[Federal Register Volume 63, Number 10 (Thursday, January 15, 1998)]
[Notices]
[Pages 2438-2443]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-1041]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-39525; File No. SR-Amex-97-29]


Self-Regulatory Organizations; American Stock Exchange, Inc.; 
Order Granting Approval and Notice of Filing and Order Granting 
Accelerated Approval of Amendment No. 1 to the Proposed Rule Change 
Relating to Listing and Trading of DIAMONDSSM Trust Units

January 8, 1998.

I. Introduction

    On August 11, 1997, the American Stock Exchange, Inc. (``Amex'' or 
``Exchange'') submitted to the Securities and Exchange Commission 
(``Commission''), 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 list and trade under Amex Rules 1000 et seq. 
DIAMONDSSM, units of beneficial interest in the DIAMONDS 
Trust. In addition, the Exchange proposes to adopt Amex Rule 1005, 
``Down Jones Indexes,'' relating to license and warranty issues.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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    Notice of the proposed rule change, together with the substance of 
the proposal, was published for comment in Securities Exchange Act 
Release No. 39143 (September 29, 1997), 62 FR 51917 (October 3, 1997). 
No comments were received on the proposal. The Exchange filed Amendment 
No. 1 to the proposed rule filing on December 3, 1997.\3\ This order 
approves the proposed rule filing as amended.
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    \3\ Amendment No. 1 discusses the composition of the trust 
securities, the basis for the mandatory termination date of the 
Trust, applicable trading halt procedures, and applicable equity 
rules. See letter from Michael Cavalier, Associate General Counsel, 
Legal and Regulatory Policy, Amex, to Sharon Lawson, Senior Special 
Counsel, Market Regulation, Commission, dated December 3, 1997.
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II. Description

    On December 11, 1992,\4\ the Commission approved Amex Rules 1000 et 
seq. to accommodate trading on the Exchange of Portfolio Depositary 
Receipts (``PDRsSM''), securities which represent interests 
in a unit investment trust (``Trust'') operating on an open-end basis 
and that hold a portfolio of securities. The Trust sponsor 
(``Sponsor'') for each series of PDRs is PDR Services Corporation, a 
wholly-owned subsidiary of Amex.\5\ Each Trust is intended to provide 
investors with an instrument that closely tracks the underlying 
securities portfolio, that trades like a share of common stock, and 
that pays to PDR holders periodic dividends proportionate to those paid 
with respect to the underlying portfolio of securities, less certain 
expenses, as described in the applicable Trust prospectus. The first 
Trust to be formed in connection with the issuance of PDRs was based on 
the Standard & Poor's 500 Index (``S&P 500 Index''), known as Standard 
& Poor's Depositary Receipts (``SPDRs''), which have been 
trading on the Exchange since January 29, 1993.\6\ In 1995, the 
Commission approved Amex's listing and trading of PDRs based on the 
Standard & Poor's MidCap 400 IndexTM (``MidCap SPDRs'').\7\
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    \4\ See Securities Exchange Act Release No. 31591 (December 11, 
1992), 57 FR 60253 (December 18, 1992) (``SPDRs Order'').
    \5\ ``PDRs'' is a service mark of PDR Services Corp.
    \6\ See SPDRs Order, supra note 4.
    \7\ See Securities Exchange Act Release No. 35534 (March 24, 
1995), 60 FR 16686 (March 31, 1995). ``Standard & Poor's 500,'' 
``Standard & Poor's MidCap 400 Index,'' ``Standard & Poor's 
Depositary Receipts,'' ``SPDRs,'' ``Standard 
& Poor's MidCap 400 Depositary Receipts'' and ``MidCap SPDRs'' are 
trademarks of The McGraw-Hill Companies, Inc. and are being used by 
the Exchange and the Sponsor under license among Standard & Poor's, 
a division of The McGraw-Hill Companies, Inc., the Exchange and the 
Sponsor. ``SPDRs'' and ``MidCap SPDRs'' are not sponsored, endorsed, 
sold, or promoted by S&P, and S&P makes no representation regarding 
the advisability of investing in SPDRs or MidCap SPDRs.
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    The Exchange now proposes to list and trade under Rules 1000 et 
seq. DIAMONDSSM, units of beneficial interest in the 
DIAMONDS Trust.\8\ The Sponsor will enter into a trust agreement with 
the Trustee, State Street Bank and Trust Company, in accordance with 
Section 26 of the Investment Company Act of 1940 (``1940 Act''). A 
distributor will act as underwriter of DIAMONDS on an agency basis. All 
orders to create DIAMONDS in Creation Unit size aggregations must be 
placed with the distributor, and it will be the responsibility of the 
distributor to transmit such orders to the Trustee. The distributor is 
a registered broker-dealer, and a member of the National Association of 
Securities Dealers, Inc.
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    \8\ ``Dow Jones Industrial AverageSM,'' 
``DJIASM,'' ``Dow JonesSM'' and ``DIAMONDS'' 
are each trademarks and service marks of Down Jones & Company, Inc. 
(``Dow Jones'') and have been licensed for use for certain purposes 
by the Exchange and the Sponsor. DIAMONDS are not sponsored, 
endorsed, sold or promoted by Dow Jones, and Dow Jones makes no 
representation regarding the advisability of investing in such 
product.
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The Dow Jones Industrial Average \9\

