[Federal Register Volume 63, Number 248 (Monday, December 28, 1998)]
[Notices]
[Pages 71524-71530]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-34251]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-40809; File No. SR-Amex-98-34]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the American Stock Exchange LLC Relating to Listing and 
Trading of Shares of the Nasdaq-100 Trust

December 18, 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 September 21, 1998, the American Stock Exchange LLC (``Amex'' or 
``Exchange'') filed with the Securities and Exchange Commission the 
proposed rule change as described in Items I, II, and III below,

[[Page 71525]]

which Items have been prepared by the self-regulatory organization. On 
December 16, 1998, the Exchange submitted to the Commission Amendments 
No. 1 and 2 to the proposed rule change.\3\ The Commission is 
publishing this notice to solicit comments on the proposed rule change 
as amended from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ The Exchange filed Amendment No. 1 to the original proposal 
to clarify the nature and operation of the Nasdaq-100 Trust shares 
(``Amendment No. 1''). See Letter from Geraldine M. Brindisi, Vice 
President and Corporate Secretary, Amex, to Michael Walinskas, 
Market Regulation, Commission, dated December 16, 1998. In Amendment 
No. 2, the Exchange discusses the basis for the mandatory 
termination date of the Trust. (``Amendment No. 2''). See Letter 
from Mike Cavalier, Associate General Counsel, Legal and Regulatory 
Policy, Amex, to Hong-anh Tran, Staff Attorney, Market Regulation, 
Commission, dated December 16, 1998.
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The Amex proposes to list and trade under Amex Rules 1000 et seq., 
Nasdaq-100 Shares, units of beneficial interest in the 
Nasdaq-100 Trust. The text of the proposed rule change is 
available at the Office of the Secretary, Amex and at the Commission.

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

    In its filing with the Commission, the self-regulatory organization 
included statements concerning the purpose of and basis for the 
proposed rule change and discussed any comments it received on the 
proposed rule change. The text of these statements may be examined at 
the places specified in Item IV below. The self-regulatory organization 
has prepared summaries, set forth in sections A, B, and C below, of the 
most significant aspects of such statements.

