[Federal Register Volume 62, Number 209 (Wednesday, October 29, 1997)]
[Notices]
[Pages 56211-56217]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-28572]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-39268; File No. SR-CSE-97-10]


Self-Regulatory Organizations; Notice of Filing and Order 
Granting Accelerated Approval of Proposed Rule Change by the Cincinnati 
Stock Exchange, Inc. Relating to Listing and Trading Standards for 
Portfolio Depositary Receipts

October 22, 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 October 14, 1997,\3\ the Cincinnati Stock Exchange, Inc. (``CSE'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I and 
II 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. The 
Commission is also granting accelerated approval of the proposed rule 
change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ The Exchange filed Amendment No. 1 to the proposed rule 
change on October 20, 1997, the substance of which is incorporated 
into this release. See letter from Adam Gurwitz, Vice President 
Legal, CSE, the Heather Seidel, Attorney, Market Regulation, 
Commission, dated October 17, 1997 (``Amendment No. 1'').
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The CSE proposes to adopt new Exchange rule 11.9(v), to provide 
listing standards for, and trading in Portfolio Depositary Receipts 
(``PDRs''). The text of the proposed rule change is available at the 
Office of the Secretary, CSE and at the Commission.

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 III 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
    a. Listing Requirements for Portfolio Depositary Receipts. The 
Exchange proposes to adopt new Rule 11.9(v) to accommodate the trading 
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 indices or securities portfolios. 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 authorized 
use of such index or portfolio, and may be revised as may be deemed 
necessary or

[[Page 56212]]

appropriate to maintain the quality and character of the index or 
portfolio.
    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 that 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.
    B. 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.\4\
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    \4\ CSE Rule 3.7, Recommendations to Customers, will also apply 
to transactions in PDRs, including SPDRs and MidCap SPDRs. That rule 
provides that when recommending to a customer the purchase, sale or 
exchange of any security, a member or member organization shall have 
reasonable grounds for believing that the recommendation is suitable 
for such customer upon the basis of the facts disclosed by such 
customer, after reasonable inquiry by the member or member 
organization, as to the customer's other securities holdings and as 
to the customer's financial situation and needs. Telephone 
conversation between Adam Gurwitz, Vice-President Legal, CSE, and 
Heather Seidel, Attorney, Market Regulation. Commission, on October 
17, 1997.
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    The CSE has represented that the Exchange understands that SPDRs 
and MidCap SPDRs will both become ITS System securities on October 24, 
1997. The Exchange intends to trade both SPDRs and MidCap SPDRs when 
they become ITS System securities, but does not intend to trade them 
before that time.
    With respect to trading halts, the trading of PDRs would be halted, 
along with trading of all other listed or traded stocks, in the event 
the ``circuit breaker'' thresholds are reached.\5\ In addition, for 
PDRs tied to an index, while the triggering of futures price limits for 
the S&P 500 Composite Price Index (``S&P 500 Index''), S&P Composite 
Price Stock Index (``S&P 100 Index'') or Major Market Index (``MMI'') 
futures contracts will not, in themselves, result in a halt in PDR 
trading or a delayed opening, such an event 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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    \5\ See Securities Exchange Act Release No. 38221 (January 31, 
1997), 62 FR 5871 (February 7, 1997) and 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. 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.
    c. Disclosure. Proposed Rule 11.9(v) 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 that 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 Members and 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.
    Two existing PDRs, Standard & Poor's Depository Receipts 
(``SPDRs'') and Standard & Poor's MidCap 400 Depository Receipts 
(``MidCap SPDRs''), are traded on the American Stock Exchange 
(``Amex'').\6\ The Exchange is not asking for permission to list SPDRs 
or MidCap SPDRs pursuant to unlisted trading privileges once the 
generic listing standards set forth herein are approved.
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    \6\ SPDRs and MidCap SPDRs are defined and discussed more fully 
below.
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    Pursuant to SEC Rule 12f-5, 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

