[Federal Register Volume 64, Number 15 (Monday, January 25, 1999)]
[Notices]
[Pages 3730-3734]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-1530]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-40950; File No. SR-CHX-98-31]


Self-Regulatory Organizations; Notice of Filing and Order 
Granting Accelerated Approval of Proposed Rule Change by the Chicago 
Stock Exchange, Inc. Relating to the Trading of Select Sector 
SPDRs

January 15, 1999.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act''),\1\ notice is hereby given that on December 18, 1998, the 
Chicago Stock Exchange, Inc. (``CHX'' or the ``Exchange'') filed with 
the Securities and Exchange Commission (``Commission'') the proposed 
rule change as described in Items I and II below, which Items have been 
prepared by the CHX. The Commission is publishing this notice and order 
to solicit comments on the proposed rule change from interested persons 
and to approve the proposal on an accelerated basis.
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    \1\ 15 U.S.C. 78s(b)(1).
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The CHX proposes to trade, pursuant to unlisted trading privileges 
(``UTP'') and the listing standards of CHX Article XXVIII, Rule 24, 
nine series of Select Sector SPDRs by adding a new 
interpretation and policy .03 to Article XXVIII, Rule 24 and amending 
interpretation and policy .05 of Article XX, Rule 22.\2\
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    \2\ ``S&P'', ``Standard & Poor's 
500'',``Standard & Poor's Depository 
Receipts'' and ``SPDRs'', and ``Select 
Sector SPDR'' are trademarks of the McGraw-Hill 
Companies, Inc.
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II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, he Proposed Rule Change

    In its filing with the Commission, The CHX 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 staements may be examined at the places specified in Item 
III below. The CHX 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
    CHX Article XXVIII, Rule 24 provides for the listing and trading of 
units representing an interest in a registered investment company 
(``Units'') that seek to provide investment results that correspond 
generally to the price and yield performance of a specified foreign or 
domestic index.\3\ The Exchange currently trades, pursuant to unlisted 
trading privileges, several series of World Equity Benchmark Shares 
TM (``WEBSTM,,) \4\ based on Morgan Stanley 
Capital International foreign stock indices pursuant to the standards 
set forth in Article XXVIII, Rule 24.\5\ WEBS are currently listed and 
traded on the American Stock Exchange (``AMEX'') under AMEX Rules 1000A 
et seq.,\6\ which rules are substantially the same as CHX Article 
XXVIII, Rule 24.
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    \3\ See Securities Exchange Act Release No. 37121 (April 17, 
1996), 61 FR 17932 (April 23, 1996) (Order approving SR-CHX-96-12 
amending Article XXVIII providing for the listing and trading of 
units representing an interest in a registered investment company).
    \4\ ``World Equity Benchmark Shares'' and ``WEBS'' are service 
marks of Morgan Stanley Group, Inc.
    \5\ See Securities Exchange Act Release No. 39117 (September 22, 
1997), 62 FR 50973 (September 29, 1997) (Order approving SR-CHX-96-
14 to commence trading of WEBS pursuant to UTP and CHX Article 
XXVIII, Rule 24).
    \6\ 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.
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    The CHX proposes to trade, pursuant to UTP and the listing 
standards of CHX Article XXVIII, Rule 24, nine series of Select Sector 
SPDRs by adding a new interpretation and policy .03 to Article XXVIII, 
Rule 24 and amending interpretation and policy .05 of Article XX, Rule 
22.\7\ The Select Sector SPDRs, described below, are issued by an open-
end management investment company.\8\
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    \7\ The AMEX received the Commission's approval to list and 
trade nine series of Select Sector SPDRs under AMEX Rules 1000A et 
seq. Securities Exchange Act Release No. 40749 (December 4, 1998), 
63 FR 68483 (December 11, 1998) (``AMEX Select Sector SPDRs Approval 
Order'').
    \8\ The Selector Sector SPDR Trust (with respect to Select 
Sector SPDRs) 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 from various provisions of the 1940 Act. See Investment 
Company Act Release No. 23492 (October 20, 1998), 63 FR 57332 
(October 27, 1998).
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(a) Select Sector SPDRs
    The Exchange proposes to trade nine investment series of Select 
Sector

[[Page 3731]]