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

1. Purpose
    On December 11, 1992,\4\ the Commission approved Amex Rules 1000 et 
seq. to accommodate trading on the Exchange of Portfolio Depositary 
Receipts (``PDRs'' SM), securities which represent interests 
in a unit investment trust (``Trust'') operating on an open-end basis 
and that hold a portfolio of securities.\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\ 
In January 1998, the Commission approved the listing and trading of 
PDRs based on the Dow Jones Industrial Average SM 
(``DIAMONDS'').\8\
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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 LLC, a wholly-
owned subsidiary of the Exchange.
    \6\ See SPDRs, Order, supra note 4.
    \7\ See Securities Exchange Act Release No. 35534 (March 24, 
1995), 60 FR 16686 (March 31, 1995) (``MidCap SPDRs Order''). 
``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.
    \8\ See Securities Exchange Act Release No. 39525 (January 8, 
1998) 63 FR 2438 (January 15, 1998) (``DIAMONDS Order''). ``Dow 
Jones Industrial Average,'' SM ``DJIA,'' SM 
``Dow Jones'' SM and ``DIAMONDS'' are each trademarks and 
service marks of Dow 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. The Sponsor for the SPDR, 
MidCap SPDR, and DIAMONDS Trust is PDR Services LLC.
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    The Exchange now proposes to list and trade under Rules 1000 et 
seq. Nasdaq-100 Shares (referred to herein as ``Trust shares''), units 
of beneficial interest in the Nasdaq-100 Trust, Series 1, a unit 
investment trust based on the Nasdaq-100 Index (``Nasdaq-
100 Trust'' or ``Trust'').\9\ The Trust Sponsor, Investment Product 
Services, Inc., which is wholly-owned by The Nasdaq Stock Market, Inc. 
(``Nasdaq''), will enter into a trust agreement with The Bank of New 
York as trustee (the ``Trustee'') in accordance with Section 26 of the 
Investment Company Act of 1940.\10\ A distributor will act as 
underwriter of the Nasdaq-100 Trust on an agency basis. All orders to 
create Trust shares 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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    \9\ The ``Nasdaq-100 Index,''  ``Nasdaq-100,'' 
 ``Nasdaq,''  and ``The Nasdaq Stock 
Market''  are trademarks of Nasdaq and have been 
licensed for use for certain purposes by Investment Product 
Services, Inc. pursuant to a License Agreement with Nasdaq. The 
specific name of the Trust and units of beneficial interest based on 
the Nasdaq-100 Index is subject to change and any such change will 
be filed with the Commission as an amendment hereto.
    \10\ An Application for Orders pursuant to Section 6(c) of the 
Investment Company Act of 1940 (``1940 Act'') has been filed with 
respect to the Trust (the ``Application''). In the interest of 
facilitating secondary market transactions in Trust shares, the 
Application seeks, among other things, an order (1) permitting 
secondary market transactions in Trust shares at negotiated prices 
rather than at a current public offering price described in the 
prospectus and based on current net asset value as required by 
Section 22(d) of the 1940 Act and Rule 22c-1 thereunder; and (2) 
permitting the sale of Trust shares 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. In addition 
a registration statement on Form S-6, including a preliminary 
prospectus for the Trust (No. 333-61001), has been filed with the 
Commission. These exemptions, if granted, will permit individual 
Trust shares to be traded in secondary market transactions similar 
to a closed end investment company. Both the Application and the 
registration statement provide additional detail relating to a 
number of the procedures referenced in SR-Amex-98-34.
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    The Nasdaq-100 Index \11\. The Nasdaq-100 
(``Index'') constitutes a broadly diversified segment of the largest 
and most actively traded securities listed on the Nasdaq Stock Market. 
Additionally, the Index has achieved wide acceptance by both investors 
and market professionals. Specifically, the Index is composed of 100 of 
the largest and most actively traded non-financial companies listed on 
the Nasdaq National Market tier of the Nasdaq Stock Market.
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    \11\ The description of the Nasdaq-100 Index herein as well as 
discussion of eligibility criteria, annual ranking review, ongoing 
index administration, and Index rebalancing are based on materials 
prepared by The Nasdaq Stock Market.
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    The Index was first published in January 1985, and includes 
companies across a variety of major industry groups. The major industry 
groups covered in the Index are: computer and office equipment, 
computer and software/services, telecommunications, retail-wholesale 
trade, biotechnology, services, health care, manufacturing, and 
transportation. The five largest companies represented in the Index as 
of December 14, 1998 are as follows: Microsoft Corporation, Intel 
Corporation, Cisco Systems Inc., Dell

[[Page 71526]]