    The DJIA  is a price-weighted stock index consisting of 30 stocks 
traded on the New York Stock Exchange (``NYSE'').\10\ The DJIA is 
called an ``average'' because originally it was calculated by adding up 
the component stock prices and then dividing by the number of stocks. 
The method remains the same today, but the divisor (the number that is 
divided into the total of the stock prices) has been increased to eight 
significant digits to minimize distortions due to rounding. The DJIA 
divisor is adjusted due to corporate actions that change the price of 
any of its component shares. The most frequent reason for such an 
adjustment is a stock split. For example, suppose a company in the DJIA 
issues one new share for each share outstanding. After this two-for-one 
``split,'' each share of stock is worth half what it was immediately 
before, other things being equal. But without an adjustment in the 
divisor, this split would produce a distortion in the DJIA. An 
adjustment must be made to compensate so that the ``average'' will 
remain unchanged. At Dow Jones, this adjustment is handled by changing 
the divisor.\11\
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    \9\ The description of the DJIA included herein is based on 
materials prepared by Dow Jones and submitted by Amex in its 
proposed rule filing.
    \10\ A price-weighted index is an index in which component 
stocks are weighted according to their price.
    \11\ Currently, the divisor is recalculated after the close of 
business on the day prior to the occurrence of the split. The 
formula used to calculate divisor adjustments is: New 
Divisor=Current Divisor x Adjusted Sum/Unadjusted of Prices Sum of 
Prices.

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[[Page 2439]]

    Changes in the composition of the DJIA are made entirely by the 
editors of The Wall Street Journal without consultation with the 
companies, the respective stock exchange, or any official agency. 
Additions or deletions of components may be made to achieve better 
representation of the broad market and of American industry.\12\
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    \12\ For further details on how the DJIA is maintained, see the 
Commission's order approving the trading of options on the DJIA 
(File No. CBOE-97-26) in Securities Exchange Act Release No. 39011 
(September 3, 1997), 62 FR 47841 (September 11, 1997).
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The DIAMONDS Trust

    To be eligible to place orders to create DIAMONDS as described 
below, an entity or person must either 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 DIAMONDS, the 
distributor will instruct the Trustee to initiate the book-entry 
movement of the appropriate number of DIAMONDS to the account of the 
entity placing the order. DIAMONDS will be registered in book entry 
only, which records will be kept by 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 substantially 
similar in composition to the component shares of the underlying index 
or portfolio;\13\ (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 specified 
adjustments;\14\ and (3) a cash payment or adjustment calculated by the 
Trustee to enable the securities portfolio portion to equal the net 
asset value of the Trust (the ``Balancing Amount''). The Balancing 
Amount and the Dividend Equivalent Payment are referred to as the 
``Cash Component'' in the case of a creation. The securities and cash 
accepted by the Trustee are referred to, in the aggregate, as a 
``Portfolio Deposit.''
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    \13\ The securities included in the Portfolio Deposit generally 
will include all of the component securities of the DJIA. The Trust 
will not hold an optimized portfolio such as is the case with World 
Equity Benchmark Shares (``WEBS''), but will hold shares of all of 
the securities included in the DJIA. The Trustee will hold, as 
nearly as practicable, an equal number of shares of each of the DJIA 
securities. See Amendment No. 1, supra note 3.
    \14\ See ``Distributions'' infra.
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    The mandatory termination date of the Trust will be the first to 
occur of (i) January 30, 2122 or (ii) the date 20 years after the death 
of the last survivor of eleven persons named in the trust agreement 
between the Trust Sponsor and the Trustee.\15\
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    \15\ Amex state that the basis of the mandatory termination date 
of the Trust is to comply with the common law rule against 
perpetuities which provides, in brief, that no estate is valid 
unless it must vest no later than twenty-one years after lives in 
being at the creation if the estate, and that any future or present 
estate is void in its creation if it suspends the absolute power of 
alienation longer than this period. See Amendment No. 1, supra note 
3.
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Issuance