[[Page 56213]]

designed to create similar standards for PDR listing and/or trading on 
the CSE. As stated above, the Exchange proposes to trade SPDRs and 
MidCap SPDRs pursuant to unlisted trading privileges upon approval of 
this rule filing.
    If at a later time the Exchange and the issuer of the product 
desires to list SPDRs and MidCap SPDRs or any other PDRs on the 
Exchange, the Exchange will request SEC approval for that listing in a 
separate proposed rule change filed pursuant to Section 19(b) of the 
Act. Additionally, in the event a new PDR is listed on another exchange 
using listing standards that are different than current Exchange 
listing standards or the Exchange listing standards proposed in this 
filing, the Exchange will file a proposed rule change pursuant to 
Section 19(b) of the Act to adopt the listing standards before it 
trades that PDR pursuant to unlisted trading privileges.
    With respect to disclosure, because SPDRs and MidCap SPDRs will be 
traded pursuant to unlisted trading privileges and will not be listed 
on the Exchange at this time, the Exchange does not intend to create 
its own product description to satisfy the requirements of proposed 
Rule 11.9(v), which requires members to provide to purchasers, a 
written description of the terms and characteristics of SPDRs and 
MidCap SPDRs in a form approved by the Exchange. Instead, the Exchange 
will deem a member or member organization to be in compliance with this 
requirement if the member delivers either (i) the current product 
description produced by the Amex from time to time, or (ii) the current 
prospectus for the SPDR or MidCap SPDR, as the case may be.\7\ It will 
be the member's responsibility to obtain these materials directly from 
Amex for forwarding to purchasers in the time frames prescribed by 
Exchange and Commission rules. The Exchange will notify members and 
member organizations of this requirement in a notice to members.
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    \7\ CSE plans to notify its members in a regulatory circular 
that members must comply with Rule 3.7, Recommendations to 
Customers, prior to recommending the purchase of SPDRs or MidCap 
SPDRs to customers. The circular will also state that members must 
deliver a SPDR or MidCap SPDR product description to all purchasers 
of the products and that they must provide the prospectus upon the 
request.
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    The remainder of this section of the proposed rule change provides 
background information on SPDRs and MidCap SPDRs. The information, 
requested by CSE to have been copied from SR-AMEX-94-52 and SR-AMEX-92-
18, describes the structure and mechanics of SPDRs and MidCap SPDRs.
    d. SPDRs and MidCap SPDRs Generally. On December 11, 1992, the 
Commission approved Amex Rules 1000 et seq.\8\ 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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    \8\ 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 Index, known as Standard & Poor's 
Depositary Receipts (``SPDRs''). SPDRs have been trading on the 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,\9\ 
known as Standard & Poor's MidCap 400 Depositary Receipts (``MidCap 
SPDRs'').\10\ 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.\11\
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    \9\ 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.
    \10\ See Securities Exchange Act Release No. 35534 (March 24, 
1995), 60 FR 16686 (March 31, 1995).
    \11\ The Commission has recently approved a rule change proposal 
covering the trading and listing of PDRs on CHX, including SPDRs and 
MidCap SPDRs. See Securities Exchange Act Release No. 39076 
(September 15, 1997), 62 FR 49270 (September 19, 1997) (``CHX 
Approval Order'').
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    E. SPDRs. 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.\12\ Therefore, SPDR holders will not be able to 
directly vote the shares of the issuers underlying the SPDRs.
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    \12\ The Trustee will abstain from voting if the stocks held by 
the Trust cannot be voted in the same 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.\13\ An Investor making a Portfolio Deposit 
into the Trust will receive a ``Creation Unit'' composed of 50,000 
SPDRs.\14\ The price of SPDRs will be based on a current bid/offer 
market. The Amex has designated 1/64's as the minimum increment for 
trading in SPDRs. The Exchange has proposed this same minimum variation 
for trading of SPDRs on the CSE. 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.\15\ PDR 
Distribution Services, Inc. a registered broker-dealer, will act as 
underwriter of SPDRs on an agency basis.
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    \13\ 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.
    \14\ The Trust is structured so that the net asset value of an 
individual SPDR should equal one-tenth of the value of the S&P 500 
Index.
    \15\ 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 redemptions.
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    F. 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 Depository Trust Company (``DTC'') 
participant. Upon acceptance of an order to create a 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

[[Page 56214]]