Computer Corporation and MCI WORLDCOM, Inc. Current information 
regarding the market value of the Index is available from Nasdaq as 
well as numerous market information services. The index is determined, 
composed, and calculated by Nasdaq without regard to the Trust.
    At any moment in time, the value of the Index equals the aggregate 
value of the then-current Index share weights (described below) of each 
of the component 100 securities in the Index (the ``Index Securities'') 
multiplied by each such security's respective last sale price on the 
Nasdaq Stock Market, and divided by a scaling factor (the ``divisor'') 
which becomes the basis for the reported Index value. The divisor 
serves the purpose of scaling such aggregate value (otherwise in the 
hundreds of billions) to a lower order of magnitude which is more 
desirable for index reporting purposes.\12\
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    \12\ For example, on November 12, 1998, the aggregate value of 
the then-current Index share weights of each of the Index Securities 
multiplied by their respective last sale price on the Nasdaq Stock 
Market was $1,218,098,456,568, the divisor was 830,593,408, and the 
reported Index value was 1,466.54.
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    The Index share weights of the component securities of the Index at 
any time are based upon the total shares outstanding in each of the 100 
Index Securities and will be additionally subject (prior to the 
issuance of Trust shares) to rebalancing to ensure that the relative 
weighting of the Index Securities continues to meet minimum pre-
established requirements for a diversified portfolio (see ``Rebalancing 
of the Index''). Accordingly, each Index Security's influence on the 
value of the Index is directly proportional to the value of its Index 
share weight. At any time at which the composition and/or Index share 
weights are adjusted as described herein, a new divisor will be 
determined and become effective so as to offset the change in aggregate 
value of the Index Securities in order to ensure the continuity of the 
value of the Index in connection with such adjustment.
    Index security eligibility criteria and annual ranking review. To 
be eligible for inclusion in the Index, a security must be traded on 
the Nasdaq National Market tier of the Nasdaq Stock Market and meet the 
following criteria:
     The security must be of a non-financial company;
     Only one class of security per issuer is allowed;
     The security may not be issued by an issuer currently in 
bankruptcy proceedings;
     The security must have average daily trading volume of at 
least 100,000 shares per day;
     The security must have ``seasoned'' on the Nasdaq Stock 
Market or another recognized market (generally, a company is considered 
to be seasoned by Nasdaq if it has been listed on a market for at last 
two years; in the case of spin-offs, the operating history of the spin-
off will be considered);
     If a security would otherwise qualify to be in the top 25% 
of the issuers included in the Index by market capitalization, the 
``seasoning'' criteria would not apply; and
     If the security is of a foreign issuer, the company must 
have a worldwide market value of at least $10 billion, a U.S. market 
value of at least $4 billion, and average trading volume on the Nasdaq 
Stock Market of at least 200,000 shares per day; in addition, foreign 
securities must be eligible for listed options trading.
    The Index Securities are evaluated annually based on market data as 
of the end of October as follows (such evaluation is referred to herein 
as the ``Annual Ranking Review''). Securities listed on the Nasdaq 
Stock Market which meet the above eligibility criteria are ranked by 
market value as of the end of October. Index-eligible securities which 
are already in the Index and which are in the top 150 eligible 
securities (based on market value) are retained in the Index provided 
that such security was ranked in the top 100 eligible securities as of 
the previous year's annual review. Securities not meeting such criteria 
are replaced. The replacement securities chosen are those Index-
eligible securities not currently in the Index which have the largest 
market capitalization. The list of annual additions and deletions is 
publicly announced via a press release in the early part of December. 
Replacements are made effective after the close of trading on the third 
Friday in December. Moreover, if at any time during the year an Index 
Security is no longer traded on the Nasdaq Stock Market, or is 
otherwise determined by Nasdaq to become ineligible for continued 
inclusion in the Index, the security will be replaced with the largest 
market capitalization security not currently in the Index and meeting 
the Index eligibility criteria listed above.
    Ongoing index administration. In addition to the Annual Ranking 
Review, the securities in the Index are monitored every day by Nasdaq 
with respect to changes in total shares outstanding arising from 
secondary offerings, stock repurchases, conversions, or other corporate 
actions. Periodically (typically, several times per quarter), Nasdaq 
may determine that total shares outstanding have changed in one or more 
Index Securities as a result of such events and Nasdaq has adopted the 
following quarterly scheduled weight adjustment procedures with respect 
to such changes. If the change in total shares outstanding arising from 
such corporate action is greater than or equal to 5.0%, such change is 
ordinarily made to the Index on the evening prior to the effective date 
of such corporate action. Otherwise, if the change in total shares 
outstanding is less than 5.0%, then all such changes are accumulated 
and made effective at one time on a quarterly basis after the close of 
trading on the third Friday in each of March, June, September, and 
December. In either case, the Index Share weights for such Index 
Securities are adjusted by the same percentage amount by which the 
total shares outstanding have changed in such Index Securities. 
Ordinarily, whenever there is a change in Index share weights or a 
change in a component security included in the Index, Nasdaq adjusts 
the divisor to assure that there is no discontinuity in the value of 
the Index which might otherwise be caused by any such change.
    As noted above, Nasdaq may also during each quarter (ordinarily, 
several times per quarter) replace one or more component securities in 
the Index due to mergers, acquisitions, bankruptcies, or due to 
delistings if an issuer chooses to list its securities on another 
marketplace, or if the issuers of such component securities fail to 
meet the eligibility criteria for continued inclusion in the Index.
    Rebalancing of the Index. Effective on December 18, 1998, the Index 
will be calculated under a ``modified capitalization weighted'' 
methodology, which is a hybrid between equal weighting and conventional 
capitalization weighting. This methodology is expected to: (1) Retain 
in general the economic attributes of capitalization weighting; (2) 
promote portfolio weight diversification (thereby limiting domination 
of the Index by a few large stocks); (3) reduce Index performance 
distortion by preserving the capitalization ranking of companies; and 
(4) reduce market impact on the smallest component securities from 
necessary weight rebalancings.
    Specifically, on a quarterly basis coinciding with Nasdaq's 
quarterly scheduled weight adjustment procedures (see ``Ongoing Index 
Administration''), the Index Securities are categorized as either 
``Large Stocks'' or ``Small Stocks'' depending on