    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 DIAMONDS, which aggregate number is 
referred to as a ``Creation Unit.'' A Creation Unit for DIAMONDS will 
be made up of 50,000 DIAMONDS. Individual DIAMONDS can then be traded 
in the secondary market like other equity securities.\16\ The DIAMONDS 
Trust has been structured to provide for the initial issuance of 
DIAMONDS at a per unit price which would approximate 1/100th of the 
value of the DJIA.\17\
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    \16\ The DIAMONDS Trust, Series I, filed with the Commission's 
Division of Investment Management an application seeking, among 
other things, an order: (1) permitting secondary market transactions 
in DIAMONDS at negotiated prices, rather than at a current public 
offering price described in the prospectus as required by Section 
22(d) of the 1940 Act and Rule 22c-1; and (2) permitting the sale of 
DIAMONDS to purchasers in the secondary market unaccompanied by a 
prospectus, when prospectus delivery is not required by Section 4(3) 
of the Securities Act of 1933 but may be required according to 
Section 24(d) of the 1940 Act for redeemable securities issued by a 
Unit Investment Trust. The Commission granted these exemptions on 
December 30, 1997. The exemptions permit individual DIAMONDS to be 
traded in secondary market transactions similar to a closed-end 
investment company. See Investment Company Act Release No. 22979 
(December 30, 1997).
    \17\ As of August 7, 1997 it is estimated that the value of such 
an individual DIAMONDS Unit would be approximately $81.88.
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    It is expected that the Trustee or Sponsor will make available (a) 
on a daily basis a list of the names and required number of shares for 
each of the securities in the current Portfolio Deposit; (b) on a 
minute-by-minute basis throughout the day, a number representing the 
value (on a per DIAMONDS Unit basis) of the securities portion of a 
Portfolio Deposit in effect on such day, plus accumulated dividends 
less expenses through the previous day's close, and (c) on a daily 
basis, the accumulated dividends, less expenses, per outstanding 
DIAMONDS Unit.
    Transactions in DIAMONDS may be effected on the Exchange until 4:15 
p.m. New York time each business day. The minimum fractional change for 
DIAMONDS shall be \1/64\ of $1.00.

Redemption

    DIAMONDS in Creation Unit size aggregations generally\18\ will be 
redeemable in kind by tendering them to the Trustee. While holders may 
sell DIAMONDS in the secondary market at any time, they must accumulate 
at least 50,000 (or multiples thereof) to redeem through the Trust. 
DIAMONDS will remain outstanding until redeemed or until the 
termination of the Trust. Creation Units generally will be redeemable 
on any business day in exchange for a portfolio of the securities held 
by the Trust identical in composition to the securities portion of a 
Portfolio Deposit in effect on the date request is made for redemption, 
together with a ``Cash Redemption Payment'' (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 generally will be number of shares 
of each of the component stocks in a Portfolio Deposit on the day of 
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.
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    \18\ The Trustee shall have the discretion to deliver the cash 
equivalent value of an Index security or Index securities, based on 
the market value of such Index security or securities as of the 
Evaluation Time on the date such redemption is deemed received by 
the Trustee, as a part of the Cash Redemption Payment in lieu of 
delivering the Index security or securities if: (1) the Trustee 
determines in its discretion that an Index security is likely to be 
unavailable or available in insufficient quantity for delivery by 
the Trust upon redemption; or (2) a redeeming investor requests 
redemption in cash with respect to one or more Index securities, if, 
for example, the redeemer is restricted by regulation or otherwise 
from investing or engaging in a transaction in one or more Index 
securities. See Draft Preliminary Prospectus for DIAMONDS Trust, 
Series 1, at 36.
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Distributions

    The DIAMONDS Trust will pay monthly dividends. The first ex-
dividend date for DIAMONDS will be the third Friday of the third full 
month following the commencement date of

[[Page 2440]]

the Trust unless such date is not a Business Day, in which case the ex-
dividend date will be the immediately preceding Business Day (the ``ex-
dividend date''). Holders of DIAMONDS as reflected on the records of 
the DTC and the DTC Participants on the second business day following 
the ex-dividend date will be entitled to receive an amount representing 
dividends accumulated through the monthly dividend period which ends on 
the business day preceding such ex-dividend date net of fees and 
expenses accrued daily for such period. The payment of dividends will 
be made on the first business day coincident with or following the 
Monday preceding the third Friday in the calendar month following the 
ex-dividend date (the ``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 
monthly dividend period. Dividend payments will be made through DTC and 
its participants to all such holders with funds received from the 
Trustee. The DIAMONDS Trust intends to make the DTC Dividend 
Reinvestment Service available for use by DIAMONDS holders through DTC 
Participant brokers for reinvestment of their cash proceeds. An 
interested investor would have to consult his or her broker to 
ascertain the availability of dividend reinvestment through such 
broker.

