[Federal Register Volume 63, Number 238 (Friday, December 11, 1998)]
[Notices]
[Pages 68483-68490]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-32962]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-40749; File No. SR-Amex-98-29]
Self-Regulatory Organizations; American Stock Exchange, Inc.;
Order Approving and Notice of Filing and Order Granting Accelerated
Approval of Amendment No. 2 to the Proposed Rule Change Relating to the
Listing Under Rules 1000A et seq. of Select Sector SPDRs SM
and Technology 100 Index Fund Shares
December 4, 1998.
I. Introduction
On July 17, 1998, the American Stock Exchange, Inc. (``AMEX'' or
``Exchange'') filed with the Securities and Exchange Commission
(``SEC'' or ``Commission'') pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934,\1\ and Rule 19b-4 thereunder,\2\ a
proposed rule change to list and trade under AMEX Rules 1000A et seq.
(``Index Fund Shares'') the following securities: (1) nine series of
Select Sector SPDRs SM.; and (2) one series of the
Technology 100 Index Fund (collectively, the ``Funds'').
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
Notice of the proposed rule change, together with substance of the
proposal, was published for comment in Securities Exchange Act Release
No. 40391 (September 1, 1998), 63 FR 48280 (September 9, 1998). On
November 12, 1998, the Exchange filed Amendment No. 2.\3\ The
Commission received no comments on the proposal. This order approves
the proposed rule change, as amended.
---------------------------------------------------------------------------
\3\ Amendment No. 2 changes the name of the Sector SPDRs to
Select Sector SPDRs; clarifies the duties and identity of the
lending agent; changes and explains the method of the dissemination
of product information by the Exchange; delineates the construction
and maintenance standards for the Select Sector Indices and the
Technology 100 Index; and clarifies that in the event of market wide
circuit breakers trading in the Select Sector SPDRs and the
Technology 100 Index Fund would be suspended pursuant to Amex Rule
117. The substance of this amendment is incorporated into this
order. See Letter from Michael Cavalier, Associate General Counsel,
Legal & Regulatory Policy, Amex, to Heather Seidel, Special Counsel,
Division of Market Regulation (``Division''), Commission, dated
November 11, 1998 (``Amendment No. 2'').
---------------------------------------------------------------------------
II. Description of the Proposal
The Exchange proposes to list and trade under Rules 1000A et
seq.\4\ the following securities issued by an open-end management
investment company: (1) nine series of Select Sector SPDRs
SM, as described herein;\5\ and (2) one series of the
Technology 100 Index Fund.\6\
---------------------------------------------------------------------------
\4\ Amex Rules 1000A et seq. provide for the listing and trading
of Index Fund Shares, which are shares issued by an open-end
management investment company that seek to provide investment
results that correspond generally to the price and yield performance
of a specified foreign or domestic index. See Securities Exchange
Act Release No. 36947 (March 8, 1996), 63 FR 2348 (March 14, 1996).
The Exchange currently lists under Rules 1000A et seq. seventeen
series of World Equity Benchmark Shares TM (``WEBS
TM'') based on Morgan Stanley Capital International
foreign stock indices. ``World Equity Benchmark Shares'' and
``WEBS'' are service marks of Morgan Stanley Group, Inc.
\5\ ``S&P'' , ``Standard & Poor's 500'' ,
``Standard & Poor's Depository Receipts'' and ``SPDRs''
are trademarks of The McGraw-Hill Companies, Inc., and
``Select Sector SPDR'' is a service mark of The McGraw-Hill
Companies, Inc.
\6\ The Select Sector SPDR Trust (with respect to Select Sector
SPDRs) and The Index Exchange Listed Securities Trust (with respect
to the series of the Technology 100 Index Fund) filed with the
Commission an Application for Orders under Sections 6(c) and 17(b)
of the Investment Company Act of 1940 (``1940 Act'') as amended, for
the purpose of exempting Select Sector SPDRs and the series of the
Technology 100 Index Fund from Sections 2(a)(32), 5(a)(1), 22(d),
17(a)(1) and (a)(2), and Rule 22c-1 under the 1940 Act. See
Investment Company Act Release No. 23492 (October 20, 1998), 63 FR
57332 (October 27, 1998).
---------------------------------------------------------------------------
(a) Select Sector SPDRs
The Exchange proposes to list and trade nine investment series of
Select Sector SPDRs to be offered by the Select Sector SPDR Trust, an
open-ended investment company and a Massachusetts business trust. The
Select Sector SPDRs offered by the Trust are: The Basic Industries
Select Sector SPDR; The Consumer Services Select Sector SPDR; The
Consumer Staples Select Sector SPDR; The Cyclical/Transportation Select
Sector SPDR; The Energy Select Sector SPDR; The Financial Select Sector
SPDR; The Industrial Select Sector SPDR; The Technology Select Sector
SPDR; and The Utilities Select Sector SPDR.\7\
---------------------------------------------------------------------------
\7\ Information on the component stocks of the Select Sector
Indices and the Technology 100 Index is available in the public
file.
---------------------------------------------------------------------------
Each Select Sector SPDR offers and issues Select Sector SPDR shares
at their net asset value only in aggregations of a specified number of
shares (``Creation Unit''), generally in exchange for a basket of
common stocks consisting of some or all of the component securities
(``Fund Securities'') of a specified market sector index (``Select
Sector Index''), together with the deposit of a specified small cash
payment known as the ``cash component'' and reflecting, for example,
net accrued dividends. It is anticipated that the deposit of Fund
Securities and the specified cash payment, in exchange for Select
Sector SPDRs will be made primarily by institutional investors,
arbitrageurs and the Exchange specialist. Creation Units are separable
upon issue into identical shares which are listed and traded on the
AMEX. Similarly, shares are also redeemable only in Creation Unit size
aggregations and usually in exchange for Fund Securities and a
specified cash payment. It is anticipated that a Creation Unit will
consist of 50,000 shares of the relevant series of Select Sector SPDRs.