[[Page 71527]]

whether their current percentage weights (after taking into account 
such scheduled weight adjustments due to stock repurchases, secondary 
offerings, or other corporate actions) are greater than, or less than 
or equal to, the average percentage weight in the Index (i.e., as a 
100-stock index, the average percentage weight in the Index is 1.0%).
    Such quarterly examination will result in an index rebalancing if 
either one or both of the following two weight distribution 
requirements are not met: (1) The current weight of the single largest 
market capitalization stock in the Index must be less than or equal to 
24.0% and (2) the ``collective weight'' of those stocks whose 
individual current weights are in excess of 4.5%, when added together, 
must be less than or equal to 48.0%.
    If either one or both of these weight distribution requirements are 
not met upon quarterly review, a weight rebalancing will be performed 
in accordance with the following plan. First, relating to weight 
distribution requirement (1) above, if the current weight of the single 
largest stock in the Index exceeds 24.0%, then the weights of all Large 
Stocks will be scaled down proportionately towards 1.0% by enough for 
the adjusted weight of the single largest stock to be set to 20.0%. 
Second, relating to weight distribution requirement (2) above, for 
those stocks where individual current weights or adjusted weights in 
accordance with the preceding step are in excess of 4.5%, if their 
``collective weight'' exceeds 48.0%, then the weights of all Large 
Stocks will be scaled down proportionately towards 1.0% by just enough 
for the ``collective weight,'' so adjusted, to be set to 40.0%.\13\
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    \13\ By applying the weight rebalancing methodology, the Trust 
is able to meet, among other things, certain diversification tests 
which enable the trust to maintain its tax treatment as a 
``regulated investment company'' under Subchapter M of the Internal 
Revenue Code of 1986, as amended.
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    The aggregate weight reduction among the Large Stocks resulting 
from either or both of the above rescalings will then be redistributed 
to the Small Stocks in the following iterative manner. In the first 
iteration, the weight of the largest Small Stock will be scaled upwards 
by a factor which sets it equal to the average index weight of 1.0%. 
The weights of each of the smaller remaining Small Stocks will be 
scaled up by the same factor reduced in relation to each stock's 
relative ranking among the Small Stocks such that the smaller the stock 
in the ranking, the less the scale-up of its weight. This is intended 
to reduce the market impact of the weight rebalancing on the smallest 
component securities in the Index.
    In the second iteration, the weight of the second largest Small 
Stock, already adjusted in the first iteration, will be scaled upwards 
by a factor which sets it equal to the average index weights of 1.0%. 
The weights of each of the smaller remaining Small Stocks will be 
scaled up by this same factor reduced in relation to each stock's 
relative ranking among the Small Stocks such that, once again, the 
smaller the stock in the ranking, the less the scale-up of its weight.
    Additional iterations will be performed until the accumulated 
increase in weight among the Small Stocks exactly equals the aggregate 
weight reduction among the Large Stocks from rebalancing in accordance 
with weight distribution requirement (1) and/or weight distribution 
requirement (2) above.
    To complete the rebalancing procedure, once the final percent 
weights of each stock in the Index are set, the Index share weights 
will be determined anew based upon the last sale prices and aggregate 