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 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 specified adjustments. The 
securities and cash accepted by the Trustee are referred to, in the 
aggregate, as a ``Portfolio Deposit.''
    G. Issuance of MidCap SPDRs. Upon receipt of a Portfolio Deposit 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.'' A 
Creation Unit is made up of 25,000 MidCap SPDRs.\16\ Individual MidCap 
SPDRs can then be traded in the secondary market like other equity 
securities. Portfolio Deposits are expected to be made primarily by 
institutional investors, arbitrageurs, and Exchange specialists.
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    \16\ 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 day; and (3) on a daily basis, the accumulated 
dividends, less expenses, per outstanding MidCap 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.
    H. Redemption of MidCap SPDRs. MidCap 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.
    I. 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-dividend 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 cash proceeds of MidCap SPDR holders 
participating in the reinvestment to obtain the Index securities 
necessary to create the requisite number of SPDRs.\17\ Any cash 
remaining will be distributed pro rata to participants in the dividend 
reinvestment.
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    \17\ The Creation of PDRs in connection with DTC DRS represents 
the only circumstances under which PDRs can be created in other than 
Creation Unit size aggregations.
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    The Exchange requests accelerated approval of the proposed rule 
change pursuant to Section 19(b)(2) of the Act. The Exchange believes 
that accelerated approval is appropriate because the listing standards 
proposed in the proposed rule change closely mirror both the listing 
standards of the primary market for SPDRs and Mid-Cap SPDRs, Amex, and 
the standards proposed by two other regional exchanges that have 
announced their intention to trade PDRs, the CHX and the Pacific 
Exchange. The Exchange believes its proposed rule change should be 
granted accelerated approval for the same reasons the Commission 
determined to approve the standards of those other exchanges.
2. Statutory Basis
    The CSE believes that the proposed rule change is consistent with 
Section 6(b) of the Act \18\ in general, and furthers the objectives of 
Section 6(b)(5) of the Act \19\ in particular in that it is designed to 
promote just and equitable principles of trade and to remove 
impediments to and perfect the mechanism of a free and open market and 
a national market system, and, in general, to protect investors and the 
public interest. Specifically, the proposed rule change will increase 
competition in PDR markets by permitting Exchange members to compete 
for PDR order flow. By adopting the proposed rule change, the Exchange 
will bring the benefits of competition, including increased efficiency 
and price competition, to those markets.
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    \18\ 15 U.S.C. 78f(b).
    \19\ 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.

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

    No written comments were either solicited or received.

III. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing.

[[Page 56215]]

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 Room. Copies of such filing will also be available for 
inspection and copying at the principal office of the Exchange. All 
submissions should refer to File No. SR-CSE-97-10 and should be 
submitted by November 19, 1997.