The Select Sector SPDR Trust reserves the right to offer a ``cash''
option for creations and redemptions of Select Sector SPDRs, although
it has no current intention of doing so. For each Select Sector, SPDR,
the Administrator (State Street Bank and Trust Company) makes available
through the National Securities Clearing Corporation (``NSCC''),
immediately prior to the opening of business on the AMEX, the list of
names and the required number of share of stocks of each relevant
Select Sector Index to be included in the securities deposit required
in connection with the creation of Select Sector SPDRs in Creation Unit
size aggregations.\8\
---------------------------------------------------------------------------
\8\ The procedures for the creation and redemption of Select
Sector SPDRs and Technology 100 Index Fund shares are similar to
those applicable for SPDRs, for utilize processes of the National
Securities Clearing Corporation in connection with the transmittal
of trade instructions, the transfer of component securities and the
cash component, and the transfer of Select Sector SPDRs or
Technology 100 Index Fund shares and component securities on
creation or redemption. This contrasts with procedures for the
creation and redemption of other Index Fund Shares currently listed
on the Amex (i.e., WEBSTM), which, while similar in
certain respects to SPDR procedures, do not utilize such National
Securities Clearing Corporation processes. Unlike the WEBS series,
which do not hold all of the applicable index stocks but instead
utilize a representative ``portfolio sampling'' technique, Select
Sector SPDRs and the Technology 100 Index Fund generally will hold
all of the securities in the applicable index, subject to certain
conditions disclosed in the applicable prospectus.
---------------------------------------------------------------------------
[[Page 68484]]
Each of the nine Select Sector Indices, which is the benchmark for
a Select Sector SPDR, is intended to give investors an efficient way to
track the movement of baskets of the equity securities of public
companies that are components of the Standard & Poor's 500 Composite
Stock Index (``S&P 500'') and are involved in specific sectors.\9\ Each
stock included in a Select Sector Index (the ``Component Stocks'') will
be selected from companies represented in the S&P 500.\10\ The nine
Select Sector Indices together will include all of the companies
represented in the S&P 500 and all of the stocks in the S&P 500 will be
allocated to one and only one of the Select Sector Indices. Each Select
Sector Index will be calculated by the AMEX's Index Services Group
(``AMEX ISG'') using the ``market capitalization'' methodology (the
same method used in calculating the S&P 500). This design ensures that
each of the component stocks within a Select Sector Index is
represented in a proportion consistent with its percentage with respect
to the total market capitalization of the Select Sector Index. Under
certain conditions, the number of shares of a component stock may be
adjusted to conform to requirements of Subchapter M under the Internal
Revenue Code.\11\
---------------------------------------------------------------------------
\9\ The S&P 500 Index consists of 500 stocks chosen by Standard
& Poor's for market size, liquidity, and industry group
representation. It is a market-value weighted index (stock price
times number of shares outstanding), with each stock's weight in the
Index proportionate to its market value.
\10\ The Select Sector Indices underlying the Select Sector
SPDRs are not the same as S&P indices based on specific industry
sectors, although the component stocks of the Select Sector Indices
may be comparable to, and overlap with, the S&P sector indices to
some degree.
\11\ Each Select Sector SPDR Fund (as well as the Technology 100
Index Fund) intends to qualify for and to elect treatment as a
separate regulated investment company under Subchapter M. To qualify
for such treatment, a company must annually distribute at least 90%
of its net investment company taxable income (which includes
dividends, interest and net short-term capital gains) and meet
several other requirements, including certain diversification tests.
---------------------------------------------------------------------------
The stocks included in a Select Sector Index have been assigned to
a Select Sector Index by Merrill Lunch, Pierce, Fenner & Smith
Incorporated (``Merrill Lynch'' or ``the Index Compilation Agent'').
The Index Compilation Agent, after consultation with Standard & Poor's,
assigns Component stocks to a particular Select Sector Index with the
aim of categorizing a company's fundamental businesses on the basis of
the company's sales and earnings composition and its predominant source
of revenue among the company's business lines. In addition, such
assignment is based on the sensitivity of the company's stock price and
business results to the common factors that affect other companies in
the specific Select Sector Index.\12\ Standard & Poor's has sole
control over the removal of stocks from the S&P 500 and the selection
of replacement stocks to be added to the S&P 500, but only plays a
consulting role in the assignment of the S&P 500 component securities
to any Select Sector Index. The assignment of component stocks to a
Select Sector Index is the sole responsibility of the Index Compilation
Agent. If Standard & Poor's removes a stock from the S&P 500, Merrill
Lynch will remove the same stock from whichever Select Sector Index it
is in. When Standard & Poor's assign a replacement stock to the S&P
500, Merrill Lynch will assign the same stock to whichever Select
Sector Index it deems appropriate.
---------------------------------------------------------------------------
\12\ For example, Amex states that a common factor that could
affect the prices for the Component Stocks in the Financial Select
Sector Index or the Utilities Select Sector Index is interest rate
variations. See Amendment No. 2, supra note 3.
---------------------------------------------------------------------------
Each Select Sector Index is weighted based on the market
capitalization of each of the Component Stocks, subject to the
following asset diversification requirements: (i) the market
capitalization-based weighted value of any single Component Stock
measured on the last day of a calendar quarter may not exceed 24.99% of
the total value of its respective Select Sector Index; and (ii) with
respect to 50% of the total value of the Select Sector Index, the
market capitalization-based weighted value of the Component Stock must
be diversified so that no single Component Stock measured on the last
day of a calendar quarter represents more that 4.99% of the total value
of its respective Select Sector Index, or in other words, the sum of
the weight of all of the component stocks that each represent less than
5% of the Index must be equal to at least 50% of the Index weight.