capitalization of the Index at the close of trading on the Thursday in 
the week immediately preceding the week of the third Friday in March, 
June, September, and December. Changes to the Index share weights will 
be made effective after the close of trading on the third Friday in 
March, June, September, and December and a corresponding adjustment to 
the Index divisor will be made to ensure continuity of the Index. Such 
changes to the Index share weights would result either from (1) 
adjustments to reflect changes in total shares outstanding in one or 
more Index Securities made during Nasdaq's quarterly scheduled weight 
adjustment procedures (see ``Ongoing Index Administration''), (2) 
changes effective in the quarter ending in December in connection with 
the Annual Ranking Review (see ``Index Security Eligibility Criteria 
and Annual Ranking Review''); or (3) changes based on the rebalancing 
of the Index in accordance with procedures described above.\14\
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    \14\ Effective on December 21, 1998, Nasdaq will be maintaining 
two versions of the Nasdaq-100 Index, calculated based on (1) 
conventional capitalization weighting and (2) modified 
capitalization weighting. Nasdaq-100 Index options listed for 
trading on the Chicago Board Options Exchange (``CBOE'') prior to 
December 21, 1998, (whose expiration dates extend as far out as 
March 1999) will continue to be based on the conventional 
capitalization weighted version. Nasdaq-100 Index options listed for 
trading on the CBOE on or after December 21, 1998, will be based on 
the modified capitalization weighted version. After expiration of 
March index option contracts on March 20, 1999, the Index version 
based on the conventional weighting method will no longer be 
calculated. At all times, the Trust intends to replicate the 
composition and weighting of the Nasdaq-100 Index based on the 
modified capitalization weighting method.
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    The Nasdaq-100 Trust. To be eligible to place orders to create 
Trust shares, 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 Trust shares, the distributor will instruct the Trustee to 
initiate the book-entry movement of the appropriate number of Trust 
shares to the account of the entity placing the order. Trust shares 
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; and, in addition, (2) an amount equal to the ``Income Net 
of Expense Amount,'' plus or minus, as the case may be, the ``Balancing 
Amount.'' The ``Income Net of Expense Amount'' is an amount equal, on a 
per Creation Unit basis, to the dividends accumulated in respect of the 
securities held in the Trust from the most recent ex-dividend date for 
Trust shares through and including the day on which the creation order 
is placed, net of accrued expenses and liabilities of the Trust for 
such period. The ``Balancing Amount'' serves the function of 
compensating for any differences between (1) the value of the portfolio 
of securities deposited with the Trustee in connection with a creation 
of Trust shares, together with the Income Net of Expense Amount, and 
(2) the net asset value of the Trust on a per Creation Unit basis. The 
``Income Net of Expense Amount'' and the ``Balancing Amount'' are 
collectively referred to as the ``Cash Component'' in the Trust 
Application and registration statement, and the deposit of a specified 
portfolio of securities (as referenced above) and the Cash Component 
are collectively referred to as a ``Portfolio Deposit.'' On any given 
day, the Cash Component of the Portfolio Deposit may be payable either 
by the Trustee on behalf of the Trust to the creator of Trust shares, 
or by the creator of Trust shares to the Trustee on behalf of the 
Trust, depending on the respective amounts of

[[Page 71528]]

