ known as Standard & Poors MidCap 400 
Depositary Receipts (``MidCap SPDRs'').\8\ The Sponsor of the two 
Trusts has entered into trust agreements with a trustee in accordance 
with Section 26 of the Investment Company Act of 1940. PDR 
Distributors, Inc. (``Distributor'') acts as underwriter of both SPDRs 
and MidCap SPDRs on an agency basis. The Distributor is a registered 
broker-dealer, a member of the National Association of Securities 
Dealers, Inc., and a wholly-owned subsidiary of Signature Financial 
Group, Inc.
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    \7\ The S&P MidCap 400 Index is a capitalization-weighted index 
of 400 actively traded securities that includes issues selected from 
a population of 1,700 securities, each with a year-end market-value 
capitalization of between $200 million and $5 billion. The issues 
included in the Index cover a broad range of major industry groups, 
including industrials, transportation, utilities, and financials.
    \8\ See Securities Exchange Act Release No. 35534 (March 24, 
1995), 60 FR 16686 (March 31, 1995).
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    SPDRs. It is anticipated that the term of the SPDR Trust will be 25 
years.\9\ The Trustee of the SPDR Trust will have the right to vote any 
of the voting stocks held by the Trust, and will vote such stocks of 
each issuer in the same proportion as all other voting shares of that 
issuer voted.\10\ Therefore, SPDR holders will not be able to directly 
vote the shares of the issuers underlying the SPDRs.
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    \9\ The SPDR Trust may terminate at an earlier time under 
certain circumstances, as provided in the prospectus.
    \10\ The Trustee will abstain from voting if the stocks held by 
the Trust cannot be voted in proportion as all other shares of the 
securities are voted.
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    The Trust will issue SPDRs in exchange for ``Portfolio Deposits'' 
of all of the S&P 500 Index securities weighted according to their 
representation in the Index.\11\ An investor making a Portfolio Deposit 
into the Trust will receive a ``Creation Unit'' composed of 50,000 
SPDRs.\12\ The price of SPDRs will be based on a current bid/offer 
market.\13\ SPDRs will not be redeemable individually, but may be 
redeemed in Creation Unit size (i.e., 50,000 SPDRs). Specifically, a 
Creation Unit may be redeemed for an-in-kind distribution of securities 
identical to a Portfolio Deposit.\14\ PDR Distribution Services, Inc., 
a registered broker-dealer, will act as underwriter of SPDRs on an 
agency basis.
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    \11\ A Portfolio Deposit also will include a cash payment equal 
to a pro rata portion of the dividends accrued on the Trust's 
portfolio securities since the last dividend payment by the Trust, 
plus or minus an amount designed to compensate for any difference 
between the net asset value of the Portfolio Deposit and the S&P 500 
Index caused by, among other things, the fact that a Portfolio 
Deposit cannot contain fractional shares.
    \12\ The Trust is structured so that the net asset value of an 
individual SDPR should equal one-tenth of the value of the S&P 500 
Index.
    \13\ The Amex has designated \1/64\'s as the minimum fraction 
for trading in SPDRs. The Exchange has proposed this same minimum 
variation for the trading of SPDRs on the PCX.
    \14\ An investor redeeming a Creation Unit will receive Index 
securities and cash identical to the Portfolio Deposit required of 
an investor wishing to purchase a Creation Unit on that particular 
day. Since the Trust will redeem in kind rather than for cash, the 
Trustee will not be forced to maintain cash reserves for 
redemptions. This should allow the Trust's resources to be committed 
as fully as possible to tracking the S&P 500 Index, enabling the 
Trust to track the Index more closely than other basket products 
that must allocate a portion of their assets for cash redemption.
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    MidCap SPDRs. All orders to create MidCap SPDRs in Creation Unit 
Size aggregations (which has been set at 25,000) must be placed with 
the Distributor, and it will be the responsibility of the Distributor 
to transmit such orders to the Trustee.
    To be eligible to place orders to create MidCap SPDRs as described 
below, an entity or person either must be a participant in the 
Continuous Net Settlement (``CNS'') system of the National Securities 
Clearing Corporation (``NSCC'') or a Depositary Trust Company (``DTC'') 
participant. Upon acceptance of an order to create MidCap SPDRs, the 
Distributor will instruct the Trustee to initiate the book-entry 
movement of the appropriate number of MidCap SPDRs to the account of 
the entity placing the order. MidCap SPDRs will be maintained in book-
entry form at DTC.
    Payment with respect to creation orders placed through the 
Distributor will be made by: (1) The ``in-kind'' deposit with the 
Trustee of a specified portfolio of securities that is formulated to 
mirror, to the extent practicable, the component securities of the 
underlying index or portfolio, and (2) a cash payment sufficient to 
enable the Trustee to make a distribution to the holders of beneficial 
interests in the Trust on the next dividend payment date as if all the 
securities had been held for the entire accumulation period for the 
distribution (``Dividend Equivalent Payment''), subject to certain 
adjustments. The securities and cash accepted by the

[[Page 53376]]