Rebalancing the Select Sector Indices to meet the asset
diversification requirements will be the responsibility of the AMEX
ISG. If shortly prior to the last business day of any calendar quarter
(a ``Quarterly Qualification Date''), a Component Stock(s) approaches
the maximum allowable value limits set forth above (the ``Asset
Diversification Limits''), the percentage that such Component Stock (or
Component Stocks) represents in the Select Sector Index will be reduced
and the market capitalization-based weighted value of such Component
Stock (or Component Stocks) will be redistributed across the Component
Stocks that do not closely approach the Asset Diversification Limits in
accordance with the methodology set forth in the prospectus and
Statement of Additional Information for the Select Sector SPDR Trust.
The Select Sector Indices are calculated and disseminated by the AMEX
ISG.
Periodically, the Index Compilation Agent will supply the AMEX ISG
with sector designations for a number of stocks deemed likely
candidates for replacement selection by the Standard & Poor's 500 Index
Committee. If a replacement not on the current list is selected by the
Standard & Poor's 500 Index Committee, the AMEX ISG will ask the Index
Compilation Agent to assign the stock to one of the nine sectors
promptly. AMEX will disseminate information on this assignment and on
consequent changes in the Select Sector Index(es). The AMEX does not
expect the timing of dissemination of such information to be materially
affected by whether a replacement stock had been included among the
candidates for replacement supplied by the Index Compilation Agent.
The Index Compilation Agent at any time may determine that a
Component Stock which has been assigned to one Select Sector Index has
undergone such a transformation in the composition of its business that
is should be removed from that Select Sector Index and assigned to a
different Select Sector Index. In the event that the Index Compilation
Agency notifies the AMEX ISG that a Component Stocks Select Sector
Index assignment should be changed the AMEX will disseminate notice of
the change by using an information circular to their membership within
one business day of receipt of such notice and will implement the
change in the affected Select Sector Indices on a date no less than one
week after the initial dissemination of information on the sector
change to the maximum extent practicable.\13\ It is not anticipated
that Component Stocks will change sectors frequently.
---------------------------------------------------------------------------
\13\ Telephone Conversation between Michael Cavalier, Associate
General Counsel, Legal & Regulatory Policy, Amex, and Marc McKayle,
Attorney, Division, Commission, on November 24, 1998.
---------------------------------------------------------------------------
Component Stocks removed from and added to the S&P 500 will be
deleted from and added to the appropriate Select Sector Index
consistent with the timing of the announcement and
[[Page 68485]]
effectiveness of additions and deletions from the S&P 500 insofar as
practicable. The AMEX will announce a change to a Select Sector Index
promptly following an announcement by Standard & Poor's of an addition
to and deletion from the S&P 500.\14\ Generally, changes in the
applicable component stock for the relevant Select Sector SPDR Index
will be made concurrently with Standard & Poor's change to the S&P
500.\15\
---------------------------------------------------------------------------
\14\ Standard & Poor's generally announces S&P 500 changes five
business days before they take effect.
\15\ Telephone Conversation between Michael Cavalier, Associate
General Counsel, Legal & Regulatory Policy, Amex, and Marc McKayle,
Attorney, Division, Commission, on November 20, 1998.
---------------------------------------------------------------------------
Standard & Poor's will advise the AMEX ISG regarding the handling
of nonroutine corporate actions which may arise from time to time and
which may have an impact on the calculation of the S&P 500, and,
consequently, on the calculation of the Select Sector Indices.
Corporate Actions such as a merger or acquisition, stock splits, and
routine spin-offs, which require adjustments in the Select Sector Index
calculation, will be handled by the AMEX staff. Index Divisor
adjustments will be calculated, when necessary, in the same manner they
are handled by Standard & Poor's in its maintenance of the S&P 500. In
the event a merger or acquisition changes a company's fundamental
business and source of revenues, the Select Sector Index assignment of
the stock may change. In any event, a new Index Divisor for affected
Select Sector Indices will be disseminated to the public promptly by
the AMEX ISG.
Each Select Sector SPDR will normally invest at least 95% of its
total assets in stocks that comprise the relevant Select Sector Index
or stock equivalent positions which the Adviser deems appropriate as an
alternative to such stocks.\16\
---------------------------------------------------------------------------
\16\ As noted above, supra note 8, Select Sector SPDRs generally
will hold all of the securities in the applicable index, subject to
certain conditions disclosed in the applicable prospectus.
---------------------------------------------------------------------------
(b) Technology 100 Index Fund Shares
The Exchange also proposes to list and trade Technology 100 Index
Fund shares issued by the Index Exchange Listed Security Trust, an
open-ended investment company and a Massachusetts business trust. Such
trust is an ``index fund'' presently consisting of a single investment
portfolio, the Technology 100 Index Fund. Fund shares may be created
and redeemed in a manner similar to that described above for Select
Sector SPDRs.\17\ The Fund Administrator (State Street Bank and Trust
Company) makes available through NSCC, immediately prior to the opening
of business on the AMEX, the list of names and the required number of
shares of stocks to be included in the securities deposit required in
connection with creation of Fund shares in Creation Unit size
aggregations. Creation Units are separable upon issuance into identical
shares which are listed and traded on the AMEX. Similarly, shares are
also redeemable only in Creation Unit size aggregations and usually in
exchange for Fund Securities and a specified cash payment. It is
anticipated that one Creation Unit will consist of 50,000 Fund shares.
---------------------------------------------------------------------------
\17\ As noted above, supra note 8, the Technology 100 Index Fund
generally will hold all of the securities in the applicable index,
subject to certain conditions disclosed in the applicable
prospectus. The Fund reserves the right to offer a ``cash'' option
for creations and redemptions of Fund shares, although it has no
current intention of doing so. The Fund will normally invest at
least 95% of its total assets in stocks that comprise the benchmark
index or stock equivalent positions which the Adviser deems
appropriate as an alternative to such stocks.