IV. Commission's Findings and Order Granting Accelerated Approval of 
Proposed Rule Change

    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, with the requirements of Section 6(b)(5).\20\ The 
Commission believes that providing for the exchange-trading on CSE of 
PDRs, in general, and SPDRs and MidCap SPDRs, in particular, will offer 
investors an efficient way of participating in the securities markets. 
Specifically, the Commission believes that the trading on CSE of PDRs, 
in general, and SPDRs and MidCap SPDRs pursuant to unlisted trading 
privileges, in particular, will provide investors with increased 
flexibility in satisfying their investment needs by allowing them to 
purchase and sell a low-cost security replicating the performance of a 
broad portfolio of stocks at negotiated prices throughout the business 
day, and by increasing the availability of SPDRs and MidCap SPDRs as an 
investment tool. The Commission also believes that PDRs will benefit 
investors by allowing them to trade securities based on unit investment 
trusts in secondary market transactions.\21\ Accordingly, as discussed 
below, the proposed rule change is consistent with the requirements of 
Section 6(b)(5) of the Act that Exchange rules facilitate transactions 
in securities while continuing to further investor protection and the 
public interest.\22\
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    \20\ 15 U.S.C. 78f(b)(5).
    \21\ The Commission notes, however, that unlike open-end funds 
where investors have the right to redeem their fund shares on a 
daily basis, investors could only redeem PDRs in creation unit share 
sizes. Nevertheless, PDRs would have the added benefit of liquidity 
from the secondary market and PDR holders, unlike holders of most 
other open-end funds, would be able to dispose of their shares in a 
secondary market transaction.
    \22\ In approving this rule, the Commission notes that it has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. 15 U.S.C. 78c(f).
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    As the Commission noted in the orders approving SPDRs and MidCap 
SPDRs for listing and trading on Amex,\23\ the Commission believes that 
the trading on CSE of a security like PDRs in general, and SPDRs and 
MidCap SPDRs in particular, which replicate the performance of a broad 
portfolio of stocks, could benefit the securities markets by, among 
other things, helping to ameliorate the volatility occasionally 
experienced in these markets. The Commission believes that the creation 
of one or more products where actual portfolios of stocks or 
instruments representing a portfolio of stocks, such as PDRs, can trade 
at a single location in an auction market environment could alter the 
dynamics of program trading, because the availability of such single 
transaction portfolio trading could, in effect, restore the execution 
of program trades to more traditional block trading techniques.\24\
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    \23\ See supra notes 8 and 10.
    \24\ Program trading is defined as index arbitrage or any 
trading strategy involving the related purchase or sale of a 
``basket'' or group of fifteen or more stocks having a total market 
value of $1 million or more.
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    An individual SPDR has a value approximately equal to one-tenth of 
the value of the S&P 500 Index, and an individual MidCap SPDR has a 
value of approximately one-fifth of the value of the S&P MidCap 400 
Index, making them more available and useful to individual retail 
investors desiring to hold a security replicating the performance of a 
broad portfolio of stocks. Accordingly, the Commission believes that 
trading of SPDRs and MidCap SPDRs on CSE will provide retail investors 
with a cost efficient means to make investment decisions based on the 
direction of the market as a whole and may provide market participants 
several advantages over existing methods of effecting program trades 
involving stocks.
    The Commission also believes that PDRs, in general, and SPDRs and 
MidCap SPDRs, in particular, will provide investors with several 
advantages over standard open-end S&P 500 Index and S&P MidCap 400 
Index mutual fund shares. In particular, investors will have the 
ability to trade PDRs continuously throughout the business day in 
secondary market transactions at negotiated prices.\25\ In contrast, 
pursuant to Investment Company Act Rule 22c-1,\26\ holders and 
prospective holders of open-end mutual fund shares are limited 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.\27\ Accordingly, PDRs in general, and SPDRs and MidCap SPDRs 
in particular, will allow investors to (1) respond quickly to changes 
in the market; (2) trade at a known price; (3) engage in hedging 
strategies not currently available to retail investors; and (4) reduce 
transaction costs for trading a portfolio of securities.
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    \25\ Because of potential arbitrage opportunities, the 
Commission believes that PDRs will not trade at a material discount 
or premium in relation to their net asset value. The mere potential 
for arbitrage should keep the market price of a PDR comparable to 
its net asset value, and therefore, arbitrage activity likely will 
be minimal. In addition, the Commission believes the Trust will 
tract the underlying index more closely than an open-end index fund 
because the Trust will accept only in-kind deposits, and, therefore, 
will not incur brokerage expenses in assembling its portfolio. In 
addition, the Trust will redeem in kind, thereby enabling the Trust 
to invest virtually all of its assets in securities comprising the 
underlying index.
    \26\ Investment Company Act Rule 22c-1 generally requires 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 a mutual fund 
generally is computed once daily Monday through Friday as designated 
by the investment company's board of directors. The Commission 
granted SPDRs and MidCap SPDRs an exemption from this provision in 
order to allow them to trade at negotiated prices in the secondary 
market. The Commission notes that CSE would need to apply for a 
similar exemption in the instance that it wishes to list and trade a 
new PDR because the exemptions are specific to SPDRs and MidCap 
SPDRs.
    \27\ Id.
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    Although PDRs in general, and SPDRs and MidCap SPDRs in particular, 
are not leveraged instruments, and, therefore, do not possess any of 
the attributes of stock index options, their prices will still be 
derived and based upon the securities held in their respective Trusts. 
In essence, SPDRs are equity securities that are priced off a portfolio 
of stocks based on the S&P 500 Index and MidCap SPDRs are equity 
securities that are price off a portfolio of stocks based on the S&P 
MidCap 400 Index. Accordingly, the level of risk involved in the 
purchase or sale of a SPDR or MidCap SPDR (or PDR in general) is 
similar to the risk involved in the purchase or sale of traditional 
common stock, with the exception that

[[Page 56216]]

