[Federal Register Volume 63, Number 212 (Tuesday, November 3, 1998)]
[Notices]
[Pages 59354-59356]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-29338]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-40603; International Series Release No. 1165; File No. 
SR-PCX-98-29]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Pacific Exchange, Inc. Relating to the Listing and 
Trading of Investment Company Units, Including World Equity Benchmark 
Shares (``WEBS'')

October 26, 1998.
    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 June 18, 1998, the Pacific Exchange, Inc. (``Exchange'' or ``PCX'') 
filed with the Securities and Exchange Commission (``Commission'') the 
proposed rule change as described in Items I, II and III below, which 
Items have been prepared by the Exchange. The Commission is publishing 
this notice to solicit comments on the proposed rule change from 
interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The Exchange seeks to adopt new rules to accommodate the trading, 
whether by listing or pursuant to unlisted trading privileges, of 
Investment Company Units (``Units''), including World Equity Benchmark 
Shares (``WEBS'').
    The text of the proposed rule change is available at the Office of 
the Secretary, the Exchange, 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 Exchange included statements 
concerning the purpose of, and basis for, the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The Exchange has prepared summaries, set forth in 
sections A, B, and C below, of the most significant aspects of such 
statements.

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

1. Purpose
    The Exchange seeks to adopt new rules to accommodate the trading, 
whether by listing or pursuant to unlisted trading privileges, of 
Units. WEBS are among the Units which the Exchange may seek to 
trade.\3\ WEBS are structured as shares of seventeen separate series 
(``Index Series''), each of which invests primarily in equity 
securities traded in a designated foreign market in an effort to track 
the performance of a specified foreign equity market index. The 
investment objective of each of the initial seventeen Index Series is 
to provide investment results that correspond generally to the price 
and yield performance of publicly traded securities in the aggregate in 
particular markets, as represented by a particular foreign equity 
securities index compiled by Morgan Stanley Capital International 
(``MSCI'').
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    \3\ The Commission notes that the Exchange intends to clarify 
whether: (i) The Exchange seeks solely to establish rules to 
accommodate the trading of Units, or (ii) the Exchange, in addition 
to establishing such rules, seeks to trade WEBS pursuant to unlisted 
trading privileges upon approval of the filing. This information 
will be reflected in any final approval order.
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    The Exchange notes that the Commission previously approved proposed 
rule changes submitted by the American Stock Exchange (``Amex'') and 
the Chicago Stock Exchange (``CHX'') to list and/or trade WEBS.\4\
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    \4\ See Securities Exchange Act Release Nos. 36947 (Mar. 8, 
1996), 61 FR 10606 (Mar. 14, 1996) (approval of the Amex's request 
to list and trade Index Fund Shares, including WEBS); and 39117 
(Sept. 22, 1997), 62 FR 50973 (Sept. 29, 1997) (approval of the 
CHX's request to trade WEBS pursuant to unlisted trading 
privileges).
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    a. Background & description. WEBS are issued by Foreign Fund, Inc., 
(``Fund'') and are based on seventeen MSCI Indices (collectively ``MSCI 
Indices,'' individually ``MSCI Index''). The countries whose exchange 
markets are represented by the MSCI Indices are: Australia, Austria, 
Belgium, Canada, France, Germany, Hong Kong, Italy, Japan, Malaysia, 
Mexico, Netherlands, Singapore, Spain, Sweden, Switzerland, and the 
United Kingdom.
    The investment objective of each WEBS series is to seek to provide 
investment results that generally correspond to the price and yield 
performance of public securities traded in the aggregate in particular 
foreign markets, as represented by specific MSCI Indices. Each WEBS 
series will use a ``passive'' or indexing investment approach which 
attempts to

[[Page 59355]]