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.
    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 (each, a ``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 and, upon 
approval of this proposed rule change, will also be traded on the 
Exchange. 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 off 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, the list of names and the 
required number of shares of stocks of each relevant Select Sector 
Index to be included in the securities deposit required in connection 
with creation of Select Sector SPDRs in Creation Unit size 
aggregations.
    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 specified sectors. Each 
stock included in a Select Sector Index (the ``Component Stocks'') will 
be selected from companies represented in the S&P 500. The nine Select 
Sector Indices together will include all of the companies represented 
in the S&P 500. Each S&P 500 stock will be allocated to one and only 
one of the Select Sector Indices. The CHX understands that 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 should ensure 
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.\9\
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    \9\ Each Select Sector SPDR 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.
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    The stocks included in a Select Sector Index have been assigned to 
a Select Sector Index by Merrill Lynch (``the Index Compilation 
Agent''). The Index Compilation Agent, after consultation with Standard 
& Poor's assigns stocks to a particular Select Sector Index with the 
aim of categorizing a company's fundamental business on the basis of 
the company's sales and earning 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. 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 assigns a replacement stock to the S&P 
500, Merrill Lynch will assign the same stock to whichever Select 
Sector Index it deems appropriate.
    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 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 Stocks must 
be diversified so that no single Component Stock measured on the last 
day of a calendar quarter represents more than 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.
    The Index Compilation Agency 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 
it should be removed from the Select Sector Index and assigned to a 
different Select Sector Index. In the event that the Index Compilation 
Agent notifies the AMEX ISG that a Component Stocks Select Sector Index 
assignment should be changed, the AMEX will disseminate notice of the 
change by issuing an information circular to its membership within one 
business day of receipt of such notice and will implement the

[[Page 3732]]

change in the affected Select Sector Indices no less than one week 
after the initial dissemination of information on the sector change to 
the extent practicable.
    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 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.\10\ 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.
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    \10\ Standard & Poor's generally announces S&P 500 changes five 
business days before they take effect.
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    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.\11\ 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.\12\
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    \11\ CHX has requested that AMEX forward changes in the 
Component Stocks of a Select Sector SPDR Index or the Index Divisors 
to the Exchange as it becomes publicly available. To the extent that 
the CHX has access to such information, the Exchange will notify its 
members of these changes. Telephone conversation between David 
Rusoff, Foley & Lardner, and Marc McKayle, Attorney, Division of 
Market Regulation, Commission, on January 12, 1999.
    \12\ Select Sector SPDRs generally will hold all of the 
securities in the applicable index, subject to certain conditions 
disclosed in the applicable prospectus.
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(b) Trading Issues
    The Select Sector SPDR shares will be deemed equity securities 
subject to all CHX rules governing the trading of equity securities, 
including, among others, rules governing priority, parity, and 
precedence of orders, market volatility related trading halt 
provisions, and responsibilities of specialists. The minimum trading 
increment under Article XX, Rule 22 for Select Sector SPDRs will be \1/
64\ of $1.00.
(c) Disclosure
    Member firms will be informed by an information circular, prior to 
the commencement of trading, that investors purchasing Select Sector 
SPDRs must receive a fund prospectus prior to, or concurrently with, 
the confirmation of a transaction. The information circular will also 
address Exchange members' responsibilities under CHX Article VIII, Rule 
25 (``know your customer rule'') regarding transactions in such 
shares.\13\ The circular also will address members' responsibility to 
deliver a prospectus to all investors as well as highlight the 
characteristics of purchases of Select Sector SPDRs.
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    \13\ CHX Article VIII, Rule 25 generally requires that members 
use due diligence to learn the essential facts relative to every 
customer, every order or account accepted.
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(d) Dissemination of Information by the Exchange
    The value of the Select Sector Indices 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.
    To provide up to date pricing information for the Funds' shares, 
the AMEX 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.
(e) Other Characteristics of Select Sector SPDRs
    For each of the nine series of Select Sector SPDRs, it is 
anticipated that a minimum of the three Creation Units will be 
outstanding at the commencement of trading on the Exchange. Select 
Sector SPDRs 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 SPDRs.\14\ 
ALPS Mutual Funds Services, Inc. will serve as principal underwriter 
and distributor for the Select Sector SPDRs. Select Sector SPDRs will 
be registered in book-entry form through The Depository Trust Company.
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    \14\ 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.
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2. Statutory Basis
    The proposed rule change is consistent with Section 6(b)(5) of the 
Act in that it is designed to promote just and equitable principles of 
trade, to remove impediments to and perfect the mechanism of a free and 
open market and a national market system, and, in general, to protect 
investors and the public interest.

(B) Self-Regulatory Organization's Statement on Burden on Competition

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

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

    The Exchange has neither solicited nor received written comments on 
the proposed rule change.