---------------------------------------------------------------------------
The Fund's investment objective is to provide investment results
that correspond generally to the price and yield performance of
publicly traded equity securities of technology companies as
represented by an index (the ``Technology 100 Index'') compiled by
Merrill Lynch. The Technology 100 Index, which is constructed in
accordance with specified selection criteria, is intended to give
investors an efficient, equal-dollar weighted way to track movements of
certain technology stocks and American Depositary Receipts (``ADRs'')
traded within the United States. According to the AMEX, the Technology
100 Index provides a diversified representation of technology stocks
and ADRs traded in the United States. The majority of the Technology
100 Index components are involved in the following industries: computer
software, data processing, computer services, semiconductors, and
telecommunications equipment.
The Technology 100 Index is constructed by Merrill Lynch based on
two criteria: market capitalization and trading volume. First, to
assure that stocks in the Index are highly liquid, stocks with daily
trading volume of less than $12.5 million (shares traded times trade
price) are eliminated from the selection universe of all U.S. traded
technology stocks and ADRs. The median 63 day trading volume
calculation, using the most recent 63 trading days, is used for this
screening; the data for the initial index construction is from January
30, 1998. Second, the top 100 stocks from the liquidity-screened
universe of technology names are chosen by market capitalization. The
price used to calculate market capitalization in connection with the
initial index construction is the primary exchange closing price as of
January 30, 1998.
The Technology 100 Index is calculated and maintained by the AMEX
ISG in consultation with Merrill Lynch, which may suggest changes in
the industry categories represented in the Index or changes in the
number of component stocks in an industry category to properly reflect
the changing conditions in the technology sector. The Technology 100
Index is calculated using an equal dollar weighting methodology
designed to ensure that each security is represented in an
approximately equal dollar amount. In addition, Merrill Lynch may
advise the Exchange regarding the handling of unusual corporate
actions. Routine corporate actions (e.g. stock splits) that require
straightforward index divisor adjustments are handled by the Exchange
staff without consulting Merrill Lynch.
Whenever possible, all stock replacements and unusual divisor
adjustments caused by the occurrence of extraordinary events such as
dissolution, merger, bankruptcy, non-routine spin-offs, or
extraordinary dividends will be made by the Exchange in consultation
with Merrill Lynch. In the case of replacements, the largest non-index
constituent in terms of market capitalization from the list of U.S.-
traded technology stocks and ADRs will be chosen.
In selecting replacement stocks, the market capitalization and
trading volume is calculated using the primary exchange closing price
one day prior to potential replacements being considered. There is no
fixed period between the consideration and change dates, but in most
instances the period between the consideration and the change dates
will be no more than a month.\18\ The chosen stock must have a median
daily trading volume over the previous 63 days that is greater than
that of the 75th percentile rank of the existing Index stocks. If the
liquidity level is insufficient, the next largest stock will be
considered. In the event that no stock meets the liquidity criteria,
[[Page 68486]]
the largest stock in terms of market capitalization will be added.
---------------------------------------------------------------------------
\18\ Telephone conversation between Michael Cavalier, Associate
General Counsel, Legal & Regulatory Policy, Amex, and Marc McKayle,
Attorney, Division, Commission, on December 3, 1998.
---------------------------------------------------------------------------
Merrill Lynch will reconstitute the Index annually after the close
of the third Friday of December. The reconstitution will take two
steps: first, determination of Index constituents, and second, share
calculations to ensure equal weighting. Index constituents will be
replaced if; 1) a stock is no longer deemed a representative
``technology'' stock; or 2) the stock's market capitalization declines
below that of the 125th market cut-off to reduce unnecessary turnover.
The shares and volume figures are calculated using data as the second
Friday of December.
(c) Dissemination of Information by the Exchange19
The value of the Select Sector Indices and the Technology 100 Index
will be calculated continuously by AMEX and disseminated every 15
seconds on Network B of the Consolidated Tape Association (``CTA'').
The major electronic financial data vendors, including Bloomberg,
Quotron, Reuters, and Bridge Information Systems, are expected to
publish information on the Select Sector and Technology 100 Indices for
their subscribers.
---------------------------------------------------------------------------
\19\ The Exchange will not disseminate the Indicative Per Share
Portfolio Value described in the initial Rule 19b-4 filing, but will
instead disseminate information as described herein. See Amendment
No. 2, supra note 3.
---------------------------------------------------------------------------
In order to provide up to date pricing information for the Funds'
shares, the Exchange will calculate and disseminate every 15 seconds
through CTA Network B an amount representing on a per share basis the
sum of the ``Dividend Equivalent Payment'' effective through and
including the previous business day, plus the current value of the
``Deposit Securities'' (the sum of the Dividend Equivalent Payment plus
the current value of the Deposit Securities is the ``Value''). The
Dividend Equivalent Payment is an amount intended to enable a Fund to
make a distribution of dividends on the next payment date as if all the
portfolio securities of the Fund had been held for the entire dividend
period. The ``Deposit Securities'' consist of a designated portfolio of
securities constituting a substantial replication, or a representation,
of the stocks included in the relevant Fund index.
(d) Other Characteristics of Select Sector SPDRs and Technology 100
Index Fund
For each of the nine series of Select Sector SPDRs and the
Technology 100 Index Fund, it is anticipated that a minimum of three
Creation Units will be outstanding at the commencement of trading on
the Exchange.20 Based on market prices as of November 12,
1998, it is anticipated that the initial trading price of a Select
Sector SPDR will range from approximately $21 to $28, and that the
initial trading price of a Technology 100 index Fund share will be
approximately $25.21
---------------------------------------------------------------------------
\20\ Based on the estimated initial trading prices for the
Select Sector SPDRs and the Technology 100 Index Fund shares, the
value of the one creation unit should be between $1 million and $1.5
million. Telephone conversation between Michael Cavalier, Associate
General Counsel, Legal & Regulatory Policy, Amex, and Marc McKayle,
Attorney, Division, Commission, on November 20, 1998.