approximate the investment performance of its benchmark index through 
quantitative analytical procedures.
    A WEBS series normally will invest at least 95% of its total assets 
in stocks that are represented in the relevant MSCI Index and will at 
all times invest at least 90% of its total assets in such stocks. A 
WEBS series will not hold all of the issues that comprise the subject 
MSCI Index, but will attempt to hold a representative sample of the 
securities in the MSCI Index in a technique known as ``portfolio 
sampling.''
    The Fund will issue and redeem WEBS of each Index Series only in 
aggregations of shares specified for each Index Series (each 
aggregation is a ``Creation Union''). The number of shares per Creation 
Unit will range from 40,000 to 600,000.\5\
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    \5\ The Exchange notes that in the Amex's filing to list and 
trade WEBS, the Amex anticipated that the value at a Creation Unit 
at the start of trading would range from $450,000 to $10,000,000 and 
the net asset value of an individual WEBS security would range from 
$10 to $20. See Securities Exchange Act Release Nos. 36947 (Mar. 8, 
1996), 61 FR 10606 (Mar. 14, 1996).
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    b. The MSCI Indices. MSCI generally seeks to have 60% of the 
capitalization of a country's stock market index reflected in the MSCI 
Index for such country. Thus, the MSCI Indices seek to balance the 
inclusiveness of an ``all share'' index against the replicability of a 
``blue chip'' index. MSCI applies the same criteria and calculation 
methodology across all markets for all indices, developed and emerging.
    All single-country MSCI Indices are market capitalization weighted. 
For countries that restrict foreign ownership, MSCI calculates two 
types of indices: the MSCI Indices and additional indices called ``Free 
Indices.'' The Free Indices exclude companies and share classes that 
may not be purchased by foreigners. MSCI currently calculates Free 
Indices for Singapore and Mexico, and for those regional and 
international indices which include such markets. The Mexico and 
Singapore WEBS series will be based on the Free Indices for those 
countries.
    All MSCI Indices are calculated daily. The calculation method 
weights stocks in an MSCI Index by their beginning-of-period market 
capitalization. Share prices are ``swept clean'' daily and adjusted for 
any rights issues, stock dividends or splits. The MSCI Indices 
presently are calculated in local currency and in U.S. dollars, without 
dividends and with gross dividends reinvested.
    Prices used to calculate the MSCI Indices are official exchange 
closing prices. All prices are taken from the predominant exchange in 
each market. To calculate the applicable foreign currency exchange 
rate, MSCI uses WM/Reuters Closing Spot Rates for all developed and 
emerging markets except those in Latin America. Because of the high 
volatility of currencies in some Latin American countries. MSCI 
continues to calculate its own rates for those countries. Under 
exceptional circumstances MSCI may elect to use an alternative exchange 
rate for any country if the WM/Ruters rate is believed not to be 
representative for a given currency on a particular day.
    Each MSCI Index underlying a WEBS series is calculated by MSCI for 
each trading day in the applicable foreign exchange market based on 
official closing prices in such exchange market. For each trading day, 
MSCI publicly disseminates each MSCI Index value for the previous day's 
close. MSCI Indices are reported periodically in major financial 
publications and also are available through vendors of financial 
information.
    The Fund will cause to be made available daily the names and 
required number of shares of each of the securities to be deposited in 
connection with the issuance of WEBS in Creation Unit size aggregations 
for each WEBS series, as well as information relating to the required 
cash payment representing, in part, the amount of accrued dividends 
applicable to such WEBS series. This information will be made available 
by the Fund Advisor to any National Securities Clearing Corporation 
(``NSCC'') participant requesting such information. In addition, other 
investors can request such information directly from the Fund 
distributor. The net asset value (``NAV'') for each WEBS series will be 
calculated directly by the Fund administrator, PFPC, Inc. The NAVs will 
be made available to the public from the Fund distributor by means of a 
toll-free number, and also will be available to NSCC participants 
through data made available from NSCC.\6\
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    \6\ The Exchange notes that in the Amex's WEBS filing, the Amex 
anticipated that it would provide current WEBS pricing information 
by disseminating through the facilities of the Consolidated Tape 
Association an indicative optimized portfolio value (``Value'') for 
each WEBS series as calculated by Bloomberg, L.P. The Value was to 
be disseminated on a per WEBS basis every fifteen seconds during 
regular Amex trading hours of 9:30 A.M. to 4:00 P.M. Eastern 
Standard Time. Id.
    The Exchange believes such Value is unlikely to reflect the 
value of all securities included in the applicable benchmark MSCI 
Index. In addition, the Exchange believes the Value would not 
necessarily reflect the precise composition of the current portfolio 
of securities held by the Fund for each WEBS series disseminated 
during Amex trading hours should not be viewed as a real-time 
update, of the NAV of the Fund, which is calculated only once a day. 
The Exchange recognizes, however, that during the trading day the 
Value will closely approximate the value, per WEBS share, of the 
portfolio of securities for each WEBS series, except under unusual 
circumstances.
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    The Exchange will distribute an information circular to its members 
in connection with the trading of WEBS. The circular will discuss the 
special characteristics and risks of trading this type of security. The 
following are among the items to be discussed in the circular: what 
WEBS are, how WEBS are created and redeemed, the requirement that 
members and member firms deliver a WEBS prospectus to investors 
purchasing WEBS prior to or concurrently with the confirmation of a 
WEBS transaction, applicable Exchange rules, dissemination information, 
trading information, and the applicability of suitability rules. The 
Exchange also intends to utilize its existing surveillance procedures 
to surveillance trading in WEBS, including surveilling specialist 
compliance with Exchange Rule 5.33(a), which contemplates specialists 
engaging in transactions with the issuer of WEBS under certain 
circumstances.
    c. Proposed rule. The Exchange seeks to adopt new rules to 
accommodate the trading, whether by listing or pursuant to unlisted 
trading privileges, of Units that meet certain criteria. A Unit is a 
security that represents an interest in a registered investment company 
(``Investment Company'') which Investment Company could be organized as 
a unit investment trust, an open-end management investment company, or 
similar entity.
    The Exchange proposes that the Investment Company must hold 
securities comprising, or otherwise based on or representing an 
interest in an index or portfolio or securities; or hold securities in 
another registered investment company that holds securities based on or 
representing an interest in an index or portfolio of securities. An 
index or portfolio may be revised as necessary or appropriate to 
maintain the quality and character of the index or portfolio.
    Under the proposed rule change, the Investment Company must also 
issue Units in a specified aggregate number in return for a deposit 
(``Deposit'') consisting of either a specified number of shares of 
securities that comprise the index or portfolio, or are otherwise based 
on or represent an investment in securities comprising such index or 
portfolio, and/or a cash amount; or shares of a registered investment 
company based on or representing an interest in, an index or portfolio 
or