the pricing mechanism for SPDRs and MidCap SPDRs (and PDRs in general) 
is based on a basket of stocks. Nonetheless, the Commission has several 
specific concerns regarding the trading of these securities. In 
particular, PDRs raise disclosure, market impact, and secondary market 
trading issues that must be addressed adequately. As discussed in more 
detail below, and in the Amex Approval Order,\28\ the Commission 
believes CSE adequately addresses these concerns.
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    \28\ See supra note. 8.
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    The Commission believes that the CSE proposal contains several 
provisions that will ensure that investors are adequately apprised of 
the terms, characteristics, and risks of trading PDRs. As noted above 
the proposal contains four aspects addressing disclosure concerns. 
First, CSE members must provide their customers trading PDRs with a 
written explanation of any special characteristics and risks attendant 
to trading such PDR securities (such as SPDRs or MidCap SPDRs), in a 
form approved by CSE. As discussed above, CSE's filing states that 
SPDRs and MidCap SPDRs product descriptions should be obtained from 
Amex.\29\ The Commission believes that it is reasonable under the Act 
to allow CSE to require its members to obtain the product description 
for SPDRs and MidCap SPDRs from Amex.\30\ Amex might decide to impose a 
reasonable charge for this service.\31\
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    \29\ The Commission notes that, in the context of a proposed 
rule change by CHX to add rules for listing and trading of PDRs in 
general, and to trade SPDRs and MidCap SPDRs pursuant to UTP, Amex 
commented on CHX's proposed method regarding the delivery of the 
SPDR and MidCap SPDR product descriptions, and reserved the right to 
charge CHX members for supplying the product description should the 
task become burdensome to Amex. Amex did not object to the 
underlying policy of CHX members obtaining the product description 
from Amex. See CHX Approval Order, supra note 11.
    \30\ The Commission notes that the exemptions granted by the 
Commission under the Investment Company Act that permit the 
secondary market trading of SPDRs and MidCap SPDRs are specifically 
conditioned upon the customer disclosure requirements described 
above. Accordingly, CSE rules adequately ensure its members must 
delivery the current product description to all investors in SPDRs 
and MidCap SPDRs.
    \31\ The Commission notes that Amex would need to file a 
proposed rule change under Section 19(b) of the Act in the event it 
decides to charge a fee for supplying the SPDR or MidCap SPDR 
product descriptions. The Commission notes that reasonable fees 
would have to be imposed on the member firms rather than the 
customers entitled to receive the prospectus or the product 
description.
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    Second, members and member organizations must include this written 
product description with any sales material relating to the series of 
PDRs that is provided to customers or the public. Third, any other 
written materials provided by a member or member organization to 
customers or the public referencing PDRs as an investment vehicle must 
include a statement, in a form specified by CSE, that a circular and 
prospectus are available from a broker upon request. Fourth, a member 
or member organization carrying an omnibus account for a non-member 
broker-dealer is required to inform such non-member that execution of 
an order to purchase a series of PDRs for such omnibus account will be 
deemed to constitute agreement by the non-member to make the written 
product description available to its customers on the same terms as 
member firms. Accordingly, the Commission believes that investors in 
PDR securities, in general, and SPDRs and MidCap SPDRs, in particular, 
will be provided with adequate disclosure of the unique characteristics 
of the PDR instruments and other relevant information pertaining to the 
instruments. Finally, CSE's Rule 3.7, Recommendations to Customers, 
will apply to the trading of PDRs, including transactions in SPDRs and 
MidCap SPDRs.\32\
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    \32\ See supra note. 4.
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    The Commission believes CSE has adequately addressed the potential 
market impact concerns raised by the proposal. First, CSE's proposal 
permits listing and trading of specific PDRs only after review by the 
Commission. Second, CSE has developed policies regarding trading halts 
in PDRs. Specifically, the Exchange would halt PDR trading if the 
circuit breaker parameters under CSE Rule 12.11 were reached.\33\ In 
addition, in deciding whether to halt trading or conduct a delayed 
opening in PDRs, in general, and SPDRs and MidCap SPDRs, in particular, 
CSE represents that it will be guided by, but not necessarily bound to, 
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.
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    \33\ In addition, for PDRs tied to an index, the triggering of 
futures price limits for the S&P 500 Index, S&P 100 Index, or MMI 
futures contracts will not, in itself, result in a halt in PDR 
trading or a delayed opening. However, the Exchange could consider 
such an event, along with other factors, such as a halt in trading 
in OEX, SPX, or MMI options, in deciding whether to halt trading in 
PDRs.
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    The Commission believes that the trading of PDRs in general on CSE 
should not adversely impact U.S. securities markets. As to the trading 
of SPDRs and MidCap SPDR pursuant to UTP, the Commission notes that the 
corpus of the SPDR Trust is a portfolio of stocks replicating the S&P 
500 Index, a broad-based capitalization-weighted index consisting of 
500 of the most actively-traded and liquid stocks in the U.S. The 
corpus of the MidCap SPDR Trust is a portfolio of stocks replicating 
the S&P MidCap 400 Index, also a broad-based, capitalization-weighted 
index consisting of 400 actively traded and liquid U.S. stocks. In 
fact, as described above, the Commission believes SPDRs and MidCap 
SPDRs may provide substantial benefits to the marketplace and 
investors, including, among others, enhancing the stability of the 
markets for individual stocks.\34\ Accordingly, the Commission believes 
that SPDRs and MidCap SPDRs do not contain features that will make them 
likely to impact adversely the U.S. securities markets, and that the 
addition of their trading on CSE pursuant to UTP could produce added 
benefits to investors through the increased competition between other 
market centers trading the product.\35\
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    \34\ Even though PDR transactions may serve as substitutes for 
transactions in the cash market, and possibly make the order flow in 
individual stocks smaller than would otherwise be the case, the 
Commission acknowledges that during turbulent market conditions the 
ability of large institutions to redeem or create PDRs could 
conceivably have an impact on price levels in the cash market. In 
particular, if a PDR is redeemed, the resulting long stock position 
could be sold into the market, thereby depressing stock prices 
further. The Commission notes, however, that the redemption or 
creation of PDRs likely will not exacerbate a price movement because 
PDRs will be subject to the equity margin requirements of 50% and 
PDRs are non-leveraged instruments. In addition, as noted above, 
during turbulent market conditions, the Commission believes PDRs and 
SPDRS and MidCap SPDRs, in particular, will serve as a vehicle to 
accommodate and ``bundle'' order flow that otherwise would flow to 
the cash market, thereby allowing such order flow to be handled more 
efficiently and effectively. Accordingly, although PDRs and SPDRs 
and MidCap SPDRs could, in certain circumstances, have an impact on 
the cash market, on balance we believe the product will be 
beneficial to the marketplace and can actually aid in maintaining 
orderly markets.
    \35\ As mentioned earlier, CSE has represented that it will not 
begin to trade SPDRs and MidCap SPDRs until they are eligible to 
trade over ITS. The Commission also reiterates its belief, expressed 
in the CHX Approval Order, that Amex's statements in its comment 
letter regarding the trading of SPDRs and MidCap SPDRs through ITS 
should be resolved, as the Amex letter suggests, through the proper 
ITS committee, not through Commission action on the CHX (or this) 
proposal. The Commission does not want to suggest that Amex's 
concerns are unfounded, but only that the proper venue for their 
resolution is the proper ITS committee, not the Rule 19b-4 process. 
See supra note 11.

