[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