the ``Income Net of Expense Amount'' and the ``Balancing Amount.''
    In connection with redemptions of Creation Unit size aggregations 
of Trust shares, the redeeming party receives a portfolio of securities 
typically identical in composition and weighting to the securities 
portion of a Portfolio Deposit as in effect on the date a request for 
redemption is deemed received by the Trustee, in addition, in certain 
cases, to a ``Cash Redemption Amount'' (as defined in the Trust 
prospectus) which is typically identical to the amount of the ``Cash 
Component,'' as in effect on such date. The ``Cash Redemption Amount'' 
will either be paid to the Trustee on behalf of the Trust by the 
redeemer or paid to the redeemer by the Trustee on behalf of the Trust, 
again depending upon the respective amounts of the ``Income Net of 
Expense Amount'' and the ``Balancing Amount,'' as described in the 
Trust prospectus.
    The mandatory termination date of the Trust will be the first to 
occur of (i) a date in 2123 or (ii) the date 20 years after the death 
of the last survivor of fifteen (15) specified persons named in the 
Trust Agreement between the Trust Sponsor and the Trustee, the oldest 
of whom was born in 1986 and the youngest of whom was born in 1996.\15\
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    \15\ The SEC staff notes that Amex has stated 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 not later than twenty-one 
years after lives in being at the creation of 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. 2, 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 Trust shares which aggregate 
number is referred to as a ``Creation Unit.'' The Exchange anticipates 
that, with respect to the Nasdaq-100 Trust, a Creation Unit will be 
made up of 50,000 Trust shares.
    Individual Trust shares can then be traded in the secondary market 
like other equity securities. It is expected that Portfolio Deposits 
will be made primarily by institutional investors, arbitrageurs and the 
Exchange specialist. The Trust has been structured to provide for the 
initial issuance of Trust shares at a per share price which would 
approximate 1/20th of the prevailing value of the Nasdaq-100 Index. As 
of November 12, 1998, it is estimated that the value of an individual 
Trust share would be approximately $74 (1/20th of the prevailing value 
of the Index on such date).
    The Trust sponsor, Investment Product Services, Inc., intends to 
make available itself, or by other persons designated to do so by the 
Sponsor, a list of the names and the required number of shares for each 
of the securities in the current Portfolio Deposit. The Trust Sponsor 
also intends to make available through the facilities of the Amex on 
each Business Day the Income Net of Expense Amount effective through 
and including the previous business day per outstanding Trust share. 
The Sponsor may also choose within its discretion to make available, 
frequently throughout each business day, a number representing, on a 
per Trust share basis, the sum of the Income Net of Expense Amount 
effective through and including the previous business day plus the 
current value of the securities portion of a Portfolio Deposit as in 
effect on such day (which value will occasionally include a cash-in-
lieu amount to compensate for the omission of a particular Index 
Security from such Portfolio Deposit). If the Sponsor elects to make 
such information available, it would be calculated based upon the best 
information available to the Sponsor and may be calculated by other 
persons designated to do so by the Sponsor (e.g., the Amex). In 
addition, the Trust will make available to NSCC prior to commencement 
of trading on each business day a list of the names and required number 