Criteria for Initial and Continued Listing

    Because of the open-end nature of the Trust upon which a series of 
PDRs is based, the Exchange believes it is necessary to maintain 
appropriate flexibility in connection with listing a specific Trust. In 
connection with initial listing, the Exchange will establish a minimum 
number of PDRs required to be outstanding at the time of commencement 
of Exchange trading. For DIAMONDS, a minimum of 150,000 DIAMONDS (i.e., 
three Creation Units of 50,000 DIAMONDS each), will be required to be 
outstanding when trading begins.
    The DIAMONDS Trust will be subject to the initial and continued 
listing criteria of Rule 1002(b). Rule 1002(b) provides that, following 
twelve months from 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 shall occur or condition exists which, in 
the opinion of the Exchange, makes further dealings on the Exchange 
inadvisable.
    A Trust shall terminate upon removal from Exchange listing and its 
PDRs 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, following 
notice to PDR holders, shall have discretion to direct that the Trust 
be terminated if the value of securities in such Trust falls below a 
specified amount.\19\ The DIAMONDS Trust may also terminate if the 
license agreement with Dow Jones terminates.
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    \19\ With respect to the DIAMONDS Trust, the Sponsor has the 
discretionary right to terminate the Trust if the value of Trust 
Securities (as defined in the Trust registration statement) falls 
below $150,000,000 at any time after six months following, and prior 
to three years following, inception of the Trust. Following such 
time, the Sponsor has the discretionary right to terminate the Trust 
if Trust Securities fall below $350,000,000 in value, adjusted 
annually for inflation.
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Trading Halts

    Prior to commencement of trading in DIAMONDS, the Exchange will 
issue a circular to members 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 further in Rule 918C(b) 
in exercising its discretion to halt or suspend trading. 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;\20\ or 
whether other unusual conditions or circumstances detrimental to the 
maintenance of a fair and orderly market are present.\21\
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    \20\ Amex Rule 918C(b)(3).
    \22\ Amex Rule 918C(b)(4).
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    Further, DIAMONDS trading will be halted if the circuit breaker 
parameters of Rule 117 have been reached. The triggering of futures 
price limits for the DJIA, S&P 500, S&P 100 or Major Market Index 
(``MMI'') futures contracts will not, in itself, require a halt in 
DIAMONDS trading or a delayed opening. However, such an event could be 
considered by the Exchange along with other factors, such as a halt in 
options on the DJIA (``DJX''), S&P 100 (``OEX''), S&P 500 (``SPX''), or 
MMI (``XMI''), in deciding whether to halt trading in DIAMONDS or other 
index-based derivative securities.\22\
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    \22\ See Amendment No. 1, supra note 3.
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Terms and Characteristics

    Under Amex Rule 1000, Commentary .01, Amex members and member 
organizations are required to provide to all purchasers of DIAMONDS a 
written description of the terms and characteristics of such 
securities, in a form prepared by the Exchange, not later than the time 
a confirmation of the first transaction in each series is delivered to 
such purchaser. The Exchange also requires that such description be 
included with any sales material on DIAMONDS that is provided to 
customers or the public. In addition, the Exchange requires that 
members and member organizations provide customers the prospectus for 
DIAMONDS upon request.
    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 DIAMONDS for such omnibus account 
will be deemed to constitute 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.
    Prior to commencement of trading of DIAMONDS, the Exchange will 
distribute to Exchange members and member organizations an Information 
Circular calling attention to these requirements as well as the 
characteristics of the DIAMONDS Trust and to applicable Exchange rules.

Proposed Rule 1005

    The Exchange proposes to adopt Rule 1005 (``Dow Jones Indexes'') 
stating that Dow Jones has licensed the Exchange to use certain Dow 
Jones indexes for purposes of the listing and trading of particular 
series of Portfolio Depositary Receipts on the Exchange, and stating, 
among other things, that Dow Jones and the Exchange make no warranty, 
express or implied, as to results to be obtained by any person or 
entity from the use of the Indexes or any data included therein.