\21\ See Amendment No. 2, supra note 3.
---------------------------------------------------------------------------
The Funds will pass along dividends and interest, net of expenses,
to fund shareholders as ``income dividend distributions.'' Net capital
gains will be distributed to shareholders as ``capital gain
distributions.''
The net asset value for the Funds is calculated by the
Administrator, State Street Bank and Trust Company (``State Street''),
which is also the Adviser and Custodian for the Funds. State Street
will also act as the lending agent for the Select Sector
SPDR.22 The lending agent for the Technology 100 Index Fund
will be determined.23 ALPS Mutual Funds Services, Inc.
serves as the principal underwriter and distributor for the Funds.
---------------------------------------------------------------------------
\22\ The lending agents for the Funds will cause the delivery of
loaned securities from each Fund to borrowers, arrange for the
return of loaned securities to the Fund at the termination of the
loans, request deposit of collateral when required by the loan
arrangements, and provide recordkeeping and accounting services. See
Amendment No. 2, supra note 3.
\23\ Merrill Lynch will not be the lending agent for the
Technology 100 Index Fund as indicated in the original filing.
Telephone Conversation Between Michael Cavalier, Associate General
Counsel, Legal & Regulatory Policy, Amex, and Marc McKayle,
Attorney, Division, Commission, on November 23, 1998.
---------------------------------------------------------------------------
Select Sector SPDRs and Technology 100 Index Fund shares are
registered in book-entry form through the Depository Trust Company.
Trading in Select Sector SPDRs and Technology 100 Index Fund shares on
the Exchange is effected until 400 p.m. each business day. The minimum
trading increment under Rule 127 for Select Sector SPDRs and Technology
100 Index Fund shares will be \1/64\ of $1.00.
(e) Stop and Stop Limit Orders
AMEX Rule 154, Commentary .04(c) provides that stop and stop limit
orders to buy or sell a security (other than an option, which is
covered by AMEX Rule 950(f) and Commentary thereto) the price of which
is derivatively priced based upon another security or index of
securities, may with the prior approval of a Floor Official, be elected
by a quotation, as set forth in Commentary .04(c)(i-v). The Exchange
has designated Index Fund Shares, including Select Sector SPDRs and
shares of the Technology 100 Index Fund, as eligible for this
treatment.\24\
---------------------------------------------------------------------------
\24\ See Securities Exchange Act Release No. 29063, n. 9 (April
10, 1991), 56 FR 15652 (April 17, 1991) (order approving File No.
SR-Amex-90-31 regarding Exchange designation of equity derivative
securities as eligible for such treatment under Rule 154, Commentary
.04(c)).
---------------------------------------------------------------------------
(f) Trading Halts
In addition to other factors that may be relevant, the Exchange may
consider factors such as those set forth in AMEX Rule 918C(b) in
exercising its discretion to halt or suspend trading in Index Fund
Shares, including Select Sector SPDRs and Technology 100 Index Fund
shares. These factors would include (1) the current calculation of the
numerical index value derived from the current market prices of the
underlying stocks in such stock index group is not available; (2)
trading in one or more of the underlying stocks comprising such stock
index group has been halted in the primary market(s) under
circumstances which indicate that such stock or stocks will likely re-
open at a price or prices significantly different than the price or
prices at which such stocks or stocks last traded prior to the halt;
(3) the extent to which trading is not occurring in stocks underlying
the index; (4) other unusual conditions or circumstances detrimental to
the maintenance of a fair and orderly market are present.25
---------------------------------------------------------------------------
\25\ In the event of market wide circuit breakers trading in the
Select Sector SPDRs and the Technology 100 Index Fund would be
suspended pursuant to Amex Rule 117. See Amendment No. 2, supra note
3.
---------------------------------------------------------------------------
(g) Disclosure
Member firms will be informed by an information circular, prior to
the commencement of trading, that investors purchasing Select Sector
SPDRs or Technology 100 Index Fund shares will be required to receive a
fund prospectus prior to, or concurrently with, the confirmation of a
transaction within. The information circular will address Exchange
members' responsibilities under AMEX Rule 411 (``know your customer
rule'') regarding transactions in such Fund Shares. AMEX Rule 411
generally requires that members use due diligence to learn the
essential facts relative to every customer, every order or account
accepted.26 The circular also will address members'
responsibility to deliver a prospectus to all investors as
[[Page 68487]]
well as highlight the characteristics of purchases in the Funds.
---------------------------------------------------------------------------
\26\ See Amex Rule 411.
---------------------------------------------------------------------------
III. Discussion
The Commission finds that the proposed rule change is consistent
with the requirements of the Act and the rules and regulations
thereunder applicable to a national securities exchange and, in
particular, the requirements of Section 6(b)(5) of the Act.\27\ The
Commission believes that the Exchange's proposal to list and trade nine
Select Sector SPDRs and one series of Technology 100 Index Fund Shares
will provide investors with a convenient and efficient way of
participating in the securities markets. The Exchange's proposal should
help to 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 portfolio of stocks at
negotiated prices throughout the business day.\28\ The Commission also
believes that Fund Shares in general, and Select Sector SPDRs and the
Technology 100 Index Fund shares in particular, will benefit investors
by allowing them to trade securities based on a portfolio of stocks in
secondary market transactions.\29\ Accordingly, as discussed below, the
proposed rule change is consistent with Section 6(b)(5) of the Act \30\
which requires Exchange rules to facilitate transactions in securities
while continuing to further investor protection and the public
interest.\31\
---------------------------------------------------------------------------
\27\ 15 U.S.C. 78f(b)(5).
\28\ 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.
\29\ The Commission notes, however, that unlike typical open-end
investment companies, where investors have the right to redeem their
fund shares on a daily basis, investors in Select Sector SPDRs and
the Technology 100 Index Fund can redeem them in Creation Unit size
aggregations only. Nevertheless, Select Sector SPDRs and the
Technology 100 Index Fund shares would have the added benefit of
liquidity from the secondary market and fund holders, unlike holders
of most other open-end funds, would be able to dispose of their
shares in a secondary market transaction.