of shares of each of the Index Securities in the current Portfolio 
Deposit as well as the Income Net of Expense Amount for the previous 
business day.
    Transactions in Trust shares may be effected on the Exchange until 
4:15 p.m. New York time each business day. The minimum fractional 
change for Trust shares shall be 1/64 of $1.00.
    Redemption. Trust shares in Creation Unit size aggregations 
generally will be redeemable in kind by tendering them to the Trustee. 
While holders may sell Trust shares in the secondary market at any 
time, they must accumulate at least 50,000 (or multiples thereof) to 
redeem through the Trust. Trust shares will remain outstanding until 
redeemed or until the termination of the Trust. Creation Unit size 
aggregations of Trust shares generally will be redeemable on any 
business day in exchange for a portfolio of the securities held by the 
Trust typically identical in composition and weighting to the 
securities portion of a Portfolio Deposit in effect on the date request 
is made for redemption, together, in certain cases, with a ``Cash 
Redemption Amount'' (as referred to above), including accumulated 
dividends, less accrued expenses and liabilities of the Trust, through 
the date of redemption, which will either be paid to the Trustee by the 
redeemer or paid to the redeemer by the Trustee on behalf of the Trust 
depending upon the respective amounts of the ``Income Net of Expense 
Amount,'' and the ``Balancing Amount,'' as described previously. The 
number of shares of each of the securities transferred to the redeeming 
holder generally will be the number of shares of each of the component 
stocks in a Portfolio Deposit on the day a redemption notice is 
received by the Trustee, multiplied by the number of Creation Units 
being redeemed. Nominal service fees may be charged in connection with 
the creation and redemption of Creation Units. The Trustee will cancel 
all Trust shares delivered upon redemption.
    The Trustee, in its discretion, upon the request of the redeeming 
investor, may redeem Creation Units in whole or in part by providing 
such redeemer with a portfolio of securities differing in exact 
composition and weighting from the Index Securities but not differing 
in net asset value from the then current net asset value of Trust 
shares. Such a redemption is likely to be made only if it were to be 
determined that this composition would be appropriate in order to 
maintain the portfolio of the Trust in correlation to the composition 
and weighting of the Index, for instance, in connection with a 
replacement of one of the Index Securities (e.g., due to a merger, 
acquisition, or bankruptcy, or in connection with the rebalancing of 
the Index).
    Distributions. Distributions by the Trust will be made quarterly in 
the event that dividends accumulated in respect of the Trust securities 
and other income, if any, received by the Trust, exceed Trust fees and 
expenses accrued during the quarter. Based on historical dividend 
payment rates of the portfolio of stocks comprising the index and 
estimated ordinary operating expenses of the Trust, little or no such 
distributions are currently anticipated. The regular quarterly Ex-
Dividend Date with respect to net dividends, if any, for the Trust will 
be the third Friday in each of March, June, September, and December, 
unless such day is not a business day, in which case the Ex-Dividend 
Date will be the immediately preceding business day. However, there 
shall be no net dividend distribution in any given quarter, and any net 
dividend amounts will be rolled into the next quarterly accumulation 
period, if the aggregate net dividend distribution would be in an 
amount less than 5/100 of one percent (0.05%) of the net asset value of 
the Trust as of the Friday in the