III. Solicitation of Comments

    Interested persons are invited to submit written data, views and

[[Page 3733]]

arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Persons making written submissions 
should file six copies thereof with the Secretary, Securities and 
Exchange Commission, 450 Fifth Street, N.W., Washington D.C. 20549. 
Copies of the submissions, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written Communications relating to the prapased 
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 Section, 450 Fifth Street, N.W., 
Washington, D.C. 20549. Copies of such filing will also be available 
for inspection and copying at the principal office of the CHX. All 
submissions should refer to File No. SR-CHX-98-31 and should be 
submitted by February 16, 1999.

IV. Commission Findings and Order Granting Accelerated Approval of 
Proposed Rule Change

    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, with the requirements of Section 6(b)(5).\15\ Section 
6(b)(5) provides that Exchange rules facilitate transactions in 
securities, remove impediments to and perfect the mechanism of a free 
and open market and a national market system, and, in general, protect 
investors and the public interest. Moreover, that section of the Act 
requires that an exchange's rules not be designed to permit unfair 
discrimination between customers, issuers, brokers, or dealers.\16\
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    \15\ U.S.C. 78f(b)(5).
    \16\ In approving this rule, the Commission notes that it has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. 15 U.S.C. 78c(f).
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    As the Commission noted in greater detail in the order approving 
Select Sector SPDRs for listing and trading on AMEX.\17\ the estimated 
cost of an individual Select Sector SPDRs \18\ 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. Under the proposed rule change, 
the benefits of Select Sector SPDRs will now be available to investors 
trading on CHX which could benefit investors through intermarket 
competition.
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    \17\ See AMEX Select Sector SPDRs Approval Order, supra note 7.
    \18\ As noted in the AMEX Select Sector SPDRs Approval Order 
supra note 7, the estimated cost at the time of the approval for 
trading on AMEX was $21 to $28 per individual Select Sector SPDR.
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    Although the value of Select SPDRs is based on the value of the 
securities and cash held in the Fund, Select Sector SPDRs are not 
leveraged instruments. Select Sector SPDRs are essentially equity 
securities that represent an interest in a portfolio of stocks designed 
to reflect substantially the applicable Select Sector SPDRs Index. 
Accordingly, it is appropriate to regulate Select Sector SPDRs in a 
manner similar to other equity securities. Nonetheless, the Commission 
believes that the characteristics of Select Sector SPDRs raise 
important disclosure, trading, and certain other issues.
(a) Trading of Select Sector SPDRs on CHX
    The Commission finds that adequate rules and procedures exist to 
govern the trading of Select Sector SPDRs on CHX pursuant to UTP.\19\ 
Select Sector SPDRs will be deemed equity securities subject to CHX's 
rules governing the trading of equity securities. Accordingly, the 
Exchange's existing general rules that currently apply to the trading 
of equity securities will also apply to Select Sector SPDRs. In 
addition, CHX's Article XXVIII, Rule 24,\20\ which contains specific 
listing and delisting criteria to accommodate the trading of Units, 
will apply to the trading of Select Sector SPDRs.\21\ The delisting 
criteria allow the Exchange to consider the suspension of trading and 
the delisting of a series of Units, including suspending trading in 
Select Sector SPDRs traded on the Exchange pursuant to UTP, if an event 
were to occur that made further dealings in such securities 
inadvisable. This will give the Exchange flexibility to suspend trading 
the Select Sector SPDRs if circumstances warrant such action. 
Accordingly, the Commission believes that CHX's equity rules in 
general, and CHX's Article XXVIII, Rule 24 in particular, provide 
adequate safeguards to prevent manipulative acts and practices and to 
protect investors and the public interest. The Commission also believes 
that the proposed rule change should help protect investors and the 
public interest, and help perfect the mechanisms of a national market 
system, in that it will allow for the trading of Select Sector SPDRs on 
CHX pursuant to UTP, making Select Sector SPDRs more broadly available 
to the investing public.
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    \19\ Pursuant to Rule 12f-5 under the Act, in order to trade a 
particular class or type of security pursuant to unlisted trading 
privileges, the Exchange must have rules providing for transactions 
in such class or type of security. See 17 CFR 240.12f-5.
    \20\ The Commission approved generic rules for the listing and/
or trading of investment company units on CHX in 1996. See 
Securities Exchange Act Release No. 37589 (August 21, 1996), 61 FR 
44370 (August 28, 1996).
    \21\ The Commission notes the CHX listing and delisting criteria 
is similar to those adopted by AMEX to trade Select Sector SPDRs.
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(b) Disclosure
    The Commission believes that CHX's proposal should provide for 
adequate disclosure to investors relating to the terms and 
characteristics of trading Select Sector SPDRs. All Select Sector SPDRs 
investors, including those purchasing Select Sector SPDRs on CHX 
pursuant to UTP, will receive a prospectus regarding the product. 
Because Select Sector SPDRs trading on CHX pursuant to UTP will be in 
continuous distribution, the prospectus delivery requirements of the 
Securities Act of 1933 will apply to both the initial investors and to 
investors purchasing such securities in the secondary market on CHX. 
The prospectus addresses the special characteristics of Select Sector 
SPDRs, including a statement regarding their redeemability and method 
of creation, and that Select Sector SPDRs are not individually 
redeemable.
    CHX has also drafted an information circular that will be sent to 
all CHX members prior to the commencement of trading of Select Sector 
SPDRs. The information circular is intended to explain the 
characteristics of Select Sector SPDRs. The circular will note, for 
example, Exchange member responsibilities, including that before an 
Exchange member undertakes to recommend a transaction in Select Sector 
SPDRs it should make a determination that it is in compliance with the 
CHX suitability rules. The circular will also address member's 
responsibility to deliver a prospectus to all investors purchasing 
Select Sector SPDRs, as well as highlight the characteristics of Select 
Sector SPDRs, including that they are only redeemable in Creation 
Units.
(c) Dissemination of Information
    The Commission believes that the Values the Exchange proposes to 
disseminate for the Funds should help to provide investors with timely 
and useful information concerning the value of the Select Sector SPDRs 
Fund shares on a per Fund basis. The Exchange understands that the 
information will be disseminated through the facilities of