\30\ 15 U.S.C. 78f(b).
\31\ 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).
---------------------------------------------------------------------------
As the Commission noted in previous orders approving other products
(SPDRs and MidCap SPDRs) for listing and trading on AMEX,\32\ the
Commission believes that the trading of a security like the Select
Sector SPDRs and the Technology 100 Index Fund shares, which replicate
the performance of a 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 Select
Sector SPDRs and the Technology 100 Index Fund shares, 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.\33\
Accordingly, the Commission believes that trading shares of the Funds
will provide retail investors with a cost efficient means to make
investment decisions based on the direction of certain sectors the
market, and may provide market participants several advantages over
existing methods of effecting program or other trades involving stocks.
---------------------------------------------------------------------------
\32\ See Securities Exchange Act Release Nos. 31591 (December
11, 1992), 57 FR 60253 (December 18, 1992) (``SPDRs Order''), and
35534 (March 24, 1995), 60 FR 16686 (March 31, 1995) (``MidCAP SPDRs
Order'').
\33\ 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.
---------------------------------------------------------------------------
Based on market prices as of November 12, 1998, it is anticipated
that the initial trading price of a Select Sector SPDR will range from
approximately $21 to $28, and the initial trading price of the
Technology 100 Index Fund share will be approximately $25. The
estimated cost of an individual Select Sector SPDR or the Technology
100 Index Fund should make it attractive to individual retail investors
who wish to hold a security replicating the performance of a portfolio
of stocks representing a particular sector of the marketplace.\34\
Accordingly, the Commission believes that trading of Select Sector
SPDRs and the Technology 100 Index Fund shares will provide retail
investors with a cost efficient means to make investment decisions
based on the direction of various segments of the market and may
provide market participants several advantages over existing methods of
effecting program or other trades involving stocks.
---------------------------------------------------------------------------
\34\ For example, an investor wishing to hold securities
tracking technology stocks could purchase in a single transaction
the Technology Select Sector SPDR or the Technology 100 Index Fund.
---------------------------------------------------------------------------
Moreover, the Commission believes that Select Sector SPDRs and the
Technology 100 Index Fund shares will provide investors with several
advantages over standard open-end mutual fund shares specializing in
such stocks. In particular, investors will be able to trade the Funds
continuously throughout the business day in secondary market
transactions at negotiated prices.\35\ In contrast, Investment Company
Rule 22c-1 \36\ limits holders and prospective holders of open-end
investment company shares to purchasing or redeeming securities of the
fund based on the net asset value of the securities held by the funds
as designated by the board of directors. Accordingly, the Select Sector
SPDRs and the Technology 100 Index Fund shares should allow investors
to: (1) respond quickly to market changes; (2) trade at a known price;
(3) engage in hedging strategies not currently available to retail
investors; and (4) reduce transaction costs for trading a portfolio of
securities.
---------------------------------------------------------------------------
\35\ Because of potential arbitrage opportunities, the
Commission believes that the Funds 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 the Funds
comparable to its net asset value, and therefore, arbitrage activity
likely will be minimal. In addition, the Commission believes the
Trusts will track the underlying index more closely than an open-end
index fund because the Trusts will accept only in-kind deposits,
and, therefore, will not incur brokerage expenses in assembling its
portfolio. In addition, the Trusts will generally redeem only in
kind, thereby enabling the Trusts to invest virtually all of its
assets in securities comprising the underlying index.
\36\ 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 the Select Sector SPDRs and the Technology 100 Fund an
exemption from this provision in order to allow them to trade at
negotiated prices in the secondary market. See supra note 6.
---------------------------------------------------------------------------
Although the Funds 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, the Funds are equity securities
that are priced off a portfolio of stocks based on the nine Select
Sector SPDR Indices and the Technology 100 Index. Accordingly, the
level of risk involved in the purchase or sale of these Funds is
similar to the risk involved in the
[[Page 68488]]
purchase or sale of traditional common stock, with the exception that
the pricing mechanism for the Funds is based on a basket of stocks.
Based on these factors, the Commission believes that it is appropriate
to regulate the Funds in a manner similar to other equity securities.
Nevertheless, the Commission believes that the nature of the Funds
raise, certain product design, disclosure, trading, market impact and
other issues that must be addressed adequately. As discussed in more
detail below, the Commission believes AMEX has adequately addressed
these concerns.
(a) The Funds Generally
The Commission believes that the proposed Funds are reasonably
designed to provide investors with an investment vehicle that
substantially reflects in value the index it is based upon, and, in
turn, the performance of: (1) public companies that are components of
the S&P 500 and are involved in a specific Select Sector Index as
designed by Merrill Lynch, and (2) publicly traded equity securities of
technology companies as represented by an index compiled by Merrill
Lynch. The components of the nine individual Select Sector SPDRs,
collectively, comprise all of the components in the S&P 500, a broad-
based, capitalization-weighted index consisting of 500 of the most
actively-traded and liquid stocks in the U.S. Thus, although Merrill
Lynch is primarily responsible for the assignment of stocks into Select
Sector Indices, the nature of the S&P 500 provides a liquidity screen
that should insure that the Select Sector Indices are comprised of
highly liquid securities. Merrill Lynch also imposes specific criteria
in its selection of the Technology 100 Index components. In selecting
components for the Technology 100 Index, Merrill Lynch evaluates the
market capitalization and trading volume of the components to assure
that the stocks within the Index are liquid and highly capitalized.
The aim of these component selection processes is to make Fund
Index components highly representative of the over-all economic sector
make-up and market capitalization of a given market. At the same time,
securities that are illiquid or that have a small capitalization are
avoided. The Commission believes that these criteria should serve to
ensure that the underlying securities of these Indices are well
capitalized and actively traded.