[[Page 59356]]

securities, and/or a cash amount. Units must be redeemable, directly or 
indirectly, from the Investment Company for securities and/or cash then 
comprising the Deposit. Units must pay holders periodic cash payments 
corresponding to the regular cash dividends or distributions declared 
with respect to the securities held by the Investment Company, less 
applicable expenses and charges, and there must be at least 300,000 
Units outstanding prior to the commencement of trading of a series of 
Units on the Exchange.
    The proposed rule change would allow the Exchange to trade, whether 
by listing or pursuant to unlisted trading privileges, specified series 
of Units, with each series based on a specified index or portfolio of 
securities. The value of the index or portfolio must be calculated and 
disseminated to the public at least once per business day; provided 
that, if the securities representing at least half the value of the 
index or portfolio are securities of a single country other than the 
United States, then the value of the index or portfolio may be 
calculated and disseminated to the public at least once per day in that 
country. Units may be either certified or issued in the form of a 
single global certificate.
    Under the proposal, the Exchange may consider suspending trading 
and delisting (if applicable) a series of Units if after the initial 
twelve-month period beginning upon the commencement of trading of a 
series of Units: (i) there are fewer than 50 record and/or beneficial 
holders of Units for 30 or more consecutive trading days; (ii) the 
value of the index or portfolio of securities on which the series is 
based is no longer calculated or available; or (iii) such other event 
occurs or condition exists that, in the opinion of the Exchange, makes 
further dealings on the Exchange inadvisable. In addition, the Exchange 
will remove Units from trading and listing (if applicable) upon 
termination of the issuing Investment Company or upon the termination 
of listing of the Units on their primary market, if the primary market 
is not the Exchange.
2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
Section 6(b) of the Act,\7\ in general, and with Section 6(b)(5),\8\ in 
particular, in that it is designed to promote just and equitable 
principles of trade; foster cooperation and coordination with persons 
engaged in regulating, clearing, settling, processing information with 
respect to, and facilitating transactions in securities; and protect 
investors and the public interest.
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    \7\ 15 U.S.C. 78f(b).
    \8\ 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 the proposed rule change will impose 
any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act.

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

    The Exchange did not solicit or receive written comments with 
respect to the proposed rule change.

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

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

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. 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 submissions, 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 persons, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C.. 552 will be available for inspection and copying in the 
Commission's Public Reference Room, 450 Fifth Street, N.W., Washington, 
D.C. 20549. Copies of such filing will also be available for inspection 
and copying at the principal office of the Exchange. All submissions 
should refer to File No. SR-PCX-98-29 and should be submitted by 
November 24, 1998.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\9\
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    \9\ 17 CFR 200.30-3(a)(12).
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Jonathan G. Katz,
Secretary.
[FR Doc. 98-29338 Filed 11-2-98; 8:45 am]
BILLING CODE 8010-01-M