[[Page 71529]]

week immediately preceding the Ex-Dividend Date, unless the Trustee 
determines that such net dividend distribution is required to be made 
in order to maintain the Trust's status as a regulated investment 
company or to avoid the imposition of income or excise taxes on 
undistributed income.
    Beneficial owners as reflected on the records of the Depository and 
the DTC Participants on the second business day following the ex-
dividend date (the ``record date'') are entitled to receive an amount, 
if any, representing dividends accumulated through the quarter, net of 
the fees and expenses of the Trust, accrued daily for such period. For 
the purposes of such distributions, dividends per Trust share are 
calculated at least to the nearest 1/100th of $0.01. When net dividend 
payments are to be made by the Trust, payment will be made on the last 
business day in the calendar month following each Ex-Dividend Date (the 
``Dividend Payment Date). Dividend payments will be made through the 
Depository and the DTC Participants to Beneficial Owners then of record 
with funds received from the trustee. The Sponsor reserves the right to 
make the DTC Dividend Reinvestment Service (the ``Service'') available 
in the future for use by Trust shareholders through DTC Participants 
for reinvestment of their periodic cash distributions, if any. In the 
event the Service is made available, not all DTC Participants may 
choose to utilize this Service and an interested investor would have to 
consult his or her broker to ascertain the availability of dividend 
reinvestment through such broker, as well as applicable procedures.
    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 
Trust shares, it is anticipated that a minimum of 150,000 Trust shares 
(i.e., three Creation Units of 50,000 Trust shares each), will be 
required to be outstanding when trading begins.
    The 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 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 shall be redeemed in accordance with provisions of the trust 
prospectus. A trust may also terminate under such other conditions as 
may be set forth in the trust prospectus. For example, the Sponsor, 
following notice to Trust shareholders, shall have discretion to direct 
that the Trust be terminated if the value of securities in such Trust 
is below a specified amount. The Trust may also terminate if the 
license agreement with Nasdaq terminates.\16\
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    \16\ With respect to the Trust, the Sponsor has the 
discretionary right to direct the Trustee to terminate the Trust if 
at any time after six months following and prior to three years 
following the inception of the Trust the net asset value falls below 
$150,000,000, or if at any time on or after three years following 
inception of the Trust the net asset value of the Trust is below 
$350,000,000 in value, adjusted annually for inflation.
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    Trading halts. Prior to commencement of trading in Trust shares, 
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 forth in 
Rule 918C(b) in exercising its discretion to halt or suspend trading in 
PDRs, including Trust shares. These factors include, but are not 
limited to (1) the extent to which trading is not occurring in stocks 
underlying the Index; and (2) whether other unusual conditions or 
circumstances detrimental to the maintenance of a fair and orderly 
market are present.\17\
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    \17\ See Amex Rule 918C.
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    In addition, trading in Trust shares will be halted if the circuit 
breaker parameters under Amex Rule 117 have been reached. The 
triggering of futures price limits for index futures contracts such as 
Nasdaq 100 Index futures, will not, in itself, require a halt in Trust 
shares trading or a delayed opening. However, such an event could be 
considered by the Exchange along with other factors, such as a halt in 
Nasdaq-100 or other broad-based index options trading, in deciding to 
halt trading in Trust shares or other index-based derivative 
securities.
    Terms and characteristics. Under Amex Rule 1000, Commentary .01, 
Amex members and member organizations are required to provide to all 
purchasers of Trust shares 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 the Trust that 
is provided to customers or the public. In addition, the Exchange 
requires that members and member organizations provide customers the 
prospectus for the Trust 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 Trust shares 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 Trust shares, the Exchange will 
distribute to Exchange members and member organizations an Information 
Circular calling attention to characteristics of the Trust and to 
applicable Exchange rules.
    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 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 PDRs (of which Trust shares are 
PDRs), as eligible for this treatment.\18\
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    \18\ See Securities Exchange Act Release No. 39607 (February 2, 
1998), 63 FR 6587 (February 9, 1998) (File No. SR-Amex-98-04), 
regarding the designation of PDRs as eligible for stop and stop 
limit order election under Amex Rule 154(c). See also Securities 
Exchange Act Release No. 29063 (April 10, 1991), 56 FR 15652 (April 
17, 1991) (File No. SR-Amex-90-31) regarding election of stop and 
stop limit orders by quotation for certain derivative equity 
securities designated by the Exchange as eligible for such election.
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    Other applicable rules. Like SPDRs, MidCap SPDRs, and DIAMONDS, 
trading in Trust shares on the Amex will be subject to the provisions 
of Amex Rules 1000 et seq. and regular Exchange

[[Page 71530]]

equity trading rules will apply, including Exchange rules relating to 
priority, parity and precedence and the obligations of specialists. The 
provisions of Amex Rule 411 (Duty to Know and Approve Customers) apply 
to customer transactions in Portfolio Depository Receipts, and would 
therefore apply to Trust units transactions; no enhanced suitability 
standards are applicable to such securities.
2. Statutory Basis
    The proposed rule change is consistent with Section 6(b) of the Act 
in general and furthers the objectives of Section 6(b)(5) in particular 
in that it is designed to prevent fraudulent and manipulative acts and 
practices, to promote just and equitable principles of trade, to foster 
cooperation and coordination with persons engaged in regulating, 
clearing, settling, processing information with respect to, and 
facilitating transactions in securities, and, in general, to protect 
investors and the public interest. The Exchange believes that PDRs, 
generally, and Trust shares specifically, have the potential to benefit 
the markets by providing an alternate trading instrument, such as those 
encouraged by the Division of Market Regulation in its report, ``The 
October 1987 Market Break,'' that may help temper market volatility and 
reduce stress on individual index component stocks during unusual 
market conditions.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any inappropriate burden on competition.

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

    No written comments were either solicited or received.

III. 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 self-regulatory organization consents, the Commission will:
    (A) by order approve such 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 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 in the 
Commission's Public Reference Room. Copies of such filing will also be 
available for inspection and copying at the principal office of the 
Amex. All submissions should refer to the File No. SR-Amex-98-34 and 
should be submitted by January 19, 1999.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\19\
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    \19\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-34251 Filed 12-24-98; 8:45 am]
BILLING CODE 8010-01-M