Additionally, the Funds generally will hold all of the securities
in the applicable index, subject to certain conditions disclosed in the
applicable prospectus. The Commission also notes that the Funds will
normally invest at least 95% of their total assets in stocks that
comprise the relevant Sector Index, the Technology 100 Index, or stock
equivalent positions which the Adviser deems appropriate as an
alternative to such stocks. The Commission believes that taken
together, the foregoing are adequate to characterize the Funds as bona
fide index funds. Furthermore, the Commission believes that the
component selection and replacement procedures for the Funds should
help to ensure that the component securities generally remain highly
capitalized and actively traded, and that the components continue to
reflect their corresponding indices.
(b) Disclosure
The Commission believes that the Exchange's proposal should ensure
that investors are adequately apprised of the terms, characteristics,
and risks of trading the Funds.\37\ As noted above, all Fund Share
investors will receive a prospectus regarding the product. Because the
Funds will be in continuous distribution, the prospectus delivery
requirements of the Securities Act of 1933 will apply both to initial
investors, and to all investors purchasing such securities in secondary
market transactions on the AMEX. The prospectus will address the
special characteristics of the Select Sector SPDRs or the Technology
100 Index Fund shares, including a statement regarding its
redeemability and method of creation.
---------------------------------------------------------------------------
\37\ The Amex will be required to file a proposed rule change if
an exemption from the prospectus delivery requirement with respect
to any of the Funds is sought in the future.
---------------------------------------------------------------------------
The Commission notes that the Exchange will issue an information
circular to its members explaining the unique characteristics of this
type of security prior to the commencement of trading in shares of the
Funds. The Commission also notes the circular will address Exchange
members' responsibilities under AMEX Rule 411 regarding transactions in
such Fund Shares. AMEX Rule 411 generally requires that members use due
diligence to learn the essential facts relative to every customer,
every order or account accepted.\38\ The circular also will address
members' responsibility to deliver a prospectus to all investors as
well as highlight the charactistics of purchases in the Fund Shares.
---------------------------------------------------------------------------
\38\ See Amex Rule 411.
---------------------------------------------------------------------------
(c) Trading of the Index Fund Shares
The Commission finds that adequate rules and procedures exist to
govern the trading of Index Fund Shares, including Select Sector SPDRs
and the Technology 100 Index Fund shares. The Fund shares will be
deemed equity securities subject to all AMEX rules governing the
trading of equity securities, including, among others, rules governing
priority, parity, and precedence of orders, market volatitly related
trading halt provisions pursuant to Rule 117, and responsibilities of
specialist. The Commission also notes that the AMEX may consider
halting trading in any series of Index Funds Shares under certain other
circumstances, including those set forth in AMEX Rule 918C(b)(4)
regarding the presence of other unusual conditions or circumstances
detrimental to the maintenance of a fair and orderly market.
The Commission is satisfied with the AMEX's development of specific
listing and delisting criteria for Index Fund Shares, including Select
Sector SPDRs and the Technology 100 Index Fund shares. These criteria
should help to ensure that a minimum level of liquidity will exist in
the Funds and allow for the maintenance of fair and orderly markets.
The delisting criteria also allows the Exchange to consider the
suspension of trading and the delisting of a Select Sector SPDR or the
Technology 100 Index Fund, if an event were to occur that made further
dealings in such securities inadvisable. Thus, the Exchange has
flexibility to delist any of the Funds if circumstances warrant such
action.\39\ Accordingly, the Commission believes that the rules
governing the trading of Index Fund Shares, including the Select Sector
SPDRs and the Technology 100 Index Fund, provide adequate safeguards to
prevent manipulative acts and practices and to protect investors and
the public interest.
---------------------------------------------------------------------------
\39\ The Commission believes that any restrictions that change
the fund shares fundamental characteristics should raise concerns
under the delisting criteria. In such a case, the Amex should
determine whether continued listing as a fund share is appropriate.
---------------------------------------------------------------------------
Under AMEX's proposal, there will be no special account opening or
customer suitability rules applicable to the trading of the Fund
shares.\40\ Nevertheless, as noted above, AMEX Rule 411, which provides
in pertinent part that ``[e]very member or member organization shall
use due diligence to learn the essential facts relative to every
customer and to every order or account accepted,'' will apply.
---------------------------------------------------------------------------
\40\ This reflects the fact that the Fund shares are equity
products and not an options product, and, therefore, do not
necessitate the imposition of options-like rules.
---------------------------------------------------------------------------
[[Page 68489]]
(d) Market Impact
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 Index Fund Share only after
review by the Commission. Second, AMEX has developed policies regarding
trading halts in Index Fund Shares. Specifically, the Exchange would
halt Index Fund Share trading in the Funds if the circuit breaker
parameters under AMEX Rule 117 were reached. In addition, in deciding
whether to halt trading or conduct a delayed opening in Index Fund
Shares, in general, and the Select Sector SPDRs and the Technology 100
Index Fund Shares, 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 to halt or suspend
trading, based on certain factors, whenever two floor governors and a
senior executive officer of the Exchange deemed such action appropriate
and in the interest of a fair and orderly market or to protect
investors.\41\
---------------------------------------------------------------------------
\41\ See Amex Rule 918C(b).
---------------------------------------------------------------------------
The Commission believes that the trading of Index Fund Shares in
general, and Select Sector SPDRs and the Technology 100 Index Fund, in
particular, on AMEX should not adversely impact U.S. securities
markets. As to the trading of the Fund Shares, the Commission notes
that the corpus of the Trusts portfolios of stock are actively traded
and liquid. In fact, as described above, the Commission believes the
Funds may provide substantial benefits to the marketplace and
investors, including, among others, enhancing the stability of the
markets for individual stocks.\42\ Accordingly, the Commission believes
that the Select Sector SPDRs and the Technology 100 Index Fund shares
do not contain features that will make them likely to impact adversely
the U.S. securities markets.