Trustee are referred to, in the aggregate, as a ``Portfolio Deposit.''
    It is anticipated that the term of the MidCap SPDR Trust will be 25 
years.
    Issuance of MidCap SPDRs. Upon receipt of a Portfolio in payment 
for a creation order placed through the Distributor as described above, 
the Trustee will issue a specified number of MidCap SPDRs, which 
aggregate number is referred to as a ``Creation Unit.'' The Amex 
anticipates that a Creation Unit will be made up of 25,000 MidCap 
SPDRs.\15\ Individual Mid Cap SPDRs can then be traded in the secondary 
market like other equity securities. Portfolio Deposits are expected to 
be made primarily by institutional investors, arbitragers, and the 
Exchange specialist.
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    \15\ PDRs may be created in other than Creation Unit size 
aggregations in connection with the DTC Dividend Reinvestment 
Service (``DRS'').
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    The Trustee or Sponsor will make available: (1) On a daily basis, a 
list of the names and required number of shares for each of the 
securities in the current Portfolio Deposit; (2) on a minute-by-minute 
basis throughout the day, a number representing the value (on a per 
MidCap SPDR basis) of the securities portion of a Portfolio Deposit in 
effect on such date; and (3) on a daily basis, the accumulated 
dividends, less expenses, per outstanding Mid Cap SPDR.
    The Amex has set the minimum fractional trading variation for 
MidCap SPDRs at \1/64\ of $1.00. The Exchange is proposing this same 
minimum variation for MidCap SPDRs.
    Redemption of MidCap SPDRs. Mid Cap SPDRs in Creation Unit size 
aggregations will be redeemable in kind by tendering them to the 
Trustee. While holders may sell MidCap SPDRs in the secondary market at 
any time, they must accumulate at least 25,000 (or multiples thereof) 
to redeem them through the Trust. MidCap SPDRs will remain outstanding 
until redeemed or until the termination of the Trust. Creation Units 
will be redeemable on any business day in exchange for a portfolio of 
the securities held by the Trust identical in weighting and composition 
to the securities portion of a Portfolio Deposit in effect on the date 
a request is made for redemption, together with a ``Cash Component'' 
(as defined in the Trust prospectus), including accumulated dividends, 
less expenses, through the date of redemption. The number of shares of 
each of the securities transferred to the redeeming holder will be the 
number of shares of each of the component stocks in a Portfolio Deposit 
on the day a redemption notice is received by the Trustee, multiplied 
by the number of Creation Units being redeemed. Nominal service fees 
may be charged in connection with the creation and redemption of 
Creation Units. The Trustee will cancel all tendered Creation Units 
upon redemption.
    Distributions for MidCap SPDRs. The MidCap SPDR Trust will pay 
dividends quarterly. The regular quarterly ex-dividend date for MidCap 
SPDRs will be the third Friday in March, June, September, and December, 
unless that day is a New York Stock Exchange holiday, in which case the 
ex-dividend date will be the preceding Thursday. Holders of MidCap 
SPDRs on the business day preceding the ex-divident date will be 
entitled to receive an amount representing dividends accumulated 
through the quarterly dividend period preceding such ex-dividend date 
net of fees and expenses for such period. The payment of dividends will 
be made on the last Exchange business day in the calendar month 
following the ex-dividend date (``Dividend Payment Date''). On the 
Dividend Payment Date, dividends payable for those securities with ex-
dividend dates falling within the period from the ex-dividend date most 
recently preceding the current ex-dividend date will be distributed. 
The Trustee will compute on a daily basis the dividends accumulated 
within each quarterly dividend period. Dividend payments will be made 
through DTC and its participants to all such holders with funds 
received from the Trustee.
    The MidCap SPDR Trust intends to make the DTC DRS available for use 
by MidCap SPDR holders through DTC participant brokers for reinvestment 
of their cash proceeds. The DTC DRS is also available to holders of 
SPDRs. Because some brokers may choose not to offer the DTC DRS, an 
interested investor would have to consult his or her broker to 
ascertain the availability of dividend reinvestment through that 
broker. The Trustee will use the cash proceeds of MidCap SPDR holders 
participating in the reinvestment to obtain the Index securities 
necessary to create the requisite number of SPDRs.\16\ Any cash 
remaining will be distributed pro rata to participants in the dividend 
reinvestment.
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    \16\ The creation of PDRs in connection with the DTC DRS 
represents the only circumstances under which PDRs can be created in 
other than Creation Unit size aggregations.
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2. Basis
    The proposed rule change is consistent with Section 6(b)(5) of the 
Act \17\ in that it fosters cooperation and coordination with persons 
engaged in regulating, clearing, settling, processing information with 
respect to, and facilitating transactions in securities, removes 
impediments to and perfects the mechanism of a free and open market and 
a national market system and protects investors and the public 
interest.
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    \17\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purposes of the Act.

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

    Written comments on the proposed rule change were neither solicited 
nor received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will--
    A. By order approve such rule change, or
    B. Institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing. Persons making written submissions 
should file six copies thereof with the Secretary, Securities and 
Exchange Commission, 450 Fifth Street, 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 in the 
Commission's Public Reference Room, 450 Fifth Street, N.W., Washington, 
D.C. 20549. Copies of such

[[Page 53377]]

filing will also be available for inspection and copying at the 
principal office of the PCX. All submissions should refer to File No. 
SR-PCX-97-35 and should be submitted by October 31, 1997.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\18\
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    \18\ 17 CFR 200.30(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-27042 Filed 10-10-97; 8:45 am]
BILLING CODE 8010-01-M