[[Page 3734]]

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. As noted in the AMEX Select Sector SPDRs Approval 
Order, 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.\22\
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    \22\ See supra, note 7.
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(d) Surveillance
    The Commission notes that CHX has submitted surveillance procedures 
for Select Sector SPDRs intended to address concerns associated with 
listing and trading such securities, including any concerns associated 
with specialists purchasing and redeeming Creation Units. The Exchange 
has represented that its surveillance procedures should allow it to 
identify situations where specialists purchase or redeem Creation Units 
to ensure compliance with CHX Article XXX, Rule 23(a), which requires 
that such purchases or redemptions facilitate the maintenance of a fair 
and orderly market in the subject security.\23\
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    \23\ In the AMEX Select Sector SPDRs Approval Order, the 
Commission discussed the concerns raised when a broker-dealer is 
involved in the development and maintenance of a stock index upon 
which a product such as Select Sector SPDRs is based. The Commission 
noted the importance of the Exchange adopting adequate procedures to 
prevent the misuse of material, non-public information regarding 
changes to component stocks in a Select Sector SPDR Index. The CHX 
surveillance procedures should help to address concerns raised by 
Merrill Lynch's involvement in the management of the Indices.
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    CHX has requested that the Commission find good cause for approving 
the proposed rule change prior to the thirtieth day after the date of 
publication of notice of filing in the Federal Register. The Commission 
believes that the Exchange's proposal to trade Select Sector SPDRs 
pursuant to unlisted trading privileges will provide investors with a 
convenient way of trading a basket of stocks, based upon a specific 
Select Sector Index as designated by Merrill Lynch, representing a 
particular sector of the marketplace. The Commission believes that the 
proposed rule change could produce added benefits to investors through 
the increased competition between other market centers trading the 
product. Specifically, the Commission believes that by increasing the 
availability of Select Sector SPDRs as an investment tool the CHX's 
proposal should help provide investors with increased flexibility in 
satisfying their investment needs, by allowing them to purchase and 
sell at negotiated prices throughout the trading day securities that 
replicate the performance of several portfolios of stock.\24\
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    \24\ 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 can redeem them in creation 
unit size aggregations only.
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    As noted above, the Commission has approved the listing and trading 
of Select Sector SPDRs at the AMEX,\25\ under rules that are 
substantially similar to CHX Article XXVIII, Rule 24. The trading 
requirements of Select Sector SPDRs at the CHX will be substantially 
similar to the trading requirements of Select Sector SPDRs at the AMEX. 
Additionally, the proposed rule change is analogous to the Commission's 
approval of the CHX's trading of WEBS pursuant to UTP and CHX Article 
XXVIII, Rule 24.\26\ As a result, the Commission does not believe that 
trading of this product raises novel regulatory issues that were not 
addressed in the previous filings. Accordingly, the Commission finds 
good cause for approving the proposed rule change prior to the 
thirtieth day after the date of publication of notice of filing in the 
Federal Register.
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    \25\ AMEX Select Sector SPDRs Approval Order, supra note 7.
    \26\ See supra, note 5.
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V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\27\ that the proposed rule change (SR-CHX-98-31) is approved.

    \27\ 15 U.S.C. 78s(b)(2).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\28\
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    \28\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-1530 Filed 1-22-99; 8:45 am]
BILLING CODE 8010-01-M