---------------------------------------------------------------------------
\42\ Even though Index Fund Share 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
Index Fund Shares could conceivably have an impact on price levels
in the cash market. In particular, if a Index Fund Share 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 Index Fund Shares
likely will not exacerbate a price movement because Index Fund
Shares will be subject to the equity margin requirements of 50% and
Index Fund Shares are non-leveraged instruments. In addition, as
noted above, during turbulent market conditions, the Commission
believes Index Fund Shares, including Select Sector SPDRs and the
Technology 100 Index Fund shares, 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
Select Sector SPDRs and the Technology 100 Index Fund Shares, like
any other Index Fund Share, 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.
---------------------------------------------------------------------------
(e) Dissemination of Portfolio Information
The Commission believes that the Values the Exchange proposes to
disseminate for the Funds will provide investors with timely and useful
information concerning the value of the Select Sector SPDRs and the
Technology 100 Index Fund shares on a per Fund basis. The Exchange
represents that the information will be disseminated through the
facilities of the CTA and will reflect currently-available information
concerning the value of the assets comprising the Deposit Securities.
This information will be disseminated every 15 seconds during regular
AMEX trading hours of 9:30 a.m. to 4:00 p.m., New York time. In
addition, since it is expected that the Value will closely track the
applicable Fund, the Commission believes that the Values will provide
investors with adequate information to determine the intra-day value of
the given Select Sector SPDR or the Technology 100 Index Fund.\43\ The
Commission expects that the AMEX will monitor the disseminated Value,
and if the AMEX were to determine that the Value does not closely track
the applicable Fund, it would arrange to disseminate an adequate
alternative value.
---------------------------------------------------------------------------
\43\ Supra, note 8.
---------------------------------------------------------------------------
(f) Surveillance
The Commission notes that the AMEX has submitted surveillance
procedures for the trading of Select Sector SPDRs and the Technology
100 Index Fund shares. These procedures incorporate the Fund Shares
into the existing AMEX surveillance procedures to address concerns
associated with the listing and trading of such securities.
The Commission also notes that certain concerns are raised when a
broker dealer, such as Merrill Lynch, is involved in the development
and maintenance of a stock index, upon which a product such as the Fund
shares is based. The Commission notes that Merrill Lynch has
implemented procedures to prevent the misuse of material, non-public
information regarding changes to component stocks in a Select Sector
Index or the Technology 100 Index to assuage such concerns. The
Commission believes that the ``Fire Wall'' procedures put in place by
Merrill Lynch to segregate and survey their trading desk and research
department should help address concerns raised by Merrill Lynch's
involvement in the management of the Select SPDR Indices and the
Technology 100 Fund Index.
(g) Stop and Stop Limit Orders
As noted above, AMEX Rule 154, Commentary .04(c) provides that stop
and stop limit orders to buy or sell a security (other than an option,
which is covered by AMEX Rule 950(f) and Commentary thereto) the price
of which is derivatively priced based upon another security or index of
securities, may with the prior approval of a Floor Official, be elected
by a quotation, as set forth in Commentary .04(c)(i-v). The Exchange
has designated Index Fund Shares, including Select Sector SPDRs and
shares of the Technology 100 Index Fund, as eligible for this
treatment. The Commission believes that to allow stop and stop limit
orders in Index Fund Shares to be elected by quotation, a rule
typically used in the options context, is appropriate because, as a
result of their derivative nature, Index Fund Shares are in effect
equity securities that have a pricing and trading relationship to the
underlying securities similar to the relationship between options and
their underlying securities.
(h) Accelerated Approval of Amendment No. 2
The Commission finds good cause to approve Amendment No. 2 to the
proposed rule change prior to the thirtieth day after the day of
publication of notice of filing thereof in the Federal Register.
Specifically, Amendment No. 2 strengthens the proposed rule change by
clarifying the duties and identity of the lending agents, the
construction and maintenance standards for the Select Sector Indices
and the Technology 100 Index, and trading halt procedures for the
Funds. Amendment No. 2 also strengthens the proposal by providing for a
method of disseminating information on the value of the Fund Shares
that more closely tracks the actual value of Funds. Additionally,
Amendment No. 2 concerns issues that have been raised in prior Exchange
proposals that have been the subject of a full comment period pursuant
to Section 19(b) of the Act.\44\ Accordingly, the Commission believes
that there is good cause, consistent with Section
[[Page 68490]]
6(b)(5) and 19(b) of the Act,\45\ to approve Amendment No. 2 to the
proposal on an accelerated basis.
---------------------------------------------------------------------------
\44\ 15 U.S.C. 78s(b).
\45\ 15 U.S.C. 78f(b) and 78s(b).
---------------------------------------------------------------------------
Interested persons are invited to submit written data, views and
arguments concerning Amendment No. 2, 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, NW., Washington,
DC 20549. Copies of the submission, all subsequent amendments, all
written statements with respect to the proposed rule change that are
filed with the Commission, and all written communications relating to
the proposed rule change between the Commission and any person, other
than those that may be withheld from the public in accordance with the
provisions of 5 U.S.C. 552, will be available for inspection and
copying at the Commission's Public Reference Room. Copies of such
filing will also be available for inspection and copying at the
principal office of the Exchange. All submissions should refer to File
No. SR-AMEX-98-29 and should be submitted by January 4, 1999.
IV. Conclusion
It is therefore ordered, pusuant to Section 19(b)(2) of the
Act,\46\ that the proposed rule change (SR-AMEX-98-29), as amended, is
approved.
---------------------------------------------------------------------------
\46\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\47\
---------------------------------------------------------------------------
\47\ 17 CFR 299.30-3(a)(12).
---------------------------------------------------------------------------
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-32962 Filed 12-10-98; 8:45 am]
BILLING CODE 8010-01-M