III. Discussion

    The Commission finds that the proposed rule changes are consistent 
with the requirements of the Act and the

[[Page 2441]]

rules and regulations thereunder applicable to a national securities 
exchange, and, in particular, with the requirements of Section 
6(b)(5).\23\ The Commission believes that providing for the exchange-
trading of DIAMONDS will offer investors an efficient way of 
participating in the securities markets. Specifically the Commission 
believes that the trading of DIAMONDS 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.\24\ The Commission also believes that PDRs 
in general, and DIAMONDS in particular, will benefit investors by 
allowing them to trade securities based on unit investment trusts in 
secondary market transactions.\25\ Accordingly, as discussed below, the 
proposed rule change is consistent with the requirements of Section 
6(b)(5) that Exchange rules facilitate transactions in securities while 
continuing to further investor protection and the public interest.\26\
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    \23\ 15 U.S.C. 78f(b)(5).
    \24\ Pursuant to Section 6(b)(5) of the Act, the Commission must 
predicate approval of any new securities product upon a finding that 
the introduction of such product is in the public interest. Such a 
finding would be difficult with respect to a product that served no 
hedging or other economic function, because any benefits that might 
be derived by market participants likely would be outweighed by the 
potential for manipulation, diminished public confidence in the 
integrity of the markets, and other valid regulatory concerns.
    \25\ 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.
    \26\ 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 previous orders approving other PDR 
products (SPDRs and MidCap SPDRs) for listing and trading on Amex,\27\ 
the Commission believes that the trading of a security like PDRs in 
general, and DIAMONDS 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 DIAMONDS, 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.\28\
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    \27\ See supra notes 4 and 7.
    \28\ 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 DIAMOND has a value approximately equal to one-one-
hundredth of the value of the DJIA, making it 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 DIAMONDS will provide retail investors with a 
cost efficient means to make investment decisions based on the 
direction of the market and 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 DIAMONDS, 
in particular, will provide investors with several advantages over 
standard open-end mutual fund shares that track a broad-based portfolio 
of stocks such as the DJIA. In particular, investors will have the 
ability to trade DIAMONDS continuously throughout the business day in 
secondary market transactions at negotiated prices.\29\ In contrast, 
pursuant to Investment Company Act Rule 22c-1,\30\ 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.\31\ Accordingly, PDRs in general, and DIAMONDS 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 
transactions costs for trading a portfolio of securities.
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    \29\ Because of potential arbitrage opportunities, the 
Commission believes that DIAMONDS 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 DIAMOND 
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 generally redeem only in 
kind, thereby enabling the Trust to invest virtually all of its 
assets in securities comprising the underlying index.
    \30\ 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 DIAMONDS an exemption from this provision in order to allow 
them to trade at negotiated prices in the secondary market. See 
supra note 16.
    \31\ Id.
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    Although PDRs in general, and DIAMONDS 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, DIAMONDS are equity securities that are priced off a portfolio 
of stocks based on the DJIA. Accordingly, the level of risk involved in 
the purchase or sale of DIAMONDS (or a PDR in general) is similar to 
the risk involved in the purchase or sale of traditional common stock, 
with the exception that the pricing mechanism for DIAMONDS (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, DIAMONDS raise disclosure, market impact, 
and secondary market trading issues that must be addressed adequately. 
As discussed in more detail below, the Commission believes Amex 
adequately addresses these concerns.
    The Commission believes that the proposed rule filing contains 
several provisions that will ensure that investors are adequately 
apprised of the terms, characteristics, and risks of trading DIAMONDS. 
As noted above, the proposal contains four aspects addressing 
disclosure concerns. First, pursuant to Amex Rule 1000(a), Commentary 
.01, Amex members must provide their customers trading DIAMONDS with a 
written explanation of any special characteristics and risks attendant 
to trading such PDR securities (such as DIAMONDS), a in form prepared 
by Amex. As discussed above, members can obtain DIAMONDS product 
descriptions for distribution to customers from Amex. Second, members 
and member organizations must include this written product description 
with any sales material relating to the series of DIAMONDS 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 DIAMONDS as an