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[[Page 56217]]

    Finally, the Commission notes that CSE has submitted surveillance 
procedures for the trading of PDRs, specifically SPDRs and MidCap 
SPDRs, and believes that those procedures, which incorporate and rely 
upon existing CSE surveillance procedures governing equities, are 
adequate under the Act.
    The Commission finds that CSE's proposal contains adequate rules 
and procedures to govern the trading of PDR securities, including 
trading SPDRs and MidCap SPDRs pursuant to UTP. Specifically, PDRs are 
equity securities that will be subject to the full panoply of CSE rules 
governing the trading of equity securities on CSE, including, among 
others, rules governing the priority, parity and precedence of orders 
and the responsibilities of specialists. In addition, CSE has developed 
specific listing and delisting criteria for PDRs that will help to 
ensure that the markets for PDRs will be deep and liquid. As noted 
above, CSE's proposal provides for trading halt procedures governing 
PDRs. Finally, the Commission notes that CSE has stated that Rule 3.7, 
Recommendations to Customers, will apply to the trading of PDRs in 
general, and SPDRs and MidCap SPDRs, in particular.
    The Commission finds good cause for approving the proposed rule 
change prior the thirtieth day after the date of publication of notice 
of filing thereof in the Federal Register. The Commission believes that 
accelerated approval of the proposal is appropriate because it is very 
similar to CHX's previously approved proposal covering the listing and 
trading of PDRs in general, and SPDRs and MidCap SPDRs, in 
particular.\36\ As such, the Commission believes that the proposed rule 
change does not raise any new regulatory concerns or issues.
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    \36\ See supra note 11.
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    It is therefore ordered, pursuant to Section 19(b)(2) \37\ that the 
proposed rule change is hereby approved on an accelerated basis.

    \37\ 15 U.S.C. 78s(b)(2).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\38\
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    \38\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-28572 Filed 10-28-97; 8:45 am]
BILLING CODE 8010--01-M