[[Page 2442]]

investment vehicle must include a statement, in a form specified by 
Amex, 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 DIAMONDS 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 
DIAMONDS, 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, under Amex's proposal there will be no special account 
opening or customer suitability rules applicable to the trading of 
DIAMONDS.\32\ Nevertheless, pursuant to Amex Rule 1000(a), Amex equity 
rules governing account opening and suitability will apply. 
Specifically, these provisions provide that members shall use due 
diligence to learn the essential facts relative to every customer, 
order or account opened, and, prior to or promptly after the completion 
of a transaction for such account, specifically approve the opening of 
the account.\33\
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    \32\ This reflects the fact that PDRs are equity products and 
not an options product, and, therefore, do not necessitate the 
imposition of options-like rules.
    \33\ See Amex Rule 411.
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    The Commission believes Amex has adequately addressed the potential 
market impact concerns raised by the proposal. First, Amex's proposal 
permits listing and trading of specific PDRs only after review by the 
Commission. Second, Amex has developed policies regarding trading halts 
in PDRs. Specifically, the Exchange would halt PDR trading in DIAMONDS 
if the circuit breaker parameters under Amex Rule 117 were reached.\34\ 
In addition, in deciding whether to halt trading or conduct a delayed 
opening in PDRs, in general, and DIAMONDS, in particular, Amex 
represents that it will be guided by, but not necessarily bound to, 
relevant stock index option trading rules. These rules would permit 
Amex, when determining whether to halt DIAMONDS trading, to consider 
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.\35\
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    \34\ 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.
    \35\ See Amex Rule 918C(b).
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    The Commission believes that the trading of PDRs is general, and 
DIAMONDS in particular, on Amex should not adversely impact U.S. 
securities markets. As to the trading of DIAMONDS, the Commission notes 
that the corpus of the DIAMONDS Trust is a portfolio of stocks 
replicating the DJIA, a broad-based price-weighted index consisting of 
30 actively-traded and liquid stocks. In fact, as described above, the 
Commission believes DIAMONDS may provide substantial benefits to the 
marketplace and investors, including, among others, enhancing the 
stability of the markets for individual stocks.\36\ Accordingly, the 
Commission believes that DIAMONDS do not contain features that will 
make them likely to impact adversely the U.S. securities markets.
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    \36\ 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, 
including SPDRs, MidCap SPDRs and DIAMONDS, 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 DIAMONDS, like any other PDR, 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.
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    Finally, the Commission notes that Amex has submitted surveillance 
procedures for the trading of DIAMONDS and believes that those 
procedures, which incorporate and rely upon existing Amex surveillance 
procedures governing equities, are adequate under the Act.
    The Commission finds that Amex's proposal contains adequate rules 
and procedures to govern the trading of DIAMONDS. Specifically, 
DIAMONDS, like other listed PDRs, are equity securities that will be 
subject to the full panoply of Amex rules governing the trading of 
equity securities on Amex, including, among others, rules governing the 
priority, parity and precedence of orders and the responsibilities of 
specialists. In addition, Amex has developed specific listing and 
delisting criteria for PDRs that are applicable to DIAMONDS that will 
help to ensure that the markets for DIAMONDS will be deep and liquid. 
As noted above, Amex's proposal provides for trading halt procedures 
governing DIAMONDS. Finally, the Commission notes that Amex's equity 
rules governing account opening and suitability will apply to the 
trading of DIAMONDS.
    The Commission finds good cause to approve Amendment No. 1 to the 
proposed rule change prior to the thirtieth day after the date of 
publication of notice of filing thereof in the Federal Register. 
Specifically, Amendment No. 1 strengthens the proposed rule change by 
clarifying the nature of composition of the Trust, the reasoning behind 
the trust term, the trading halt procedures, and the applicable equity 
trading rules. In addition, the proposed rule change was noticed for 
the full statutory period and no comment letters were received. 
Finally, amendment No. 1 does not raise any new regulatory issues. 
Accordingly, the Commission believes that there is good cause, 
consistent with Section 6(b)(5) of the Act, to approve Amendment No. 1 
to the proposal on an accelerated basis.
    Interested persons are invited to submit written data, views, and 
arguments concerning Amendment No. 1 to the rule proposal. 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 also will be available for 
inspection and copying at the principal office of the Exchange. All 
submissions should refer to File No.

[[Page 2443]]

SR-Amex-97-29 and should be submitted by February 5, 1998.

IV. Conclusion

    It is Therefore Ordered, pursuant to Section 19(b)(2) of the 
Act,\37\ that the proposed rule change (SR-Amex-97-29), as amended, is 
approve.

    \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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Jonathan G. Katz,
Secretary.
[FR Doc. 98-1041 Filed 1-14-98; 8:45 am]
BILLING CODE 8010-01-M